Spectrum Organic Products Inc – ‘10KSB40’ for 6/30/99

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Annual Report — Small Business — [x] Reg. S-B Item 405   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB40     Form 10-Ksb                                           43    192K 
 2: EX-10.22    Material Contract                                     76    233K 
 3: EX-10.23    Material Contract                                     12     53K 
 4: EX-27.1     Financial Data Schedule                                1      6K 

10KSB40   —   Form 10-Ksb
Document Table of Contents

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
 THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)                                                                      

[X]   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange  
Act of 1934 [Fee Required] For the fiscal year ended June 30, 1999  

[ ]   Transition report pursuant to Section 13 or 15(d) of the Securities       
Exchange Act of 1934 [No Fee Required]                              

For the transition period from _______________ to________________               

Commission File No. 333-22997                                                   

ORGANIC FOOD PRODUCTS, INC. 
--------------------------------------------
(Name of Small Business Issuer in its Charter)

   California                                            94-30762-94
-------------------------------                           ----------------------
(State or other jurisdiction of                              (I.R.S. Employer   
incorporation or organization)                            Identification Number)

550 Monterey Road                                                               
Morgan Hill, California                                                   95037 
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

Issuer's telephone number: (408) 782-1133                                       

Securities registered pursuant to Section 12(b) of the Act: None                

Securities registered pursuant to Section 12(g) of the Act:                     

 No Par Value Common Stock
 -------------------------
(Title of Class)

      Check whether the Registrant (1) 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                                                              

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     As of October 11, 1999, 7,275,688 shares of the Registrant's no par value
Common Stock were outstanding. As of October 11, 1999, the market value of the  
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$4,547,305 based upon a closing bid price of $0.625 per share of Common Stock on
the NASDAQ Smallcap Market.                                                     

    Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best  
of the Registrant's knowledge, in definitive proxy or information statements    
incorporated by reference in Part III of this Form 10-KSB or any amendment to   
this Form 10-KSB. Yes X  No                                                     

The Registrant's revenues for its year ended June 30, 1999 were     
$10,368,300.                                                                    

      The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.                                                      

PART I

ITEM 1. DESCRIPTION OF BUSINESS                                                 
-------------------------------                                                 

Introduction                                                                    

      This Form 10-KSB of Organic Food Products, Inc., ("OFPI" or the "Company")
contains forward-looking statements within the meaning of the Private Litigation
Reform Act of 1995 (the "Litigation Reform Act"). These forward-looking         
statements are subject to risks and uncertainties that may cause actual results 
to differ materially.                                                           

     OFPI was incorporated in 1987 as S&D Foods, Inc., and changed its name to
Garden Valley Naturals in 1995. Doing business as Garden Valley Naturals from   
1987 to 1996, OFPI has manufactured and marketed pesticide-free or "organic" and
"all natural" pasta sauces, salsas and condiments under the brand names "Garden 
Valley Naturals", "Garden Valley Organics", "Millina's Finest" and "Parrot." It 
began marketing its Parrot line of salsas in 1987, its Garden Valley Naturals   
line of condiments in 1991 and its Garden Valley Naturals line of pasta sauces  
and salsas in 1984. In June 1996, Garden Valley Naturals merged with Organic    
Foods Products, which also marketed a line of organic food products, including  
pasta sauces, salsas and canned tomatoes, together with dry cut pastas and      
organic children's meals. The surviving merged entity operates under the Organic
Food Products, Inc. name.                                                       

  In June 1996, OFPI restructured its Garden Valley Organics, Parrot and
Millina's Finest product lines by eliminating all non-organic products,         
eliminating salsas and ketchup sold under the Millina's Finest brand name, and  
adding pasteurized organic fruit juices to its product offerings. In February   
1998, OFPI acquired product lines from Sunny Farms Corporation of Richmond,     
California, a producer of natural fruit and vegetable juices for the food       
service retail market. Sunny Farms also markets a line of bottled water products
under the Napa Valley Springs Water brand. In April 1998, OFPI introduced a new 
energy drink known as Energy Plus. This drink is positioned to compete with     
energy drinks marketed under the brand names Red Bull and Hansen's. The         
ingredients in Energy Plus are healthy and meant to give the users a "natural"  
lift.                                                                           

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OFPI sells its products either directly or through distributors or  
independent commissioned food brokers and specialty food brokers to health food 
and specialty food stores, club stores, including Price/Costco and BJ's, and    
retail chain and independent grocery stores, including Safeway, A&P, Trader     
Joe's, Raley's, Long's and Lucky's.                                             

On May 14, 1999, the Company and Spectrum Naturals, Inc., and its   
affiliate, Spectrum Commodities, ("SNI") entered into a definitive agreement to 
merge the companies in a stock exchange. In addition, the Company entered into a
definitive agreement to acquire all the outstanding shares of Organic           
Ingredients, Inc. ("OI"). The combined transaction herein defined as the        
"Merger". Under the terms of the anticipated merger, which will be accounted for
as a reverse acquisition purchase, SNI will receive approximately 75% of the    
post merger Common Stock of the Company, subject to certain adjustments. The    
merger and related acquisitions were approved by shareholders at a special      
shareholders meeting held on September 8, 1999 and became effective on October  
6, 1999.                                                                        

Strategy                                                                        

OFPI's business strategy is to:                                     

o     increase revenue by offering additional organic food products 
through OFPI's existing distribution network;           

 o     reduce costs and improve operating efficiencies by using OFPI's
           excess manufacturing capacity to increase the volume of products it
manufactures for itself as well as for others;          

     o     expand current geographic and retail store distribution by offering
     OFPI's products in new markets and increasing distribution in
existing markets; and                                   

o     specialize in the marketing of organic food products.         

    OFPI has added new products through its strategic purchase of two brands
as well as through its own product development. These and other new product     
offerings are expected to continue to open new channels of distribution, expand 
revenues and improve the utilization of manufacturing facilities. It is         
anticipated that OFPI's current geographic and retail store distribution will be
expanded by offering OFPI's products in new markets, increasing distribution in 
existing markets, and specialization in the marketing of organic food products. 

Offer additional organic food products. OFPI continues to offer new 
products and develop new flavors and packages for its sauces and salsas in order
to add to its product offerings. OFPI believes that offering additional products
will increase revenues without proportionately increasing costs, due to the     
economies of scale that result from volume product manufacturing efficiencies as
well as better utilization of OFPI's existing distribution channels.            

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Increase manufacturing volumes. OFPI believes it can reduce per unit
manufacturing costs by higher utilization of its excess manufacturing capacity  
to increase manufacturing volume. OFPI seeks to increase its manufacturing      
volume by adding new products and by manufacturing food products for other food 
marketers on a contract basis.                                                  

Expand geographic and retail store distribution. Although OFPI has  
national distribution for its products in health food stores, distribution of   
products through club stores and grocery stores is primarily limited to northern
California and the northeast coast of the United States. OFPI is seeking        
additional distribution channels in order to increase its club store, grocery   
store, and convenience store sales throughout the United States.                

   Specialize in the marketing of organic food products. OFPI believes its
exclusive marketing of organic food products will improve its brand image and   
awareness and generally promote its consumer sales.                             

Products                                                                        

The Company introduces and discontinues products on a regular basis,
consistent with customary practices of other firms in the processed food        
industry. The Company's current product lines are as follows:                   

Organic Pasta Sauces and Pastas                                                 

    OFPI markets 20 organic pasta sauces under the Garden Valley Organic and
Millina's Finest brand names. The pasta sauces are all natural and most are     
fat-free. Varieties include garden vegetable, sun-dried tomato, roasted garlic  
tomato, tomato mushroom, sweet pepper and onions, hot and spicy, smoked garlic  
and zesty basil. OFPI also offers dry organic pastas including spaghetti,       
linguini, fettuccine, angel hair, rotini, penne and bowties.                    

Organic Salsas                                                                  

     OFPI markets 16 organic salsas under the Garden Valley Organic brand name
including five varieties of fat-free and vinegar-free salsas (sun-dried tomato, 
roasted garlic tomato, black bean, black bean and corn and chunky organic       
tomato) in three levels of heat, mild, medium and hot. A medium green tomatillo 
salsa is also available. OFPI also markets a line of ten organic salsas under   
the Parrot brand name. Varieties include chunky, black bean, tomatillo, spicy   
gourmet as well as an enchilada sauce.                                          

Natural Juices and Water                                                        

     OFPI markets a line of natural fruit and vegetable juices under the Sunny
Farms brand name. In addition, it also distributes a line of bottled water      
products under the Napa Valley Springs Water brand.                             

Organic Condiments                                                              

    OFPI offers three organic mustards under the Garden Valley Organic brand
name. All three mustards use organic mustard seed for flavoring and are offered 
in yellow, stoneground and dijon. OFPI offers an organic ketchup and an organic 
crushed garlic under the Millina's Finest brand name. All condiments are        
fat-free and sugar-free.                                                        

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Children's Meals                                                                

     OFPI offers five canned organic children's meals, composed of pasta rings
in tomato sauce, pasta rings in tomato cheese sauce, letters and numbers in     
tomato sauce, pasta rings and veggie franks, and beans with veggie franks.      

Organic Juices                                                                  

OFPI markets a line of pasteurized organic fruit juices under the   
"Cinagro" brand name in 32 oz. and 10 oz. glass jars. Flavors include           
Carrot/Lemon Lime, Apple Carrot Smoothie, Total Tomato, Veggie Array, Hibiscus  
Super "C", Lemon Berry, Tropical Peach, and Very Berry Cranberry.               

Functional Beverages                                                            

  OFPI markets a functional beverage called Energy Plus, sold in 7.7 oz.
cans in a single flavor.                                                        

Sales and Distribution                                                          

OFPI sells its products either directly or through distributors or  
independent commissioned food brokers and specialty food brokers to health food 
and specialty food stores, club stores, including Price/Costco and BJ's, retail 
chain and independent grocery stores, including Safeway, A&P, Trader Joe's,     
Raley's, Long's and Lucky's, and convenience stores. Currently OFPI's products  
are offered in over 6,000 health food stores, 250 club stores and 2,000 grocery 
stores located in all 50 states and in the Far East, Middle East, Canada, and   
Europe. OFPI currently uses 21 specialty food brokers and 50 food distributors  
to sell to health food and other independent retail stores and 8 food brokers to
sell to club stores and certain grocery store chains. OFPI also sells directly  
to other grocery store chains. In order to increase its distribution and sales, 
OFPI offers special promotional pricing and occasionally may pay "slotting      
fees," which are payments made by food processors and distributors to retail    
stores in order to acquire retail shelf space for their food products.          

