** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION********WASHINGTON, D.C. 20549**

----

**FORM10-KSB**

**ANNUAL REPORT UNDER SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2004**

Commission file number: **001-31816**

----

**Centennial Specialty Foods Corporation******(Exact name of small business issuer in its charter) 
| **Delaware**                                                       | ** ** | **55-0825751**                       | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| (State or other jurisdiction of incorporation or  organization)    | ** ** | (I.R.S. Employer Identification No.) | ** ** |
| **10700 E. Geddes Ave.,**

**Suite 170**

**Centennial, Colorado** | ** ** | **80112**                            | ** ** |
| (Address of principal  executive offices)                          |       | (Zip Code)                           |       |
| ** **                                                         | ** ** | ** **                           | ** ** |
| Issuer’s telephone  number: **(303)  292-4018**               |       |

----

Securities registered under Section 12(b) of the ExchangeAct: 
| **Title  of each class**        | ** ** | **Name of each exchange on which registered** | ** ** |
|---------------------------------|------------|-----------------------------------------------|------------|
| Common Stock,  $.0001 par value |       | Boston Stock Exchange                         |       |

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

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during thepast 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý    No o

Check if there is no disclosure of delinquent filers inresponse to Item 405 of Regulation S-B is not contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference inPart III of this Form 10-KSB or any amendment to this Form 10-KSB. o

The issuer’s revenues for its most recent fiscal yearwere $6.0 million.

The aggregate market value of the voting andnon-voting common equity held by non-affiliates of the registrant on January31, 2005, computed by reference to the closing price for such stock on theNasdaq SmallCap Market, was $1,537,500.

Shares of commonstock outstanding at February 28, 2005 — 5,050,000.

Transitional Small Business Disclosure Format Yes o No ý

**DOCUMENTS INCORPORATED BY REFERENCE**

Certainportions of the registrant’s definitive proxy statement to be used inconnection with its 2005 Annual Meeting of Stockholders and to be filed within120 days of December 31, 2004 are incorporated by reference intoPart III, Items 9-12 and 14, of this report on Form 10-KSB.

 

----

 

 

   
|  |  |
|--|--|

 

 

----

** **

**TABLE OFCONTENTS**
| Part I        |                                                                                                                   |
|---------------|------------------------------------------------------------------------------------------------------------------------|
| Item 1.       | Description of Business                                                                                                |
| Item 2.       | Description of  Property                                                                                               |
| Item 3.       | Legal Proceedings                                                                                                      |
| Item  4.      | Submission  of Matters to a Vote of Security Holders                                                                   |
|          |                                                                                                                   |
| Part II       |                                                                                                                   |
| Item  5.      | Market  for Common Equity and Related Stockholder Matters                                                              |
| Item  6.      | Management’s  Discussion and Analysis or Plan of Operation                                                        |
| Item 7.       | Financial Statements                                                                                                   |
| Item  8.      | Changes  In and Disagreements with Accountants on Accounting and Financial Disclosure                                  |
| Item 8A.      | Controls and  Procedures                                                                                               |
| Item 8B.      | Other Information                                                                                                      |
|          |                                                                                                                   |
| Part III      |                                                                                                                   |
| Item  9.      | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act |
| Item 10.      | Executive  Compensation                                                                                                |
| Item  11.     | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                       |
| Item  12.     | Certain  Relationships and Related Transactions                                                                        |
| Item 13.      | Exhibits                                                                                                               |
| Item  14.     | Principal  Accountant Fees and Services                                                                                |
|          |                                                                                                                   |
| SIGNATURES    |
|          |                                                                                                                   |
| CERTIFICATONS |
|               |                                                                                                                        |  |

 

 

----

 

**PART I**

*The information in thisForm 10-KSB contains certain forward-looking statements, includingstatements related to trends in the Company’s business. The Company’s actualresults may differ materially from the results discussed in the forward-lookingstatements. Factors that might cause such a difference include those discussedin “Management’s Discussion and Analysis of Financial Condition and Results ofOperation — Factors That May Affect Future Operating Results, FinancialCondition or Business,” and “Business” in this Form 10-KSB.*

**Item 1.****DESCRIPTION OF BUSINESS**

**Overview**

Centennial Specialty Foods Corporation (“we,” “us,” “our,”the “Company” or “Centennial”), a Delaware corporation organized in February 2003,is the parent company of Stokes Canning Company (“Stokes”).     We market, sell and distribute qualitybranded ethnic Southwestern sauces and food products in the expanding Mexicanfood segment of the domestic food industry. Our products are sold under theStokes and Ellis labels, two Southwestern brands now nearly 100 years oldthat are well-recognized in our primary market of Colorado.