    A broker incentive plan has been implemented based on semi-annual quotas
to motivate brokers to increase their sales of OFPI products. OFPI has also     
entered into "preferred vendor" arrangements with certain retail store chains to
obtain closer working relationships and enhanced retail merchandising and       
promotional support.                                                            

    OFPI is focusing on its core natural foods distribution, and is entering
into new distribution arrangements with mass-market accounts where profitable.  
Management believes there is an opportunity to enter conventional supermarkets  
as they become more committed to providing a variety of organic and natural food
products.                                                                       

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Marketing and New Product Development                                           

      OFPI's product marketing emphasizes the organic, all natural and generally
fat-free content of its products as a healthful and tasty alternative to similar
traditional food products. Each brand is targeted toward specific consumer      
segments with appropriate products, flavor variants, images and messages. OFPI  
promotes its Millina's Finest and Parrot product lines for sale to natural food 
and health food stores and the specialty or "gourmet" departments of grocery    
stores, while the Garden Valley Naturals line is offered as a lower priced      
mass-market product. OFPI also promotes a pricing strategy in which its organic 
food products are offered at prices only slightly higher than their non-organic 
counterparts. United Natural Foods accounted for approximately 26% and          
Price/Costco accounted for approximately 17% of OFPI's revenues for the year    
ended June 30, 1998. In the year ended June 30, 1999, United Natural Foods      
accounted for approximately 27% and Price/Costco accounted for approximately 9% 
of OFPI's revenue. A loss of either of these customers would have a material    
adverse effect on OFPI's operations.                                            

Manufacturing Facilities and Suppliers                                          

      OFPI manufactures its products in a 24,000 square-foot food processing and
warehouse facility it leases in Morgan Hill, California. Manufacturing involves 
mixing the product's ingredients in 1,000-gallon kettles and then bottling,     
labeling and casing the product for delivery to the customer. Some products are 
packaged in shrink-wrapped combination packs consisting of two or more separate 
products in one tray. OFPI manufactures all of its products, except its mustard 
condiments, Kids' Meals, Energy Plus and certain beverage sizes and pastas which
are processed and packaged for OFPI by a co-packer. In addition to the Morgan   
Hill facility, OFPI uses a public warehouse on the East Coast and a leased      
warehouse on the West Coast of the United States for inventory storage and      
distribution.                                                                   

 While many raw materials are available from a number of sources, OFPI
currently purchases its organic tomato products from only two suppliers and has 
written agreements covering a majority of its anticipated tomato product        
purchases. Sun Garden Packing Company sourced approximately 18% of OFPI's raw   
material purchases for the year ended June 30, 1999, and 20% for the year ended 
June 30, 1998. OFPI believes that other suppliers are available who could       
provide products at similar prices and terms. A change in suppliers, however,   
could cause a delay in manufacturing and a possible loss of sales, which could  
adversely affect operating results.                                             

Competition                                                                     

The natural food and health food industries in general and the pasta
sauce, salsa, condiment and fruit juice businesses in particular are highly     
competitive, and there are numerous multinational, regional and local firms that
currently compete, or are capable of competing, with OFPI. In the non-organic   
pasta sauce market, our competitors include The Campbell's Soup Company, through
its Prego brand, Unilever Canada Limited, through its Ragu brand, Borden, Inc., 
through its Classico brand, and Newma s Own. In the non-organic salsa market, we
face competition from Campbell's Soup's Pace brand, the Old El Paso brand of    

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International Home Foods, Inc. and the La Victoria brand of products of         
Authentic Specialty Foods (DESC). Our competitors in the non-organic condiments 
market include H.J. Heinz Company, Reckitt & Colman Inc., which markets French's
mustard, and International Home Foods, which markets Gulden's mustard. Our      
competition in the fruit juice market includes the Coca-Cola Company, through   
its Minute Maid brand, and Del Monte Foods International, Inc. We compete with  
national cut pasta manufacturers such as Borden, through its Ravarino & Freschi 
brand, and New World Pasta Company, which sells pasta under the American Beauty 
and Ronzoni brands.                                                             

      We also compete with DeBoles, which makes a line of pastas and organic and
natural pasta sauces. In the organic salsa market, our competitors include      
Simply Natural, Small Planet Foods, L.L.C.'s Muir Glen line of products, and    
Enrico. We face competition in the natural food condiment market from Eden,     
Canoleo, Nasoya, Annie's, and Braggs. In the organic or natural fruit juice     
market, we face competition from Odwalla, Inc. and J.M. Smucker Company's       
Knudsen brand of drinks.                                                        

     Competitive factors in the pasta sauce, salsa and related specialty foods
industry include price, quality, brand image and flavor. OFPI positions its     
product lines to be slightly more expensive than their nonorganic food          
counterparts but consistent with prices charged by other organic food marketers.
OFPI believes its products compete favorably against other organic foods with   
respect to quality and flavor.                                                  

Trade Names and Trademarks                                                      

The Company has Federal registration for its "Millina's Finest" and 
"Parrot Brand" trademarks, and has applied for Federal trademark registration   
for its "Cinagro" brand. There can be no assurance that any trademark or trade  
name registrations will be granted to the Company, or, if granted, that the     
trademarks or trade names will not be copied or challenged by others.           

Government Regulation                                                           

  The Company is subject to various Federal, state and local regulations
relating to cleanliness, maintenance of food production equipment, food storage 
and food handling, and the Company is subject to unannounced on-site inspections
of its manufacturing facilities. As a manufacturer and distributor of foods, the
Company is subject to regulation by the U.S. Food and Drug Administration       
("FDA"), state food and health boards and local health boards in connection with
the manufacturing, handling, storage, transportation, labeling and processing of
food products. In order to offer organic food products, the Company is also     
subject to inspection and regulation by the USDA. Regulations in new markets and
future changes in the regulations may adversely impact the Company by raising   
the cost to manufacture and deliver the Company's products and/or by affecting  
the perceived healthfulness of the Company's products. A failure to comply with 
one or more regulatory requirements could interrupt the Company's operations and
result in a variety of sanctions, including fines and the withdrawal of the     
Company's products from store shelves. The Company holds all material licenses  
and permits required conducting its operations.                                 

      The Company is also subject to Federal and state laws establishing minimum
wages and regulating overtime and working conditions.                           

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Employees                                                                       

As of June 30, 1999, OFPI had 29 employees including its executive officers,    
food production, processing and warehousing employees and administrative        
personnel. OFPI's employees are not covered by a collective bargaining          
agreement, but OFPI considers its employee relations to be satisfactory.        

ITEM 2. DESCRIPTION OF PROPERTY                                                 
-------------------------------                                                 

  OFPI leases approximately 24,000 square feet for its corporate office,
manufacturing and warehouse facility in Morgan Hill, California from a          
non-affiliate on a seven-year lease expiring April 30, 2003, at a monthly rental
of $6,674 plus rental escalations of 3% per year. The Company also leases 20,000
square feet of warehouse space in San Jose, California for use as a distribution
center on a month-to-month lease, at a monthly rental of $6,000. OFPI is        
negotiating with its landlord at Morgan Hill to lease an additional 50,000      
square feet of space for additional warehousing facilities, although no such    
lease has been executed.                                                        

ITEM 3. LEGAL PROCEEDINGS                                                       
-------------------------                                                       

In November 1998, Global Natural Brands, Inc.("Global")and its four 
principals filed a lawsuit against Organic and its four principals, alleging    
unpaid wages and seeking money damages and injunctive relief. Global had        
provided managerial services to the Company from April 1998 to October 1998,    
when its services were terminated by the Company. In January 1999, Global       
amended its complaint by including securities fraud claim, among other causes of
action. Meanwhile, Global sought to obtain a temporary restraining order, a     
preliminary injunction and a writ of attachment against Organic without success.

In May 1999, Organic and its principals cross-complained against Global and its 
principals, seeking damage for breach of contract, breach of fiduciary duty,    
fraud, negligence and a declaratory relief for indemnity and contribution, plus 
punitive damages. In June 1999, the parties mediated this dispute to no avail.  

Having tendered Global's claim to its E&O liability carrier, Organic and its    
principals are in the process of obtaining coverage from the carrier and will   
vigorously defend against this lawsuit.                                         

On August 26, 1999, the Court denied Organic's motion for bond and Global's     
motions to compel arbitration and for sanctions. Consequently, this dispute is  
still pending before the Santa Clara Superior Court.                            

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                     
-----------------------------------------------------------                     

Not applicable.                                                                 

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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
----------------------------------------------------------------                

      The Company's Common Stock traded on the NASDAQ Small cap Market under the
symbol "OFPI" from August, 1997 to May 26, 1999 Since then, it has traded on the
NASDAQ OTC Bulletin Board System.                                               

      The following table sets forth for the quarter indicated the range of high
and low closing prices of the Company's Common Stock as reported by NASDAQ but  
does not include retail markup, markdown or commissions.                        

                                                         Price
                                                         -------------
By Quarter Ended:                                             High      Low     
-----------------                                             ----      ---     

September 30, 1997.......................................    $ 4.3125  $ 3.875  
December 31, 1997........................................      4.5625    2.875  
March 31, 1998 ..........................................      3.625     2.625  
June 30, 1998 ...........................................      4.25      3.00   
September 30, 1998.......................................      3.375     1.00   
December 31, 1998 .......................................      0.9375    0.375  
March 31, 1999 ..........................................      1.6875    0.5625 
June 30, 1999 ...........................................      1.50      0.5312 

  As of September 30, 1999, the Company had approximately 700 record and
beneficial stockholders.                                                        

Dividend Policy                                                                 

   The Company has not paid cash dividends on its Common Stock in the past
and does not intend to do so in the near future. The Company intends to retain  
earnings, if any, for use in the operation and expansion of its business. The   
amount of future dividends, if any, will be determined by the Board of Directors
based upon the Company's earnings, financial condition, capital requirements and
other conditions.                                                               

 In connection with the February, 1998 acquisition of Sunny Farms, the
company is obligated to pay a 6% "coupon rate" on the portion of the purchase   
price that was paid for in common stock. Amounts earned through June 30, 1999   
were not material.                                                              

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS                                                   
--------------------------------------------------------------------------------

     The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report. The 
financial results reported herein do not necessarily indicate the financial     
results that may be achieved by the Company in any future period.               

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Introduction                                                                    

     OFPI was incorporated in 1987 as S&D Foods, Inc., and changed its name to
Garden Valley Naturals in 1995. Doing business as Garden Valley Naturals from   
1987 to 1996, OFPI has manufactured and marketed pesticide-free or "organic" and
"all natural" pasta sauces, salsas and condiments under the brand names "Garden 
Valley Naturals", "Garden Valley Organics," "Millina's Finest" and "Parrot." It 
began marketing its Parrot line of salsas in 1987, its Garden Valley Naturals   
line of condiments in 1991 and its Garden Valley Naturals line of pasta sauces  
and salsas in 1994. In June 1996, Garden Valley Naturals merged with Organic    
Food Products, which also marketed a line of organic food products, including   
pasta sauces, salsas and canned tomatoes, together with dry cut pastas and      
organic children's meals. The surviving merged entity operates under the Organic
Food Products, Inc. name.                                                       

 The Company's operating results could vary from period to period as a
result of a number of factors, including the purchasing patterns of significant 
customers, the timing of new product introductions by the Company and its       
competitors, the amount of slotting fees and new product development advertising
expenses incurred by the Company, variations in sales by distribution channel,  
fluctuations in market prices of raw materials and competitive pricing policies.
These factors could cause the Company's performance to differ from investor     
expectations, resulting in volatility in the price of the Common Stock.         

    Investors should carefully consider the following information as well as
other information contained in this Report. Information included in this Report 
contains "forward-looking statements" which can be identified by the use of     
forward-looking terminology such as "believes," "expects," "may," "should" or   
"anticipates" or the negative thereof or other variations thereon or comparable 
terminology, or by discussions of strategy. See, e.g., Item 1, "Strategy." No   
assurance can be given that the future results covered by the forward-looking   
statements will be achieved. The following matters constitute cautionary        
statements identifying important factors with respect to such forward-looking   
statements, including certain risks and uncertainties that could cause actual   
results to vary materially from the future results covered in such              
forward-looking statements. Other factors could also cause actual results to    
vary materially from the future results covered in such forward-looking         
statements.                                                                     

Year Ended June 30, 1999 Compared to Year Ended June 30, 1998                   

Revenues                                                                        

     OFPI's revenues for the year ended June 30,1999 ("1999") were $10,368,000
compared to $12,304,000 for the year ended June 30, 1998 ("1998"), a decrease of
$1,936,000, or 15.7% compared to an 8.1% increase in 1998. The decrease in      
revenues in 1999 was primarily due to a reduction in club stores sales combined 
with a decrease in overall pasta sauce and salsa product sales due to           
competitive pressures and stock outs due to working capital constraints in the  

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second half of 1999. The decrease in pasta sauce sales was partially offset by  
the sales of juice products as a result of the Sunny Farms acquisition in       
February 1998. The 1998 increase was attributable to the acquisition of Sunny   
Farms Corporation in February, 1998.                                            

Cost of Goods Sold                                                              

OFPI's cost of goods sold for 1999 was $9,177,000 or 88.5% of sales,
versus $9,420,000, or 76.5% of sales for 1998. The increase in cost-of-goods    
sold as a percentage of sales was due primarily to increased manufacturing      
costs, inventory write-downs, and higher priced raw food ingredients,           
specifically organic tomatoes. The manufacturing cost increase was caused       
primarily by lower throughput, which reduced plant operating efficiencies and   
resulted in a higher proportion of fixed plant costs.                           

    Subsequent to year-end and in connection with the Merger, organizational
changes have been made within the manufacturing and purchasing functions. As a  
result, management believes with the merger OFPI's operations will become more  
efficient and unit costs will decrease by the end of the 2000 fiscal year,      
producing reductions in cost-of-goods sold in subsequent periods.               

Sales and Marketing Expenses                                                    

  OFPI's sales and marketing expense for 1999 as $2,624,000, or 25.3% of
sales, versus $3,049,000 or 24.8% of sales for 1998. The decrease in sales and  
marketing expense was due to decreases in personnel and a reduction in          
promotional activities such as in-store demonstrations. The Company's marketing 
activities in 1999 were constrained due to the limited working capital during   
the fiscal year. The Company anticipates the synergies and additional capital   
available as a result of the Merger will enable the Company to increase its     
market share in certain categories.                                             

General and Administrative Expenses                                             

   OFPI's general and administrative expenses for 1999 were $1,856,000, or
17.9% of sales, versus $1,922,000 or 15.6% of sales for 1998. The decrease in   
1999 was due, in large part, to higher levels of expense in 1998 professional   
services, legal fees, accounting and tax services and such other costs          
incidental to OFPI becoming a public company. These increases were offset in    
1999 in part by a decrease in salaries and related costs as a result of cost    
cutting and lower sales levels.                                                 

Loss on Write-down of Fixed Assets and Goodwill                                 

  During 1999 and 1998, the Company determined that certain goodwill and
fixed assets were impaired, based on estimations of expected undiscounted future
cash flows from operations under current operating conditions. Discounted cash  
flow estimates under the same operating assumptions indicated that they may not 
be sufficient to recover the cost of the goodwill arising from the purchase of  

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OFP, and accordingly, goodwill of $2,182,000 was written off. The related fixed 
assets were reduced by $240,000 to their fair value as estimated by appraisal   
from an independent third party, resulting in a total 1998 write off of         
$2,422,000. The affected fixed assets will be depreciated at their new book     
basis over their remaining useful life. Unamortized goodwill of $1,080,000      
relating to the February, 1998 Sunny Farms acquisition was similarly evaluated  
and written off during 1999. These losses are included in "Loss on Write-down of
Fixed Assets and Goodwill" in the accompanying Statements of Operations.        

Net Interest Expense                                                            

   OFPI's interest expense for 1999 was $181,000 versus $102,000 for 1998.
The increase in interest expense resulted from an increase in the utilization of
the revolving credit line to fund operating losses. (See Liquidity and Capital  
Resources).                                                                     

Deferred Tax Assets                                                             

  Since the Company could not determine that it was more likely then not
that the deferred tax assets would be realized, a 100% valuation allowance was  
provided.                                                                       

Year 2000 Compliance                                                            

      Organic Food Products Inc., uses computer software that may be impacted by
the year 2000 problem, and also relies upon vendors of equipment and services   
whose products may be impacted by the year 2000 problem. The Company's year 2000
compliance issues include: 1) the equipment it uses in its manufacturing        
process; 2) the hardware and third-party software it uses for corporate         
administration; 3) the services of third-party providers it purchases for       
certain professional services; and 4) the external services such as             
telecommunications and electrical power. The Company has initiated a plan that  
will attempt to identify all computer hardware and software, plant equipment and
services upon which it relies that may be impacted. After identification of any 
problem areas, the Company will verify whether or not those products or services
are year 2000 compliant. The plan includes contacting those vendors or service  
providers to determine their compliance or plans to become complaint before     
December 31, 1999. It is the intent of the Company to complete this process by  
December 31, 1999.                                                              

     The Company uses various pieces of equipment in its manufacturing process
that may contain computer chips that could be affected by the year 2000 problem.
The Company has started, but not completed a program to identify which pieces of
equipment could be affected and how the affected equipment could be updated.    

The Company's corporate administrative and operating systems are    
exclusively PC-based using a commercially available software package. The       
Company has received written confirmation from the legal department of the      
software developer confirming that it is year 2000 compliant.                   

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The Company uses outside service providers for the processing and   
administration of its payroll, 401k retirement plan and insurance benefit       
programs. Although a survey of these services providers has not been completed, 
the Company believes that these providers will have systems, and based upon its 
initial efforts to date as described herein, and does not anticipate that any   
other information technology projects will be delayed in the future due to the  
year 2000 problem.                                                              

    The Company has not deferred any information technology projects to date
due to the need to assess or ensure year 2000 compliance of its systems, and    
based upon its initial efforts to date as described herein, and does not        
anticipate that any other information technology projects will be delayed in the
future due to the year 2000 problem.                                            

For the reasons mentioned herein, the Company does not anticipate that it will  
have an incomplete or untimely resolution of the year 2000 problem. Although the
total costs of compliance have not been completely assessed, management does not
believe they will be material in nature. As previously mentioned, with regard to
items (1) - (3), the Company believes it has or will achieve year 2000          
compliance in advance of December 31, 1999. With respect to external companies  
that provide telecommunications and electrical power, the Company is less       
certain about the impact of their non-compliance regarding the year 2000        
problem. Clearly, the loss of these services would create a major disruption of 
the Company's normal operations. Given this scenario, the Company would be      
required to obtain these services from other sources. The cost of switching to  
other utility providers has not been assessed.                                  

      Issues similar to these also face the Company's customers. The Company has
not yet completed an assessment of year 2000 readiness of its customers.        
However, based on initial discussions with certain customers, management does   
not currently believe that business with those customers will be significantly  
disrupted by the year 2000 problem.                                             

Seasonality                                                                     

 The Company is experiencing some seasonal fluctuation in revenues. In
relation to product purchasing, the Company will seasonally contract for certain
product for the entire year at harvest time or at planting time to secure raw   
materials through the year. These purchases take place annually, with payments  
being made quarterly and are effected to reduce the risk of price swings due to 
demand fluctuations. These annual purchases can occasionally create overages or 
shortages in inventory. The Company's intention to sell certain excess bulk raw 
materials to other manufacturers may assist in reducing any overages and should 
allow for more effective purchasing of the required raw materials.              

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Liquidity and Capital Resources                                                 

   During 1998, the Company completed its initial public offering (IPO) of
1,495,000 shares of Common Stock at $4.00 per share, for gross proceeds at      
$5,982,000 (including 195,000 underwriters' over-allotment shares). The net     
proceeds of approximately $4,596,000 (after offering costs of $1,384,000) were  
used to pay down approximately $3,613,000 of existing debt. The balance was used
for working capital purposes, to purchase raw materials and equipment, to repay 
debt and to provide marketing funds to introduce new products and to introduce  
existing products into new markets. Equipment purchases were used for retooling 
and to acquire additional packaging equipment to convert, when required,        
production from boxed cases to shrink wrap cases.                               

     The Company also used an equipment line provided by its lender to finance
the purchase of juice bottling equipment as part of its acquisition of Sunny    
Farms. Such equipment line was retired during 1998.                             

      As of June 30, 1999, the Company's cash position was severely limited. The
operating losses have placed severe strains on the Company's cash position. To  
remedy this situation, the Company pursued the Merger, which became effective   
October 6, 1999. In connection with the Merger, the newly combined group        
replaced existing lines of credit with a new $9,000,000 package with Wells Fargo
Bank. The new agreement will be collateralized by substantially all assets of   
the newly combined group, and will bear interest at prime plus 1% to 1 1/4%.    
Advances under the new line will be limited to a borrowing base consisting of   
certain accounts receivable and/or inventory. Included in the total borrowings  
will be two term notes of $1,067,000 and $150,000 requiring payment over 60 and 
18 months, respectively, and a capital expenditure note of up to $1,500,000 to  
be repaid over 60 months beginning in August 2002. Other advances will be made  
under a revolving promissory note expiring in October 2000.                     

Also in connection with the Merger, the Company completed a Private 
Placement of 16 Units in October 1999. Each Unit consisted of a $25,000         
unsecured and subordinated promissory note bearing interest of 10%, plus        
warrants to purchase 10,000 shares of Common Stock at $.01 per share from       
January 1, 2000 to September 30, 2000. Net proceeds of approximately $370,000   
were received, after offering expenses of approximately $30,000.                

     The Company believes that with the new credit facilities and proceeds for
the private placement, coupled with anticipated cost savings in the area of     
manufacturing, should be adequate to fund the Company's estimated cash          
requirements for the year ending June 30, 2000. There can be no assurances,     
however, that all of the anticipated savings can be attained by year-end.       

During 1999, the Company provided $70,000 in cash from operating    
activities, compared to using $1,215,000 in 1998. The decrease use of cash      
resulted primarily from increases in accounts payable and reduction of inventory
levels. Cash used in investing activities was $134,000 in 1999 compared to      
$1,624,000 in 1998, reflecting the Sunny Farms acquisition as well as increased 
purchases of fixed assets in 1998.                                              

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Cash provided by financing activities decreased to $189,000 in 1999 
compared to $2,818,000 in 1998. Proceeds from sale of stock to Global Natural   
Brands, Ltd. and the IPO mentioned above totaled $5,517,000 in 1998, offset by  
repayments of debt to outsiders and to related parties.                         

    The Company's future results of operations and the other forward-looking
statements contained in this document, in particular the statements concerning  
plant efficiencies and capacities, capital spending, research and development,  
competition, marketing and manufacturing operations and other information       
provided herein involve a number of risks and uncertainties. In addition to the 
factors discussed above, other factors that could cause actual results to differ
materially are general business conditions and the general economy; competitors'
pricing and marketing efforts; availability of third-party material products at 
reasonable prices; risk of nonpayment of accounts receivable; risks of inventory
obsolescence due to shifts in market demand; timing of product introductions;   
and litigation involving product liabilities and consumer issues.               

New Applicable Account Pronouncements                                           

   In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires 
companies to recognize all derivatives contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions   
are met, a derivative may be specifically designated as a hedge, the objective  
of which is to match the timing of gain or loss recognition on hedging          
derivative with the recognition of (i) the changes in the fair value of the     
hedged asset or liability that are attributable to the hedged risk or (ii) the  
earnings' effect of the hedged forecasted transaction. For a derivative not     
designated as a hedging instrument, the gain or loss is recognized in income in 
the period of change. SFAS 133 is effective for all fiscal quarters of fiscal   
years beginning after June 15, 2000.                                            

Historically, the company has not entered into derivatives contracts
either to hedge existing risks of for speculative purposes. Accordingly, the    
Company does not expect adoption of this new standard on July 1, 2000 to affect 
its financial statements.                                                       

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ITEM 7. FINANCIAL STATEMENTS                                                    
----------------------------                                                    

Report of Independent Certified Public Accountants                              

To The Shareholders and Board of Directors of Organic Food Products, Inc.       

We have audited the accompanying balance sheet of Organic Food Products, Inc. as
of June 30, 1999, and the related statements of operations, changes in          
shareholders' equity (capital deficit), and cash flows for each of the two years
in the period ended June 30, 1999. 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 audit.                       

We conducted our audits in accordance with generally accepted auditing          
standards. Those standards 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. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion, the 1999 and 1998 financial statements referred to above present
fairly, in all material respects, the financial position of Organic Food        
Products, Inc. as of June 30, 1999, and the results of its operations, changes  
in shareholders' equity (capital deficit), and its cash flows for each of the   
two years in the period ended June 30, 1999 in conformity with generally        
accepted accounting principles.                                                 

The accompanying financial statements have been prepared assuming that the      
Company will continue as a going concern. As discussed in Note 1 to the         
financial statements, the Company has sustained recurring losses from           
operations, has violated its loan covenants, and has a net capital deficit and  
negative working capital at June 30, 1999. These conditions raise substantial   
doubt about the ability of the Company to continue as a going concern.          
Management's plans as to these matters are also discussed in Note 1. The        
financial statements do not include any adjustments that might result from the  
outcome of this uncertainty.                                                    

                                  BDO SEIDMAN, LLP
                                              Certified Public Accountants
San Francisco, California                                                       
September 10, 1999, except for                                                  
Notes 6 and 13, which are as of October 6, 1999                               

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ORGANIC FOOD PRODUCTS, INC.                                                     
BALANCE SHEET                                                                   

                                                                   June 30, 1999
                                                                   -------------
Assets                                                                          

Current Assets                                                                  
    Cash                                                            $  166,485
Accounts receivable, less allowances for bad debts,                   
spoils and returns, and charge-backs of $706,237                
       (Notes 6 and 8)                                               1,059,107
    Inventory, net (Notes 2, 3, 6, and 7)                            1,194,261
    Prepaid expenses                                                   117,652
                                                                    ----------
Total current assets                                                  2,537,505 

Fixed assets (Notes 4 and 6)                                          1,175,075 
                                                                    ----------

Total Assets                                                         $3,712,580 
                                                                    ==========

 See accompanying summary of accounting policies
and notes to financial statements.