Our products are currently sold through leadinggrocery stores, superstores and club stores such as Kroger, Safeway, Wal-Mart, Sam’sClub, Albertson’s and Costco, located in Colorado, Arizona, California and in asmall number of major metropolitan markets in adjoining states.

We have expanded our product distribution into othermarkets in the Western United States. However, this process has taken longerthan expected and the sales results have been disappointing. We are continuingto review our business plan to evaluate opportunities to grow. We are alsoexploring other strategic alternatives, which may include other financingarrangements, mergers, acquisitions and joint ventures.

**Industry and the Market**

According to an Information Resources, Inc. (“IRI”)survey, an independent market research firm, dated February 20, 2005 whichreflected sales data for the last 52 weeks, Mexican food sales in Coloradoenjoy one of the highest retail market penetration rates for Mexican food inthe U.S. Our Stokes sauces have attained a leading market share in the Coloradoretail Mexican food market. We believe this is because of consumer loyalty hasresulted in high repeat purchase rates of our products. According to IRI, ourbest-selling products are Stokes Green Chile Sauces, four of which are nowranked #1, #2, #3 and #4 in retail sales as the most popular Mexican sauces inColorado.

We believe that we have unique products that arecapable of being sold in other geographic markets throughout the United States.While significant competition exists in the Mexican food market, we are seekingto expand sales of our premium Stokes Green Chile Sauces through variousdistribution channels.

**Our Brands and Products**

The Stokes and Ellis brands are both now nearly100 years old. We believe that products marketed under the Stokes andEllis brand names are associated with ethnic Southwestern foods that featurehigh quality natural ingredients, selected blends of spices and seasonings, andtraditional recipes with a Southwestern flair.

We currently offer five distinct green chile saucesand three distinct chili con carne or chili products under the Stokes brand.Both our sauces and chili products come in varieties with pork, chicken, beefand no meat. Our Ellis products include four varieties of refried beans, threedistinct tamale products, three distinct chili products, two bean products, andour Ellis burrito sauce.

1

----

 

Our products are made according to traditionalSouthwestern recipes that we consider to be trade secrets. Each of our productsis made using all natural ingredients, natural flavorings and spices. Wepackage our sauces and food products in 15 and 28 ounce cans designed forconvenient one-meal and family-sized portions. We also sell a limited number ofproducts in 108 ounce cans suitable for use by food service customers.

From time to time, we may introduce new ethnicSouthwestern products that will extend or complement our current product lines.As the launch of new packaged foods is an expensive and time-consumingundertaking, we expect that any new products we introduce will seek to capitalizeon our ethnic Southwestern heritage, be consistent with our existing productquality standards, and be positioned to enhance our brands’ reputation. Since1998, Stokes has introduced six new products under our Stokes and Ellis brands.During the same period, Stokes discontinued approximately 25 products inconjunction with its streamlining of product lines designed to focus on salesof higher margin products. Among the discontinued products were approximatelyten organic products formerly marketed under the “Greene’s Farm” label. We do not currently market any products under thislabel. Stokes also discontinued several meat and bean products in 2002 thatwere test marketed by a third party on our behalf.

Some of our Ellis products carry the lowest gross marginsof our product lines and reflect the “commoditized” nature of these products.In general, these products experience more competition with private labelbrands made by or for the major grocery chains. We do not expect to emphasizethe marketing of these products except where we believe a clear marketopportunity exists.