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ORGANIC FOOD PRODUCTS, INC.                                                     
BALANCE SHEET                                                                   

                                                                 June 30, 1999
                                                                 -------------

Liabilities and Capital Deficit                                                 

Current Liabilities                                                             
    Line of Credit (Note 6)                                       $  1,168,349
    Accounts payable (Note 8)                                        2,009,969
    Accounts payable-related parties (Note 3)                          216,579
    Accrued expenses (Notes 5, 7 and 9)                                355,083
    Accrued wages and taxes                                             92,583
    Notes payable-related parties  (Note 3)                            497,238
    Capitalized  lease obligation                                       13,237
                                                                  ------------

Total current liabilities                                          $  4,353,038 

Commitments (Notes 6, 7, and 13)                                                

Capital Deficit (Notes 5, 9, 10 and 13):                                        
Common stock, no par value, 20,000,000 shares authorized,             
       7,275,688 issued and outstanding                              9,851,687

     Accumulated deficit                                            (10,492,145)
                                                                  ------------

Total capital deficit                                                  (640,458)
                                                                  ------------

Total Liabilities and Capital Deficit                              $  3,712,580 
                                                                  ============

 See accompanying summary of accounting policies
and notes to financial statements.

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ORGANIC FOOD PRODUCTS, INC.                                                             
STATEMENTS OF OPERATIONS                                                                

                                                               Years ended June 30,     
                                                           ---------------------------- 
                                                               1999            1998     
                                                               ----            ----     

                                                                                        
Revenues (Note 8)                                          $ 10,368,300    $ 12,304,323 

Cost of Goods Sold (Notes 3 and 8)                            9,176,881       9,419,802 
                                                           ------------    ------------ 

Gross Profit                                                  1,191,419       2,884,521 
                                                           ------------    ------------ 

Sales and Marketing Expense                                   2,624,155       3,048,865 

General and Administrative Expenses (Note 3)                  1,855,661       1,922,030 

Loss on Write-down of Fixed Assets and Goodwill (Note 4)      1,024,213       2,410,936 
                                                           ------------    ------------ 

                                                              5,504,029       7,381,831 

Loss from Operations                                         (4,312,610)     (4,497,310)

Interest Expense, Net (Note 6)                                 (181,336)       (102,413)

Other Expense, Net                                              (22,914)        (34,719)
                                                           ------------    ------------ 

Loss before Income Taxes                                     (4,516,860)     (4,634,442)

Provision for Income Taxes (Note 11)                               (800)         15,200 
                                                           ------------    ------------ 

Net Loss                                                   $ (4,517,660)   $ (4,619,242)
                                                           ============    ============ 

Basic and Diluted Loss per Share (Note 9)                  $       (.62)   $       (.69)
                                                           ============    ============ 

Weighted Average Number of Shares Outstanding (Note 9)        7,275,668       6,696,945 
                                                           ============    ============ 

                    See accompanying summary of accounting policies                     
                          and notes to financial statements.                            

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ORGANIC FOOD PRODUCTS, INC.                                                                            
STATEMENTS OF CHANGES IN SHAREHOLDERS'                                                                 
EQUITY (CAPITAL DEFICIT)                                                                               

                                                                                              Total    
                                                                                          Shareholders'
                                                     Common Stock                            Equity    
                                               -------------------------    Accumulated     (Capital   
                                                 Shares         Amount        Deficit        Deficit)  
                                                 ------         ------        -------        --------  

                                                                                                       
Balance, July 1, 1997                          5,297,913    $  3,971,720   $ (1,355,243)  $  2,616,477 

Repurchase of Shares                             (40,000)       (100,000)          --         (100,000)

Proceeds from initial public offering,                                                                 
   net of costs of $1,384,404 (Note 9)         1,495,000       4,595,566           --        4,595,566 

Stock issued for director  expenses               17,200          34,401           --           34,401 

Stock issued for  acquisition of                                                                       
  Sunny Farms, Inc. (Note 5)                     283,333         850,000           --          850,000 

Proceeds from sale of stock to                                                                         
  Global Natural Brands  (Note 9)                222,222         500,000           --          500,000 

Net loss  for the year                              --              --       (4,619,242)    (4,619,242)
                                            ------------    ------------   ------------   ------------ 

Balance, June 30, 1998                         7,275,668       9,851,687     (5,974,485)     3,877,202 

Net loss for the year ended June 30, 1999           --              --       (4,517,660)    (4,517,660)
                                            ------------    ------------   ------------   ------------ 

Balance, June 30, 1999                         7,275,668    $  9,851,687   $(10,492,145)  $   (640,458)
                                            ============    ============   ============   ============ 

                          See accompanying summary of accounting policies                              
                                 and notes to financial statements.                                    

                                                 F-5                                                   

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ORGANIC FOOD PRODUCTS, INC.                                                        
STATEMENTS OF CASH FLOWS                                                           

                                                            Years ended June 30,   
                                                        -------------------------- 
Increase (Decrease) in Cash:                                1999           1998    
----------------------------                                ----           ----    
                                                                                   
Cash flows from operating activities:                                              

   Net Loss                                             $(4,517,660)   $(4,619,242)

   Adjustments to reconcile net loss to net cash                                   
   provided (used) by operating activities                                         
     Depreciation and amortization                          277,702        345,352 
     Loan to shareholder forgiven                              --          168,000 
     Loss on write-down of fixed assets and goodwill      1,024,213      2,410,977 
     Stock issued for directors' expenses                      --           34,401 
     Provision for reserves against receivables             381,744        160,981 
     Provision for reserve for inventory obsolescence       203,973         85,000 
     Deferred income taxes                                     --          (16,000)
   Changes in Assets and Liabilities                                               
     Accounts receivable                                   (294,566)        36,625 
     Inventory                                            2,295,752        410,061 
     Prepaid expenses and other                              69,817       (143,644)
     Income tax refund receivable                              --          167,694 
     Accounts payable                                       613,269       (461,227)
     Accrued liabilities                                     15,260        206,029 
                                                        -----------    ----------- 

Net cash provided (used) by operating activities             69,504     (1,214,993)
                                                        -----------    ----------- 

Cash flows from investing activities:                                              
     Purchase of fixed assets                              (134,601)      (603,915)
     Advances to shareholder                                   --          (84,000)
     Cash received from sale of fixed assets                  1,000         34,600 
     Purchase of Sunny Farms                                   --         (971,171)
                                                        -----------    ----------- 

Net cash used by investing activities                      (133,601)    (1,624,486)
                                                        -----------    ----------- 

Cash flows from financing activities:                                              
     Repayment of notes payable and capital lease       $  (100,000)   $  (181,356)
     Repayment of notes payable-related parties                --       (1,749,322)
     Proceeds from issuance of stock                           --        5,516,904 
     Proceeds from line of credit                         7,840,846      1,911,205 
     Repayments on line of credit                        (7,551,849)    (2,679,292)
     Proceeds from notes payable                               --          100,000 
     Re-purchase of treasury stock                             --         (100,000)
                                                        -----------    ----------- 

Net cash provided by financing activities                   188,997      2,818,139 
                                                        -----------    ----------- 

Net increase  (decrease) in cash                            124,900        (21,340)

Cash at beginning of year                                    41,585         62,925 
                                                        -----------    ----------- 

Cash at End of Year                                     $   166,485    $    41,585 
                                                        ===========    =========== 

                 See accompanying summary of accounting policies                   
                       and notes to financial statements.                          

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ORGANIC FOOD PRODUCTS, INC.                                                     
SUMMARY OF ACCOUNTING POLICIES                                                  

Nature of Operations    Organic Food Products, Inc. ("OFPI" or the "Company") is
                      a California corporation incorporated on July 7, 1987.
                    The principal business purpose of the Company is the
                    production and distribution of organic food products
throughout the United States.   

Use of Estimates        The preparation of financial statements in conformity   
                      with generally accepted accounting principles requires
                        management to make estimates and assumptions that affect
                  the reported amounts of assets and liabilities and
                      disclosure of contingent assets and liabilities at the
                 date of the financial statements and the reported
                     amounts of revenues and expenses during the reporting
              period. Actual results could differ from those
estimates.                      

Stock-Based                                                                     
Compensation            Statement of Financial Accounting Standards (SFAS) No.  
                        123, Accounting for Stock-Based Compensation established
                 a fair value method of Accounting for stock-based
                   compensation plans and for transactions in which an
                       entity acquires goods or services from non-employees in
                     exchange for equity instruments. SFAS 123 encourages,
                     but does not require companies to record compensation
                       cost for stock-based employee compensation. The Company
                        has chosen to continue to account for employee utilizing
                   the intrinsic value method prescribed in Accounting
                     Principles Board Opinion (APB) No. 25, Accounting for
                    Stock Issued to Employees. Accordingly, compensation
                  cost for employee stock options is measured as the
               excess, if any, of the fair market price of the
                       Company's stock at the date of grant over the amount an
                       employee must pay to acquire the stock. Options granted
                   to non-employees are recorded at the estimated fair
                     value of the option granted over the service peri net
                       income (loss) and earnings (loss) per share is provided
                      as if the Company had elected the fair value method of
                   accounting for all stock-based compensation awards.

Accounts Receivable                                                             
and Allowances          The Company provides allowances for estimated credit    
            losses, product returns, spoilage, and other
                     manufacturer charge back adjustments (for advertising
                  allowances, etc.) at a level deemed appropriate to
                  adequately provide for known and estimated losses.

                    The allowances are based on reviews of loss, return,
                       spoilage, adjustment history, contractual relationships
                      with customers, current economic conditions, and other
                        factors that deserve recognition in estimating potential
                  losses. While management uses the best information
                   available in making its determination, the ultimate
                 recovery of recorded accounts receivable, is also
                      dependent on future economic and other conditions that
   may be beyond management's control.

Inventory               Inventory quantities and valuations are determined by a 
                       physical count and pricing of same. Inventory is stated
                    at the lower of cost, first-in, first-out method, or
market.                         

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ORGANIC FOOD PRODUCTS, INC.                                                     
SUMMARY OF ACCOUNTING POLICIES                                                  

Earnings (Loss)                                                                 
Per Share               In February 1997, the financial Accounting Standards    
                    Board issued SFAS No. 128, Earnings Per Share, which
                 supersedes APB No. 15, the existing authoritative
                 guidance. SFAS No. 128 is effective for financial
                      statements for periods ending after December 15, 1997,
                     and requires restatement of all prior-period earnings
                        per share data presented. The new statement modifies the
                      calculations of primary and fully diluted earnings per
                      share and replaces them with basic and diluted earning
                        (loss) per share are computed by dividing income or loss
                        available to common shareholders by the weighted average
                     number of shares actually outstanding for the period.
                Diluted earnings per share reflect the potential
                       dilution of securities that could share in the earnings
                     of an entity. Because of losses in 1999 and 1998, the
                   decline in market price below the exercise price of
                     certain options and warrants, and differences of less
                than $.01 per share due to certain other options
                        potentially dilutive securities are either anti-dilutive
                      or have no effect. Accordingly, calculations under the
                    new standard, which was adopted in the quarter ended
                        December 31, 1997 were the same as those under the prior
method.                         

Income Taxes            The Company accounts for income taxes in accordance with
                SFAS No. 109, Accounting for Income Taxes, which
                       requires an asset and liability approach. This approach
                 results in the recognition of deferred tax assets
                      (future tax benefits) and liabilities for the expected
                       future tax consequences of temporary timing differences
                      between the book carrying amounts and the tax basis of
                       assets and liabilities. Future tax benefits are subject
                   to a valuation allowance to the extent of the l tax
assets may not be realized.     

Revenue Recognition     The Company recognizes revenues through sales of        
                    products primarily to grocery and club store chains.
                    Sales are recorded generally when goods are shipped.
                      Potential returns, adjustments and spoilage allowances
                      are provided for in accounts receivable allowances and
accruals.                       

Fixed Assets            Fixed Assets are recorded at cost. Depreciation is      
                provided using the straight-line method over the
                     estimated useful lives of the assets. Maintenance and
                       repairs that neither materially add to the value of the
                        property nor appreciably prolong its life are charged to
                expense as incurred. Betterments or renewals are
capitalized when incurred.      

Long-Lived Assets       Long-lived assets, including fixed assets, goodwill, and
                  other intangible assets, are assessed for possible
                      impairment whenever events or changes in circumstances
             indicate that the carrying amounts may not be
                      recoverable, or whenever management has committed to a
                      plan to dispose of the assets. Such assets are carried
                        at the lower of book value or fair value as estimated by
                     management based on appraisals, current market value,
                     and comparable sales value, as appropriate. Assets by
                    such impairment loss are depreciated or amortized at
                      their new carrying amount over the remaining estimated
                        life; assets to be sold or otherwise disposed of are not
                   subject to further depreciation or amortization. In
                     determining whether an impairment exists, the company
                   uses undiscounted future cash flows compared to the
carrying value of assets.       

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ORGANIC FOOD PRODUCTS, INC.                                                     
SUMMARY OF ACCOUNTING POLICIES                                                  

Fair Value of                                                                   
Financial Instruments   The Company's notes payable approximate fair value based
                        on rates currently available from the bank for debt with
                     similar terms and maturities. The fair value of notes
                       payable-related parties approximates the book value due
                     to shortness of the remaining term. The fair value of
                        the Company's commitments to purchase inventory is based
                      on current market prices available to the Company. The
                        carrying amounts of accounts receivable approximate fair
                    value because of the short maturity of thiese items.

Comprehensive Income    During 1999, the Company adopted SFAS No. 130, Reporting
                        Comprehensive Income. SFAS 130 established standards for
                     reporting and display of comprehensive income and its
                    components in the entity's financial statements. The
                   objective of SFAS 130 is to report a measure of all
                       changes in the equity of an enterprise that result from
                     transactions and other economic events of the period.
                       Comprehensive income is the total of net income and all
                      other non-owner changes in equity. SFAS 13 recognition
               or measurement for comprehensive income and its
                        components and, therefore, did not have an impact on the
                  financial condition or results of the Company upon
adoption.                       

Slotting and                                                                    
Advertising Costs       The Company expenses advertising costs as incurred or   
                       when the related campaign commences. Slotting fees paid
                       or credited to club stores and grocery chains for shelf
                    space allocations are amortized over the life of the
agreement, generally one year.  

Segments                Effective July 1, 1998, the company also adopted SFAS   
                        No. 131, Disclosures about Segments of an Enterprise and
                      Related Information. This statement requires reporting
              of financial and descriptive information about
                     reportable operating segments. Operating segments are
                components of an enterprise about which separate
                    financial information is available that is evaluated
                  regularly by the chief operating decision-maker in
                   deciding how to allocate resources and in assessing
                performan operates in only one business segment,
                       production and distribution of processed organic foods,
                       and has already complied with any additional disclosure
                 requirements. SFAS 131 does not address issues of
                 recognition or measurement in the basic financial
                   statements, and thus had no impact on the Company's
                financial condition or results of operation upon
adoption.                       

Other New Accounting                                                            
Pronouncements          In June 1998, the Financial Accounting Standards Board  
                      issued SFAS 133, Accounting for Derivative Instruments
                      and Hedging Activities. SFAS 133 requires companies to
                       recognize all derivatives contracts as either assets or
                       liabilities in the balance sheet and to measure them at
                       fair value. If certain conditions are met, a derivative
                        may be specifically designated as a hedge, the objective
               of which is to match the timing of gain or loss
                        recognition on hedging derivative with th changes in the
                    fair value of the hedged asset or liability that are
                     attributable to the hedged risk or (ii) the earnings'
                  effect of the hedged forecasted transaction. For a
                      derivative not designated as a hedging instrument, the
                     gain or loss is recognized in income in the period of
                        change. SFAS 133 is effective for all fiscal quarters of
           fiscal years beginning after June 15, 2000.

              Historically, the company has not entered into
                       derivatives contracts either to hedge existing risks or
                       for speculative purposes. Accordingly, the Company does
                        not expect adoption of this new standard on July 1, 2000
   to affect its financial statements.

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ORGANIC FOOD PRODUCTS, INC.                                                     
NOTES TO FINANCIAL STATEMENTS                                                   

1. Basis of                                                                     
Presentation and                                                          
Going Concern        Through June 30, 1999 the company had sustained      
                      recurring losses from operations, was in vciolation of
                   its loan covenants (see Note 6), and had both a net
                     capital deficit and a net working capital deficiency.
                  These conditions raise substantial doubt about the
                      ability of the Company to continue as a going concern.
                   During fiscal 2000, the Company expects to meet its
                     working capital and other cash requirements with cash
                       derived from operations, borrowings and other financing
                       as required. In addition, the Company is in the process
                    of a strategic merger with two other food companies,
                  which will include a new financing package for the
    newly-combined entity (see Note 13).

                       The Company's continued existence is dependent upon its
                        ability to achieve and maintain profitable operations by
                       controlling expenses, obtaining additional business and
                completing the merger and related new financing.
                Management believes that the combination of cost
                     reduction actions and synergies related to the merger
                    should improve the Company's profitability in fiscal
                 2000. However, there can be no assurance that the
                      Company's efforts to achieve and maintain profitable o
                       The financial statements do not include any adjustments
                       that might result from the outcome of this uncertainty.

2. Inventory            As of June 30, 1999, inventory consisted of the         
following:                      

                    Raw materials                            $   508,280
                    Finished goods                             1,015,293
                     Less: provision for obsolete inventory      (329,312)
                                                             -----------
                                                             $ 1,194,261
                                                             ===========

3. Related Party                                                                
Transactions         Notes Payable-Related Parties                        

                        Notes payable-related parties consist of two 6% interest
                      bearing notes payable for $248,619 each, unsecured and
                       subordinated to other secured parties, past due at June
30, 1999.                       

                        Organic Ingredients, Inc. ("OI"), a company 50% owned by
                 the Company's President, supplies certain organic
                       ingredients used primarily in the Company's fruit juice
                      products. Total purchases from OI amounted to $258,881
              and $564,450 during fiscal year 1999 and 1998,
                      respectively. As of June 30, 1999, a total of $216,579
was owed to OI.                 

                       As of June 30, 1998, the Company wrote off the $168,000
                      balance of a non-interest bearing note receivable from
                      the Company's President in exchange for termination of
                    the contract, which originally called for additional
   non-interest bearing cash advances.

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ORGANIC FOOD PRODUCTS, INC.                                                     
NOTES TO FINANCIAL STATEMENTS                                                   

3. Related Party                                                                
Transactions                                                              
(continued)          Management Services Contract                         

                    In April 1998, the Company contracted for management
                   services from Global Natural Brands, Inc. (Global).
                        Under the contract, Global provided the services of four
                  individuals to fill the offices of Chief Executive
                        Officer, Chief Financial Officer, Vice President-Sales &
               Distribution and Vice President-Marketing for a
                   four-year period ending June 30, 2002. The contract
                      provided for minimum annual cash payments to Global of
                  $300,000, with escalations based on certain earnin
                   attainment conditions. In addition, up to 1,808,784
                    options to purchase the Company's Common Stock could
                       have vested over a total of four years based on certain
                stock price and earnings improvement performance
                 conditions. However, the contract with Global was
          terminated by the Company in October 1998.

                        Under the agreement, $380,109 and $154,135 in management
                 fees, related travel and relocation expenses were
                       incurred during the years ended June 30, 1999 and 1998,
                 respectively. Additionally, Global also agreed to
                   reimburse the Company $50,000 in costs related to a
                     failed acquisition of an unrelated third party during
the year ended June 30, 1998.   

                       Subsequent to termination of the contract, Global filed
                  suit against the Company alleging unpaid wages and
                      seeking money damages and injunctive relief. Mediation
                efforts have been unsuccessful to date. However,
                      management plans to vigorously defend this action, and
                       believes the outcome will not have a material effect on
                    the financial position or results of operations upon
settlement.                     

4. Fixed Assets and                                                             
Goodwill             A summary of fixed assets at June 30, 1999 is as     
follows:                        

                                                        Useful      Carrying
                                                        Life         Value
                                                        ----         -----

                       Computer software and equipment   5 years   $    58,218
                       Leasehold improvements            7 years       185,449
                       Machinery and equipment        7-20 years     1,112,198
                       Office equipment                  5 years        53,257
                       Printing plates                   7 years        66,865
                       Vehicles                          5 years        19,542
                                                      ----------   -----------
                                                                     1,495,529
                        Accumulated depreciation                       (320,454)
                                                                   -----------
                                                                   $ 1,175,075
                                                                   ===========

                During 1998, the Company determined that certain
                    goodwill and fixed assets were potentially impaired,
                    based on estimations of expected undiscounted future
                  cash flows from operations under current operating
                    conditions. Discounted cash flow estimates under the
                       same operating assumptions indicated that there may not
                   be sufficient cash flows to recover the cost of the
              goodwill arising from the purchase of OFP, and
                        accordingly, goodwill of $2,182,401 was written off. The
                    rela by $240,024 to their fair value as estimated by
                        appraisal from an independent third party. The resulting
                        total $2,422,425 loss is included in "Loss on write-down
                 of fixed assets and goodwill" in the accompanying
                        statements of operations. The affected fixed assets will
               be depreciated at their new book basis over the
remaining useful life.          

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ORGANIC FOOD PRODUCTS, INC.                                                     
NOTES TO FINANCIAL STATEMENTS                                                   

4. Fixed Assets and                                                             
Goodwill                                                                  
   (continued)          Unamortized goodwill relating to the February 1998 Sunny
                     Farms acquisition (see Note 5) was not affected as of
                      June 30, 1998. During 1999, additional goodwill in the
                        amount of $156,867 was recorded to reflect the estimated
                      value of escrowed shares of common stock which will be
                    released and recorded in 1999 in connection with the
                      Sunny Farms purchase (see Note 5). This amount and all
                    remaining unamortized Sunny Farms goodwill, totaling
                     $1,019,921, was written off during 1999, based on the
                results for the first year after purchase and an
                      analysis of estimated future cash flows, these amounts
              could not be recovered under current operating
conditions.                     

                        For the years ended June 30, 1999 and 1998, depreciation
                expense was $217,240 and $210,158, respectively.
                       Goodwill amortization expense charged to operations for
                      the years ended June 30, 1999 and 1998 was $60,462 and
$135,194, respectively.         

5. Acquisition of                                                               
   Sunny Farms          In February, 1998, OFPI acquired the natural fruit juice
                        and water bottling operations of Sunny Farms Corporation
                   for a total of $971,171 in cash (including costs of
                     acquisition), and the issuance of Common Stock of the
                   Company valued at $1,700,000. Of the total purchase
               price, $850,000 of the Common Stock portion was
                       contingent upon certain performance conditions over the
                      first year after acquisition and, accordingly, was not
recorded at June 30, 1998.      

                        The $963,822 excess of the remaining purchase price over
                      identified inventory and fixed assets of approximately
              $857,000 was accounted for as goodwill. Of the
                  contingent consideration, $156,867 was recorded in
                  fiscal year 1999 based on gross sales targets, but
                 subsequently written off along with the remaining
               unamortized goodwill due to inability to attain
                   profitable operations and positive cash flows under
          current operating conditions (see Note 4).

                   The actual number of common stock to be released is
                currently under review and will be recorded when
                       mutually agreed to by both parties involved. Management
                      has recorded an estimated accrual of $156,867 which is
                 included in accrued expenses as of June 30, 1999.

                    The acquisition was accounted for as a purchase and,
                      accordingly, the results of the Sunny Farms operations
                      are included from February 11, 1998 forward. Pro forma
                      unaudited estimated results of operations for 1998, as
                        if the acquisition had been made effective July 1, 1997,
                        beginning of the first period presented, are as follows:

                  Year ended June 30,                           1998
                  -------------------                           ----
                      Revenues                                  $ 15,486,000
                       Net loss                                  $ (5,059,000)
                       Loss per share                            $       (.75)

                 Only the basic shares issued in February 1998 not
                   subject to forfeit (see Note 9) are included in the
              above pro forma computation of loss per share.