**Our Customers**

Sales to four customers accounted for a total of 70%of our sales in 2004, with each of those customers accounting for 10% or moreof 2004 sales. These customers are Kroger, Safeway, Wal-Mart/Sam’s Club andAlbertson’s. Sales to Costco accounted for less than 5% of 2004 sales. Ourproducts are currently sold through stores operated by these customers aswell as a number of regional retailers in Colorado, Arizona and California, anda small number of major metropolitan markets in adjoining states. Our productsare now carried in four distribution regions for Wal-Mart. Our products areapproved for sale in one distribution region by Costco, representing a smallnumber of Costco club stores, and four distribution regions by Sam’s Clubs.Sales to our customers are made under one-time purchase orders. Our customershave no binding commitments to us and can discontinue purchasing or stockingour products at any time. For this reason, we have no backlog and we do notconsider backlog to be material to our business.

**Marketing, Sales and Distribution**

Our marketing strategy is based upon management’sbelief that consumers prefer high quality ethnic Southwestern sauces and foodsjust as they prefer high quality foods in other product categories. The pricingof our products, as well as their taste, ingredients and packaging, is designedto reinforce the high quality brand image we seek to convey. By deliveringconsistently high quality products, we believe our ethnic Southwestern productshave developed a loyal base of consumers in our existing markets and we areseeking to do so in our target markets. Our existing consumer following inColorado has been obtained without significant advertising and promotionactivities to date.

The packaged ethnic Southwestern food category and thebroader Mexican food category are our primary markets. In general, these marketsare comprised of two segments, the premium brands and the low-priced “commodity”brands. These segments are primarily distinguished by retail price differences,the quantity and quality of ingredients, and by packaging. These categories arerelatively fragmented among national and regional competitors in comparisonwith many other food categories. We have positioned our Stokes brand as a highquality line that delivers Southwestern taste and flavor experiences not foundin private label or other competitive products. The Ellis line is a mix ofhigher quality and commodity products in which we emphasize sales of the higherquality products and offer commodity products as a convenience for our retailcustomers.

During 2004, the Company focused on expanding itsdistribution of premium products into new markets such as California. Our promotionaland advertising activities were integrated with our efforts to secure shelfspace in individual stores through payment of slotting fees to grocery chains.The exact amount of slotting fees paid to obtain shelf space in

2

----

 

individual stores or markets depended on the amount and locationof shelf space, sales of other ethnic Southwestern products in particularstores, competitive market conditions, and similar factors. As sales of ourproducts are made to customers, recovery of our investment in slotting fees ismade through profits from the sale of the products. However, sales of ourproducts in new expansion markets, such as California, have been disappointing.The Company has recently been notified that certain customers in the Californiamarket representing approximately 500 grocery stores will be discontinuing ourproducts. Accordingly, recovering the slotting fees and marketing investmentmade in California will be very slow, if even possible.

We sell and distribute our products directly to retailgrocery chains, supercenters and club stores as well as to wholesalers anddistributors that resell our products to retailer customers. We also distributethrough specialty food brokers that represent our products and assist inselling and stocking our products at the retail level, but do not purchase ortake title to our products.

During 2004, our primary expansion efforts weredirected at the California market. We spent approximately $500,000 on slottingfees in the California market as well as significant spending on marketing andpromotional allowances (approximately $500,000) in order to introduce ourproducts in that market. Despite our effort, the expansion in the Californiamarket has been disappointing. As a result, we are now exploring alternativedistribution channels which may include specialty distributors within theCalifornia market which will purchase and distribute our products on a smallerscale. Other alternatives may include acquisition of or merger with other foodcompanies under which we market their product in areas where they have stronglocal presences, such as we do in Colorado.

**Contract Manufacturing Relationshipwith Hoopeston**

Our products are manufactured by Hoopeston FoodsDenver Corp. (“Hoopeston”) at our plant in Denver, Colorado. Stokes enteredinto a series of inter-related agreements with Hoopeston in January 2001, including,but not limited to, a Lease Agreement, a Co-Pack & Warehousing Agreement, aLease Override Agreement, an EBITDA Overview Committee Agreement and anExclusive License Agreement. Under these agreements Hoopeston agreed to produceand warehouse finished inventory, lease our production facility and equipment,and acquire the raw material and in-process inventory. Under the Co-Pack &Warehousing Agreement, Hoopeston receives reimbursement for the cost ofmanufacturing sauces and food products plus a fixed rate of return, togetherwith a storage fee for warehousing products after an agreed-on period.Hoopeston pays a monthly lease fee for the plant and equipment of approximately$35,000, together with reimbursement of applicable taxes and insurance.