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ORGANIC FOOD PRODUCTS, INC.                                                     
NOTES TO FINANCIAL STATEMENTS                                                   

6. Line of Credit       Revolving line of credit with Finova Capital            
              Corporation for up to $3,500,000 interest at
             the bank's prime rate plus 2 1/2% per annum
          (10 1/4% at June 30, 1999), interest due
     monthly, collateralized by accounts
                         receivable, inventory, and fixed assets      $1,168,349

                    The line agreement contains covenants which require,
                  among other things, attainment of certain earnings
                levels. At June 30, 1999, the Company was not in
                     compliance with this covenant, and had not obtained a
                       waiver for the violation. However, effective October 6,
                        1999, this financing was replaced in connection with the
merger referred to in Note 13.  

7. Commitments          Inventory Purchases                                     

                       The Company is committed to purchase raw materials over
                     the next year at contracted prices. At June 30, 1999,
           these future committed purchases aggregated
                     approximately $60,000 based on the contracted prices.

Lease Obligations               

                   The Company leases office, warehouse and production
                       space in Morgan Hill, California under a non-cancelable
                     operating lease agreement, expiring April, 2003. Rent
                      expense under this lease agreement for the years ended
                June 30, 1999 and 1998 was $80,894 and $102,590,
                respectively. A schedule of future minimum lease
                      payments due under the non-cancelable operating leases
at June 30, 1999, is as follows:

                    Year ending                                   Amount
                    -----------                                   ------

                     2000                                           83,300
                     2001                                           85,800
                     2002                                           88,400
                     2003                                           67,600
                                                                  --------
                                                                  $325,100
                                                                  ========

Employment Contracts            

                 The Company had an employment contract with a key
                     employee, expiring in July 1999, which provided for a
                 base salary and incentives based on attainment of
                        specified levels of sales and earnings. The contract was
                     terminated in 1998 by mutual agreement; approximately
                 $26,000 still due at June 30, 1999 is included in
accrued expenses.               

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ORGANIC FOOD PRODUCTS, INC.                                                     
NOTES TO FINANCIAL STATEMENTS                                                   

8. Significant                                                                  
  Concentrations       For the years ended June 30, 1999 and 1998, the Company
                       had two customers which accounted for approximately 35%
                        and 43% of the total sales volume, respectively. At June
                      30, 1999, the amount due from these customers included
   in accounts receivable was $76,246.

                       For the year ended June 30, 1999, the Company had three
             suppliers which accounted for an aggregate of
                  approximately forty-one percent (41%) of the total
                        purchases. For the year ended June 30, 1998, the Company
                  had one supplier which accounted for approximately
                        twenty percent (20%) of the total purchases. At June 30,
                    1999, the amounts due to these suppliers included in
                       accounts payable totaled $339,544. The Company believes
                    that other suppliers are available who could provide
                    terms. A change in suppliers, however, could cause a
                    delay in manufacturing and a possible loss of sales,
               which could affect operating results adversely.

9. Shareholders'                                                                
Equity               Common Stock                                         

                   The Company completed an initial public offering of
                      1,495,000 shares of its no par value common stock at a
                price of $4.00 per share sold (including 195,000
              underwriters' over-allotment shares) under its
                     Registration Statement and Prospectus dated August 8,
            1997. The Company received gross proceeds of
approximately $5,980,000.       

                       In connection with the management contract discussed in
                     Note 3, Global purchased a total of 222,222 shares of
                      the Company's Common Stock in June, 1998 for $500,000.
                      OFPI committed to issue additional shares to bring the
                      market value of the shares issued back to the purchase
                       amount if the market value of the Common Stock was less
                   than $2.50 per share for the average of the closing
               prices on specified trading dates in August and
                September, 1998 (with a minimum assigned va this
                      provision, the Company issued 22,222 additional shares
                       to Global; the additional shares are treated as if they
                        were outstanding since the June 1998 date of sale of the
initial related shares.         

                 In connection with the February, 1998 Sunny Farms
                  acquisition, the Company issued a total of 425,000
                       shares at $4.00 per share, of which 212,500 were placed
                     in escrow pending certain performance conditions. The
                       agreement provided for issuance of additional shares if
                   the market price of the Company's shares was not at
                    least $4.00 per share for the average of the closing
                       prices on specified trading dates in August, 1998 (with
                       a minimum assigned value of $3.00 per share). U Company
                  issued and recorded an additional 83,333 shares in
                 connection with the non-contingent portion of the
              purchase. The additional shares related to the
                        non-contingent portion of the purchase are treated as if
                     they were outstanding for the entire period since the
Sunny Farms acquisition date.   

                       A further 83,334 shares to satisfy the price guarantees
                        related to the contingent shares and were also placed in
              escrow pending certain performance conditions.
                        Accordingly, only the 283,333 non-contingent shares were
                      actually recorded as issued in the year ended June 30,
                 1998. The contingently forfeitable shares are not
                  included in the calculation of earnings (loss) per
share.                          

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ORGANIC FOOD PRODUCTS, INC.                                                     
NOTES TO FINANCIAL STATEMENTS                                                   

10. Stock Options and                                                           
Warrants            Options                                             

                 The following table shows activity in outstanding
options during 1999 and 1998:   

                                                                [Download Table]


                                              1999                  1998        
                                     --------------------    -------------------
                                                 Weighted               Weighted
                                                  Average                Average
                                                 Exercise               Exercise
                                       Shares       Price     Shares       Price
                                       ------       -----     ------       -----

                                                                                
Outstanding, beginning of year        2,342,784    $ 2.26      625,000    $ 2.11
Granted-employees, directors,                                                   
 and consultants                        428,000    $ 0.73       40,000    $ 3.34
Granted (expired unvested)-                                                     
 Global management services          (1,808,784)   $ 2.25    1,808,784    $ 2.25
Canceled or expired                    (337,000)   $ 2.56     (131,000)   $ 2.50
                                     ----------    ------   ----------    ------
Outstanding, end of year                625,000    $ 1.19    2,342,784    $ 2.26
                                     ==========    ======   ==========    ======
Options exercisable at year end         208,444    $ 2.09      283,000    $ 2.00
                                     ==========    ======   ==========    ======
Weighted average fair value of                                                  
 options granted during the year-                                               
 employee and director shares only                 $ 0.57                 $ 1.75

                 The following table shows information for options
               outstanding or exercisable as of June 30, 1999:

                                                        [Enlarge/Download Table]

---------------------------------------------------------------------------------------
                       Options Outstanding                   Options Exercisable       
                -----------------------------------  ----------------------------------
                              Weighted                             Weighted            
                               Average     Weighted                 Average    Weighted
                   Number     Remaining     Average     Number     Remaining    Average
  Range of      Outstanding  Contractual   Exercise  Exercisable  Contractual  Exercise
Exercise Price  at 6/30/99   Life (Years)   Price     at 6/30/99  Life (Years)  Price  
---------------------------------------------------------------------------------------

                                                                                       
  Up to $2.00     418,000        9.9        $0.69         7,982       9.9       $0.69  
   $2-$2.99       197,000        4.4        $2.16       190,462       4.7       $2.08  
   $3-$3.34        10,000        9.0        $3.34        10,000       9.0       $3.34  
---------------------------------------------------------------------------------------
                  625,000        8.2        $1.19       208,444       4.7       $2.09  
=======================================================================================

                  In 1998, the Company granted options for 1,808,784
                   shares at $2.25 per share to Global, the management
                    company providing executive management services (see
                  Note 3). Vesting of the options was dependent upon
                 performance conditions relating to improvement in
                     earnings and share price for which targets were to be
                        established yearly. As of June 30, 1998, no such targets
                 were set by OFPI and the management company, and,
                    accordingly, no amounts were included in expense. No
               shar when the management company's contract was
terminated (see Note 3).        

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ORGANIC FOOD PRODUCTS, INC.                                                     
NOTES TO FINANCIAL STATEMENTS                                                   

10. Stock Options and                                                           
Warrants                                                                
  (continued)         All stock options issued to employees have an exercise
                price not less than the fair market value of the
               Company's common stock on the date of grant. In
                     accordance with accounting for such options utilizing
               the intrinsic value method, there is no related
                        compensation expense recorded in the Company's financial
                 statements. Had compensation cost for stock-based
                       compensation been determined based on the fair value of
                       the grant dates consistent with the method of SFAS 123,
                        th per share for the years ended June 30, 1999 and 1998,
                 would have been adjusted to the pro forma amounts
presented below:                

                  June 30,                       1999           1998
                  --------                       ----           ----
Net loss                        
                        As reported              $(4,517,660)   $(4,619,242)
                        Pro forma                $(4,546,131)   $(4,622,802)

Loss per share                  
                        As reported              $      (.62)   $      (.69)
                        Pro forma                $      (.62)   $      (.69)

                      The 1999 amounts include the effects of an increase in
                  fair value resulting from extension of the life of
                  35,000 directors' shares from 5 to 10 total years.

                        The fair value of option grants is estimated on the date
                   of grant utilizing the Black-Scholes option-pricing
                       model, with the following assumptions for grants in the
                 years ended June 30, 1999 and 1998, respectively:
                     average expected life of five years, average expected
                   volatility of 114.16% and 50.4%, risk-free interest
              rates of 4.9% and 5.6%, and no dividend yield.

Warrants                        

                The Company issued warrants to an underwriter in
                        connection with a private placement offering in 1995. As
                      of June 30, 1999, 150,000 warrants were outstanding at
                        exercise prices of $2.00 per share, expiring on December
31, 2002.                       

                       In addition, the Company issued warrants to individuals
                       in connection with various ten percent (10%) promissory
                     note agreements in 1997. As of June 30, 1999, 200,666
                     warrants were outstanding at exercise prices of $3.00
         per share, expiring on December 31, 1999.

                    In connection with its August, 1997 IPO, the Company
                    issued 130,000 warrants to purchase shares of common
                        stock at $4.00 per share, expiring in August, 2002. Also
                     in 1998, the Company issued 60,656 warrants at $2.625
                    per share expiring in February, 2003 in exchange for
                    services related to the Sunny Farms acquisition (see
Note 5).                        

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ORGANIC FOOD PRODUCTS, INC.                                                     
NOTES TO FINANCIAL STATEMENTS                                                   

11. Income Taxes and                                                            
Deferred Income                                                         
 Taxes               A reconciliation of the Federal statutory rate to the
                       tax provision of the corresponding years is as follows:

                                                                [Download Table]


                                          1999           1998    
                                          ----           ----    
                                                                 
Tax benefits at Federal statutory                                
 rates                                $ 1,536,000    $ 1,564,800 
Non deductible expense                     (5,200)       (10,900)
Valuation limitation on deferred                                 
 tax assets                            (1,671,900)    (1,749,600)
State income tax benefit, net of                                 
 Federal effect                           140,300        210,900 
                                      -----------    ----------- 
                                      $      (800)   $    15,200 
                                      ===========    =========== 

                    Deferred tax assets at June 30, 1999 are as follows:

                       Net operating losses                        $ 2,241,500
                       Inventory Reserve                               112,000
                       Goodwill amortization and write-down            707,700
                        Depreciation and fixed asset  write-down        (25,000)
                       Allowances against receivables                  221,300
                       State income taxes, net of Federal benefits     441,400
                                                                   -----------
                       Total                                         3,698,900
                        Valuation allowance                          (3,698,900)
                                                                   -----------
                     Net                                         $      --
                                                                   ===========

                        Since the Company could not determine it was more likely
                       than not that the deferred tax assets will be realized,
                     a 100% valuation allowance has been provided. At June
               30, 1999, the Company had Federal and state net
                       operating loss carryforwards available to offset future
                 Federal and state taxable income of approximately
                    $6,618,000 and $3,482,000, expiring through 2019 and
                      2014, respectively. These carryforwards may be subject
                      to limitations due to the Company's subsequen than 50%
                    in connection with the pending merger (see Note 13).

12. Statements of Cash                                                          
Flows               Non-Cash Investing and Financing Activities         

              The Company recognized investing and financing
                        activities that affected assets and liabilities, but did
                       not result in cash receipts or payments. These non-cash
activities are as follows:      

                     Years ended June 30,                   1999      1998
                     --------------------                   ----      ----

Accrual for value of contingent 
   shares to be issued in connection
                       with the Sunny Farms acquisition    $156,867  $    --
  Issuance of stock for a portion of
                         Sunny Farms acquisition             $   --    $ 850,000
Deferred offering costs charged 
                          to Shareholders' equity            $   --    $ 421,338
                        Stock issued for director expenses   $   --    $  34,401

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ORGANIC FOOD PRODUCTS, INC.                                                     
NOTES TO FINANCIAL STATEMENTS                                                   

13. Subsequent Events   On May 14, 1999, the Company and Spectrum Naturals, Inc.
                   ("Spectrum") entered into a definitive agreement to
                     merge the companies in a stock exchange. In addition,
                  the Company entered into a definitive agreement to
                   acquire all the outstanding shares of OI. Under the
                     terms of the merger, which will be accounted for as a
                   reverse acquisition purchase, Spectrum will receive
                        approximately 75% of the post merger Common Stock of the
              Company, subject to certain adjustments. The m
                        shareholders of all of the parties, and became effective
on October 6, 1999.             

                       In connection with the merger, the newly-combined group
                       replaced existing lines of credit with a new $9,000,000
                        package with Wells Fargo Bank. The new agreement will be
                 collateralized by substantially all assets of the
                       newly-combined group, and will bear interest at Norwest
       Bank Minnesota prime plus 1% to 1 1/4%.

                Advances under the new line will be limited to a
                        borrowing base consisting of certain accounts receivable
                       and/or inventory. Included in the total borrowings will
                      be two term notes of $1,067,000 and $150,000 requiring
                  payment over 60 and 18 months, respectively, and a
                  capital expenditure note of up to $1,500,000 to be
                     repaid over 60 months beginning in August 2002. Other
                       advances will be made under a revolving promissory note
expiring in October 2000.       

               Also in connection with the Merger, the Company
                    completed a Private Placement of 16 Units. Each Unit
                 consisted of a $25,000 unsecured and subordinated
                      promissory note bearing interest of 10%, plus warrants
                     to purchase 10,000 shares of Common Stock at $.01 per
                     share from January 1, 2000 to September 30, 2000. Net
                       proceeds of approximately $370,000 were received, after
                      offering expenses of approximately $30,000. The buyers
                      of the Units were current shareholders/warrant holders
of the Company                  

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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND         
FINANCIAL DISCLOSURE                                            
--------------------------------------------------------------------------------

    On June 18, 1998, the Company elected to terminate its relationship with
Semple & Cooper, LLP, as the Company's independent public accountants. Semple & 
Cooper's reports on the financial statements for the past two years (1) did not 
contain an adverse opinion or a disclaimer opinion, (2) nor were they qualified 
or modified as to uncertainty, audit scope, or accounting principles.           

On July 17, 1998, the Company appointed BDO Seidman, LLP, as its    
independent auditor. The Company did not consult with BDO with respect to the   
application of accounting principles to a specified transaction, either         
completed or proposed, or the type of audit report that might be rendered on the
Company's financial statements, nor did the Company consult with BDO regarding  
the subject of any disagreement with its former independent public accountants  
or with respect to any events required to be reported pursuant to paragraph     
(a)(1)(v) or Item 304 with respect to such former independent accountants.      

     The decision to change accountants was approved by the audit committee of
the Company.                                                                    

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT                                          
--------------------------------------------------------------------------------

Directors and Executive Officers                                                

The name, age, position, and term of office of each of the Company's
executive officers and directors are set forth below:                           

                                                                        Held
                                                                        Position
      Name                   Age                    Position           Since
      ----                   ---                    --------           -----
John Battendieri               51              Chief Executive Officer          
                                             and Director               1996
Richard Bacigalupi             50              Chief Financial Officer    1999  
Kenneth A. Steel Jr. (1)       40              Director                   1996  
Charles B. Bonner (1) (2)      56              Director                   1996  

(1)   Member of the Audit Committee.                                            

(2)   Member of the Compensation Committee.                                     

     Directors hold office for a period of one year from their election at the
annual meeting of shareholders or until their successors are duly elected and   
qualified. Officers of the Company are elected by, and serve at the discretion  
of, the Board of Directors.                                                     

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Background                                                                      

   The following is a summary of the business experience of each executive
officer and director of the Company for at least the last five years:           

     John Battendieri founded OFPI in 1988 and has served as its President and
as a director since 1988 and as its chief executive officer since October 1998. 
In 1987, he founded Santa Cruz Naturals, an organic fruit juice company, which  
he sold to Smuckers Corporation in 1992. Mr. Battendieri has grown, developed   
and marketed a wide variety of natural food products for more than 25 years. He 
has also served as a director of Organic Ingredients a company in which he holds
a 50% ownership interest, since its inception. See "Item 12."                   

    Richard R. Bacigalupi has served as OFPI's Chief Financial Officer since
January 1999. Prior to joining OFPI, he served as the Chief Financial Officer   
for PowerBar, Inc., a branded consumer product company, from February 1995 to   
May 1998. From October 1991 to April 1994, Mr. Bacigalupi served as Corporate   
Controller for Spreckels Industries, Inc., a sugar processing and equipment     
manufacturing company. Mr. Bacigalupi is a Certified Public Accountant and holds
a Bachelor of Science degree in business administration from California State   
University, Fresno.                                                             

 Kenneth A. Steel, Jr. has been employed by K.A. Steel Chemicals, Inc.
("K.A. Steel") since 1978 and has been its Executive Vice President since 1979. 
K.A. Steel is a privately held Chicago, Illinois based chemical company in which
Mr. Steel holds primary responsibilities for sales, marketing and operations    
management.                                                                     

    Charles B. Bonner has been President and majority shareholder since 1990
of Pacific Resources Inc., a Fresno, California merger/acquisition and venture  
capital firm. From 1975 to 1989, he was President of Bonner Packing Company, a  
California dried fruit producer and marketer. Mr. Bonner has been a director    
(since 1993) and an officer (from 1993 to 1994) of Monterey Pasta, Inc., a      
publicly traded pasta and salsa manufacturer. Mr. Bonner earned a Bachelor of   
Arts degree from Stanford University.                                           

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ITEM 10. EXECUTIVE COMPENSATION                                                 
-------------------------------                                                 

The following table discloses compensation paid to certain of the   
Company's executive officer for the year's ended June 30, 1999 and 1998:        

                                          Options/         All Other
Name and Principal                   Salary       SARS         Compensation     
Position                    Year       $         (#)                $         
--------                    ----    ------     --------       ------------    

James F. Swallow             1999   $   --          --          $    --         
Chief Executive Officer     1998   $ 1 (3)    1,808,784(5)     $    --        

Floyd Hill                   1999   $    --         --          $ 154,000(6)    
Chief Executive Officer     1998   $ 123,000    200,000(1)(4)  $    --        

John Battendieri             1999   $ 106,000       --          $    --         
Chief Executive Officer     1998   $ 114,000       --          $ 168,000(2)   

----------                                                                      

(1)   See "1995 Stock Option Plan and Item 11                                   

(2)   Represents forgiveness of debt. See Item 12, "Certain Relationships and   
Related Transactions".                                              

(3)   Mr. Swallow is an employee of Global Natural Brands Ltd. (Global), which  
 provided executive management services to the Company from April 1998
 through October 1998. See Item 12, "Certain Relationships and Related
  Transactions". During 1999 and 1998, the Company incurred $380,000 and
      $154,000 in management fees and with Global. Mr. Swallow did not receive a
separate salary.                                                    

(4)   Of these options, 100,000 were terminated by agreement upon Mr. Hill's    
resignation from the Company in 1998.                               

(5)   Includes 1,808,784 shares issued pursuant to options granted to Global    
Natural Brands, Ltd., attributed to Mr. Swallow through his partial 
ownership of Global. These options expired in October 1998 upon     
   termination of the management services contract between the Company and
Global. See Item 3, "Legal Proceedings", and Item 12, "Certain      
Relationships and Related Party Transactions".                      

(6)   Represents amounts paid out under a severance agreement and broker        
      commissions following Mr. Hill's resignation in 1998. Mr. Hill resigned as
Chief Executive Officer on February 19, 1998. Amounts due under his 
employment agreement are being paid over approximately two years.   

    The Company's nonsalaried directors do not receive any cash compensation
as directors, although they are reimbursed for out-of-pocket expenses in        
attending Board of Directors' meetings. They have also been granted an aggregate
of 75,000 stock options under the Company's 1995 Stock Option Plan exercisable  
at prices of $2.00 to $2.50 per share.                                          

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1995 Stock Option Plan                                                          

  In November 1995, the Company adopted a stock option plan (the "Plan")
which provides for the grant of stock options intended to qualify as "incentive 
stock options" or "nonqualified stock options" within the meaning of Section 422
of the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock
options are issuable only to eligible officers, directors and key employees of  
the Company.                                                                    

The Plan is administered by the Board of Directors. The Company had 
reserved 625,000 shares of Common Stock for issuance under the Plan. Under the  
Plan, the Board of Directors determines which individuals shall receive stock   
options, the time period during which the options may be partially or fully     
exercised, the number of shares of Common Stock that may be purchased under each
option and the option price.                                                    

      For incentive stock options (i) the per share exercise price of the Common
Stock may not be less than the fair market value of the Common Stock on the date
the option is granted and (ii) no person who owns, directly or indirectly, at   
the time of the granting of an incentive stock option, more than 10% of the     
total combined voting power of all classes of stock of the Company is eligible  
to receive stock options unless the option price is at least 110% of the fair   
market value of the Common Stock subject to the option on the date of grant. No 
stock options may be transferred by an optionee other than by will or the laws  
of descent and distribution and, during the lifetime of an optionee, the option 
may only be exercisable by the optionee. Stock options may be exercised only if 
the option holder remains continuously associated with the Company from the date
of grant to the date of exercise. Stock options under the Plan must be granted  
within ten years from the effective date of the Plan. The exercise date of a    
stock option granted under the Plan cannot be later than ten years from the date
of grant. Any options that expire unexercised or that terminate upon an         
optionee's ceasing to be employed by the Company become available once again for
issuance. Shares issued upon exercise of an option will rank equally with other 
shares then outstanding.                                                        

      As of June 30, 1999, 625,000 stock options were outstanding under the plan
for officers, directors and employees (593,000 for current and past executive   
officers and directors) at exercise prices of $0.69 to $3.34 per share.         

Option Grants in Last Fiscal Year                                               

The following table sets forth the options granted to the executive 
officer named below for the year ended June 30, 1999. During the year, there    
were no exercises of stock options by the executive officers named below:       

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INDIVIDUAL GRANTS     

Number       % of Total       
Of Securities      Options            
       Underlying       Granted         Exercise
                        Options       to Employees      or Base       Expiration
                     Granted         in 1999          Price           Date
                     -------         -------          -----           ----

Richard Bacigalupi      418,000          97.6%           $0.69         June 2019

(1)   Options vest monthly over a three-year period beginning June 1, 1999.     

Aggregated option exercises in last fiscal year and fiscal year end option      
values:                                                                         

                  Number of Securities          Value of Unexercised
            Underlying Unexercised            In-the-money
                  Options at June 30, 1999      Options at June 30, 1999
Name              Exercisable  Unexercisable    Exercisable  Unexercisable
----              -----------  -------------    -----------  -------------

Floyd R. Hill          100,000            0           $  --        $   --       
Richard Bacigalupi       6,576      411,424           $ 1,233      $ 77,142     

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT         
-----------------------------------------------------------------------         

 The following table sets forth information concerning the holdings of
Common Stock by each person who, as of the date June 30, 1999, holds of record  
or is known by the Company to hold beneficially or of record, more than 5% of   
the Company's Common Stock, by each director, and by all directors and executive
officers as a group. All shares are owned beneficially and of record. The       
address of all persons (unless otherwise noted in the footnotes below) is in    
care of the Company at 550 Monterey Road, Morgan Hill, California.              