The Co-Pack & Warehousing Agreement calls forHoopeston to purchase and be reimbursed for raw materials and ingredientsnecessary to manufacture our products. If Hoopeston’s production or ingredientcosts increase or decrease, it may, under certain circumstances, adjust their productcosts to us on an annual basis. We have periodically agreed to interim priceadjustments with Hoopeston reflecting higher production costs incurred byHoopeston; however, we are not required to accept price changes except on anannual basis. Hoopeston purchases ingredients from suppliers using purchaseorders and neither we nor Hoopeston have any long-term arrangements withsuppliers.

At the time Stokes enteredinto the Co-Pack & Warehousing Agreement with Hoopeston, it also gaveHoopeston an exclusive license to use the manufacturing processes, formulas andrecipes related to the making of our products. The Exclusive License Agreementspecifically excludes any rights to our brands or any license to use our tradenames or trademarks. The Co-Pack & Warehousing Agreement containsconfidentiality provisions that obligate Hoopeston to maintain the confidentialityof the formulas, recipes and other trade secrets and confidential informationreceived from us during the term of the Co-Pack & Warehousing Agreement andfor a period of 10 years thereafter. Hoopeston is responsible forcomplying with all federal and state laws and regulations in operating theplant.

The Co-Pack & Warehousing Agreement with Hoopestoncurrently runs until January 26, 2010, with additional automatic one-yearextensions that occur on June 30th of each year unless either partyelects to terminate the automatic one year extension. Either party mayterminate the Co-Pack & Warehousing Agreement in the event of a breach thatcontinues after written notice that is not cured or waived. The Lease Agreementwith Hoopeston currently has the same duration as the Co-Pack & WarehousingAgreement, subject to an extension option, which, if validly exercised byHoopeston, could

3

----

 

extend the term of the lease until January 26, 2011. The LeaseAgreement is subject to Hoopeston’s right to purchase the property from usduring the lease term for fair market value. We have the right to sell the propertyto any other party subject to Hoopeston’s continuing option to purchase the propertyfrom the third party while the lease is in effect. If we sell the property to athird party, Hoopeston has a right to terminate the Co-Pack & WarehousingAgreement.

Under the Co-Pack & Warehousing Agreement, we mustpurchase from Hoopeston a minimum number of cases of products during each yearof the agreement. If we fail to do so, we must pay Hoopeston a per-case feemultiplied by the difference between the actual numberof cases produced and the minimum number called for in the agreement. For thecontract years ended June 30, 2004 and 2003, we did not meet the minimum case requirementand paid Hoopeston fees of $81,874 and $16,841, respectively. In addition, asof December 31, 2004, we have accrued an estimated $251,000 in shortfall paymentsfor the contract year ending June 30, 2005.

The Co-Pack & Warehousing Agreement with Hoopestonrequires us to provide a rolling multi-week production plan that is used toestablish firm production schedules ahead of actual production. Followingproduction, Hoopeston must inventory canned food for at least a 5 dayincubation period to allow USDA inspectors to test product forcontamination or spoilage. For these reasons, it is difficult to produce ourfood products on short notice. Although Hoopeston can add shifts to increaseshort-term production, the use of additional shifts increases production coststhat Hoopeston passes through to us if we request additional, unscheduledproduction.

Hoopeston has provided us with contractualindemnification in the event of its failure to comply with the terms of the Co-Pack& Warehousing Agreement, including any failure to comply with applicablelaws. We maintain product liability insurance of our own in amounts that weconsider to be commercially reasonable. In the event a product liability claimis made against us or Hoopeston, we have agreed to investigate the claim inaccordance with the standards of the National Food Processors Association andto negotiate the determination of any liability for a period of 90 days,after which we or Hoopeston may pursue outstanding claims in a courtproceeding.