Name                          Amount of Ownership         Percent of Class
----                          -------------------         ----------------
John Battendieri                   2,102,499                    27.8      
Sunny Farms Corp.(1)                 566,667                     7.5      
Richard R. Bacigalupi(2)             418,000                     5.5      
Kenneth A. Steel(3)                  380,019                     5.0      
Charles Bonner(4)                     25,000                      *       
Dean E. Nicholson                    442,750                     5.9      
Steven A. Reedy                      450,000                     6.0      
All officers and directors                                                
as a group (4 persons)                                                    
(1)(2)(3)(4)                       2,925,518                    38.7      
                             ---------                    ----

*     Less than 1%                                                              

(1)   Includes 295,833 shares held in escrow, a portion of which are subject to 
cancellation. See Item 12, "Certain Relationships and Related       
Transactions".                                                      

(2)   Includes 418,000 shares issuable upon exercise of options granted prior to
closing of Merger.                                                  

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(3)   Includes options to purchase 30,000 shares of Common Stock at $2.00 per   
    share and 20,000 shares of Common Stock at $2.50 per share granted under
   the 1995 Stock Option Plan. Includes 25,328 warrants owned by Mr. Steel
     and an additional 25,328 owned beneficially by Mr. Steel belonging to his
brother, Robert Steel, to purchase Common Stock at $2.625 per share.

(4)   Includes stock options to purchase 25,000 shares of Common Stock at $2.50 
per share granted through the 1995 Stock Option Plan.               

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                         
-------------------------------------------------------                         

    John Battendieri, OFPI's current Chief Executive Officer and Chairman of
the Board, is also currently a director and 50% shareholder of OI. Mr.          
Battendieri abstained from voting as a director of OI and OFPI upon matters     
relating to each other company. Following the Merger, Mr. Battendieri will be   
Director of Product Development and a director of the combined-group.           

 In October 1998, OFPI and OI entered into a joint venture arrangement
under which the two companies provide private label products to manufacturers   
and retailers. Under this arrangement, OFPI and OI are currently producing juice
concentrates, applesauces, and fruit juices. OFPI and OI share equally the      
inventory costs and gross profit under the arrangement, except with respect to  
one customer where OI receives the first 10% of the gross margin, after which   
OFPI and OI share the remainder equally. Total revenue generated under the      
arrangement as of June 30, 1999 was approximately $68,000. OFPI's total         
purchases from OI under this arrangement amounted to approximately $564,000     
during fiscal 1998 and approximately $259,000 for the nine months ended June 30,
1999. OFPI management believes that the price of, and terms for, the ingredients
purchased from OI were fair, reasonable and consistent with prices and terms    
that would be available to OFPI from third parties.                             

In June 1996, Mr. Battendieri entered into a three-year employment  
agreement with OFPI that provides for an annual salary of $110,000. The         
agreement originally called for non-interest bearing loans of $7,000 per month  
during the full term of the employment agreement repayable the earlier of August
1999 or upon termination of the agreement. As of June 30, 1998, OFPI had loaned 
an aggregate of $168,000 loaned to Mr. Battendieri, and that amount was forgiven
by OFPI effective as of June 30, 1998. OFPI agreed to the loan arrangement as a 
negotiated part of the 1996 merger that created OFPI. This agreement was        
terminated as of June,1999.                                                     

     In connection with the February 1998 acquisition of assets related to the
juice and water bottling business of Sunny Farms Corporation, OFPI issued in the
name of Sunny Farms an aggregate of 566,667 shares of common stock. Of these    
shares, 295,833 were placed in escrow, and were to be released only upon the    
attainment of certain performance milestones by the acquired business unit.     
Since the acquisition, Sunny Farms has filed for bankruptcy and OFPI is         
negotiating with Sunny Farms' bankruptcy trustee to determine the amount, if    
any, of shares of stock that should be released to Sunny Farms from escrow, the 
remainder of which would be cancelled. If at least 107,516 shares were released,
Sunny Farms would own at least five percent of OFPI's shares of stock           
outstanding as of June 30, 1999.                                                

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 In April 1998, OFPI entered into an agreement with Global pursuant to
which Global was to provide the services of four individuals to fill the offices
of Chief Executive Officer, Chief Financial Officer, Vice President of Sales and
Distribution, and Vice President, Marketing. The contract provided for minimum  
annual cash payments to Global of $300,000, with escalations based on certain   
earnings performance and acquisition attainment conditions. In addition, up to  
1,808,784 options issued to Global to purchase OFPI's common stock would have   
vested over a five-year period based on the achievement of certain stock price  
targets and earnings milestones. The options would have been exercisable at     
$2.25 per share and would have had terms of four years from the date of vesting.
Upon any change in ownership interest of more than 50% of the capital stock of  
OFPI, the balance of the minimum annual cash payments for the remaining         
contractual term would have become due and payable and all stock options would  
have vested immediately. The management agreement with Global was terminated in 
October 1998 and all options issued to Global were cancelled. In connection with
the management agreement with Global, Global purchased 222,222 shares of OFPI   
common stock in June 1998 for an aggregate of $500,000, and had committed to    
invest an additional $500,000 before the earlier of 30 days after completion of 
a qualified acquisition transaction or April 15, 1999. The agreement targeted   
the value of such additional purchases at $2.50 per share, with adjustments to  
account for specified market conditions.                                        

    The Company had an employment agreement with Floyd Hill, shareholder and
former Director and Chief Executive Officer of the Company, which was terminated
by mutual agreement in February 1998. Pursuant to the agreement, a total of     
$167,000 was accrued for payout over approximately three years. Approximately   
$125,000 and $20,000 was paid during the years ended June 30, 1999 and 1998,    
respectively.                                                                   

 Subsequent to June 30, 1999, in expectation of and for the purpose of
funding cash requirements with respect to the Merger, the Company completed a   
Private Placement of 16 Units. Each Unit consisted of a $25,000 unsecured and   
subordinated prommisory note bearing interest at 10%, plus warrants to purchase 
10,000 shares of Common Stock at $.01 per share from January 1, 2000 to         
September 30, 2000. Net proceeds of approximately $370,000 were received, after 
offering expenses of approximately $30,000. The buyers of the Units were current
share/warrant holders of the Company                                            

The Company believes that the terms and conditions of the above     
transactions were fair, reasonable and consistent with terms the Company could  
have obtained from unaffiliated third parties. Any future transactions with the 
Company's executive officers or directors will be entered into on terms that are
no less favorable to the Company than those that are available from unaffiliated
third parties, and all such transactions will be approved by a majority of the  
Company's disinterested directors.                                              

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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                       
-----------------------------------------                                       

(a)   Exhibits:                                                                 

Exhibit No.             Title                                                   
-----------             -----                                                   

1.01      Form of Underwriting Agreement (1)                                
1.02      Form of Selected Dealer Agreement (1)                             
1.03      Form of Representatives' Warrant (1)                              
1.04      Form of Amended Underwriting Agreement (1)                        
1.05      Form of Amended Selected Dealer Agreement (1)                     
1.06      Form of Amended Representatives' Warrant (1)                      
1.07      Form of Lock-Up Agreement (1)                                     
2.01      January 21, 1998 Agreement of Purchase and Sale of Assets between 
the Registrant and Sunny Farms Corporation (2)          
2.02      February 10, 1998 Amendment to Agreement of Purchase and Sale of  
    Assets between the Registrant and Sunny Farms Corporation(2)
3.01      Articles of Incorporation of the Registrant, as amended (1)       
3.02      Bylaws of the Registrant (1)                                      
10.01     1995 Employee Stock Option Plan (1)                               
10.02     Office and Warehouse Lease (Morgan Hill, California) (1)          
10.03     Employment Agreement with Mr. Hill (1)                            
10.04     Employment Agreement with Mr. Battendieri (1)                     
  10.05     Merger Agreement between the Registrant(Garden Valley Naturals,Inc.)
And Organic Food Products, Inc. (1)                     
10.06     Loan Agreement with Mr. Steel (1)                                 
10.07     Stock Redemption Agreement with Messrs. Nicholson and Reedy (1)   
10.08     Settlement Agreement with Mr. Nicholson (1)                       
10.09     First Amendment to Stock Redemption Agreement (1)                 
 10.10     Amendment to Promissory Notes issued to Messrs. Nicholson and Reedy
(1)                                                     
10.11     Form of Subscription Agreement, Promissory Note and Warrant for   
Bridge Loan (1)                                         
10.12     Management Services Agreement between the Registrant and Global   
Natural Brands, Ltd., effective April 15, 1998 (3)      
10.13     1995 Stock Option Plan (4)                                        
10.14     Incentive Stock Option Agreement (4)                              
10.15     Non-qualified Stock Option Agreement (4)                          
10.16     Agreement and Plan of Merger and Reorganization dated May 14, 1999
         by and between Organic Food Products, Inc and Organic Ingredients
(5)                                                     
10.17     Agreement and Plan of Merger and Reorganization dated May 14, 1999
            by and between Organic Food Products and Spectrum Naturals, Inc. (5)
10.18     Form of Amended and Restated Articles of Incorporation of Organic 
Food Products, Inc. (5)                                 
10.19     Form of Organic Food Products, Inc. Employment Agreement (5)      
10.20     Form of Organic Food Products, Inc. Shareholder Lock-up Agreement 
(5)                                                     

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Exhibit No.             Title                                                   
-----------             -----                                                   

10.21     Form of Voting Agreement dated May 14,1 999 between Spectrum      
         Naturals, Inc. and certain shareholders of Organic Food Products,
Inc. (5)                                                
  10.22     October 6, 1999 Credit and Security Agreement by and between Organic
          Food Products, Inc., Organic Ingredients, Inc., Spectrum Naturals,
            Inc. and Spectrum Commodities, Inc. and Wells Fargo Business Credit,
Inc.                                                    
10.23     September 23, 1999 Private Placement Memorandum by Organic Food   
Products, Inc.                                          
27.01     Financial Data Schedule (1)                                       

----------                                                                      

(1)   Incorporated by reference to the Registrant's Registration Statement on   
 Form SB-2, File No. 333-22997, declared effective on August 11, 1997.

(2)   Incorporated by reference to exhibits filed with the Registrant's Form 8-K
on February 25, 1998.                                               

(3)   Incorporated by reference to exhibits filed with the Registrant's Form 8-K
on May 19, 1998.                                                    

(4)   Incorporated by reference to exhibits filed with the Registrant's Form S-8
on August 26, 1998.                                                 

(5)   Incorporated by reference to annexes filed with Registrant's Joint Proxy  
      Registration Statement on Form S-4, File No. 333-83675, declared effective
July 30, 1999.                                                      

(b)   Reports on Form 8-K during the quarter ended June 30, 1999:               

Form 8-K filed June 3, 1999 to report the delisting of the Company's securities 
from NASDAQ'S Small Cap Market on May 26, 1999 and trading on the NASDAQ OTC    
Bulletin Board System effective on May 27, 1999.                                

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SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,      
thereunto duly authorized, in Morgan Hill, California, on October 12, 1997.     

                       ORGANIC FOOD PRODUCTS, INC.

                         By: /s/ Richard R. Bacigalupi
                         -----------------------------
                 Richard R. Bacigalupi
                   Chief Financial Officer

   Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed below by the following persons on the dates         
indicated.                                                                      

   Signature                       Title                        Date
   ---------                       -----                        ----

/s/ John Battendieri             Chief Executive Officer      October 12, 1999  
-----------------------------    and Director                                   
John Battendieri                                                                

/s/ Richard R. Bacigalupi        Chief Financial Officer      October 12, 1999  
-----------------------------                                                   
Richard R. Bacigalupi                                                           

/s/ Kenneth A. Steel Jr.         Director                     October 12, 1999  
-----------------------------                                                   
Kenneth A. Steel, Jr.                                                           

/s/ Charles B. Bonner            Director                     October 12, 1999  
-----------------------------                                                   
Charles B. Bonner                                                               

25

Dates Referenced Herein   and   Documents Incorporated by Reference

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		5/26/99		9		42
		5/14/99		3		41			NT 10-Q
		4/15/99		40
		3/31/99		9					10QSB,  NT 10-Q
		12/31/98		9					10QSB,  NT 10-Q
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		8/26/98		42					S-8
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		12/15/97		23
		10/12/97		43
		9/30/97		9					10QSB
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