The plant operated by Hoopeston is the only facilitywe own and the sole source of supply for our products. A natural disaster orother event that resulted in the destruction or loss of part or all of the facilitycould interrupt or stop production, which would significantly harm our businessand operations.  In order to mitigatepart of this risk, we have identified another production facility where ourproducts could be produced.

The Lease Override Agreementwith Hoopeston entitles us to receive, at least annually based on Hoopeston’sJune 30 fiscal year end, an override payment equal to a portion of Hoopeston’searnings before interest, income taxes, depreciation and amortization, orEBITDA. Stokes recorded $170,000 for its share of Hoopeston’s EBITDA for thecontract year ended June 30, 2003, which is to be paid to us in the form of apromissory note. In March 2004, we agreed to transfer the note when issued, toour majority stockholder in full satisfaction of the related $170,000 liabilityto the stockholder, since such income was earned by Stokes prior to itsacquisition by the Company. Hoopeston is allowed to offset against the overridepayment any monetary damages it incurs in the event we breach our Co-Pack andWarehousing Agreement, property and equipment leases and related agreements.

We do not own Hoopeston anddo not make its production decisions. Our principal stockholder and the Chief ExecutiveOfficer of Hoopeston are members of a committee that under the EBITDA OverviewCommittee Agreement is required to approve Hoopeston’s annual budget, oncesubmitted by Hoopeston, for capital expenditures and operations. This committeeis also responsible for approving any changes to the annual budget and for monitoringthe operating and production expenses that are used to calculate EBITDA. Basedupon representations made by Hoopeston management, we do not anticipate anyoverride payments for the contract years ended June 30, 2004 or 2005.

The production plant consists of approximately100,000 square feet of manufacturing area and approximately120,000 square feet of warehouse space. We also use warehouse space forinventory storage in California, Phoenix and Salt Lake City on an as-neededbasis. The warehouses in these cities are known as “in and out” facilities thatare used by a number of food manufacturers to store food and beverage productsthat are supplied to the grocery industry. The warehouses supply storage spaceto us as needed and there is no minimum space or time commitment for use of thewarehouse space. We are charged a storage or handling fee for each pallet westore in these facilities. These warehouses

 

4

----

 

also supply delivery services or coordinate with localcommon carriers to facilitate deliveries of our products to individual grocerystores.

**Suppliers**

The principal items used to make our products aregreen chiles, beef, pork, chicken, corn, beans, seasonings and packagingmaterial. Hoopeston chooses suppliers of raw materials for our products basedprimarily on quality, availability and price and does not have any long-termarrangements with any suppliers of raw materials. In order to ensureconsistency of flavor, Hoopeston purchases, to the extent practicable, all ofthe produce and commodities needed to make our products from a limited numberof significant suppliers. Except as described below, we believe the ingredientsneeded to manufacture our products are readily available from numerous supplierson commercially reasonable terms.

Although our business is not dependent on any singlesupplier, the failure of suppliers of key ingredients to meet our qualitystandards or delivery schedules could delay or hinder Hoopeston’s manufacturingof our roducts. In particular, a sudden scarcity, a substantial price increase,or the unavailability of product ingredients could harm Hoopeston’s ability toproduce our products on a timely and cost-effective basis.

Hoopeston purchases packaging materials and labels forour products from two suppliers for each item and believes that alternatesources of supply for these materials can be located on relatively shortnotice. Once purchased, Hoopeston arranges for delivery of these materials at theirexpense to the production plant where they are inventoried until used.

The largest component of our cost of goods sold is rawmaterials and ingredients. Our gross margins therefore depend significantly onthe prices of raw materials and ingredients that can fluctuate due to a numberof factors, including:

•   changes in crop size;

 

•   prices of animal feed andcattle, hogs and chickens;

 

•   national, state and localgovernment-sponsored agricultural programs;

 

•   export demand foragricultural products and beef, pork and chicken;

 

•   the presence, or theperception, of health risks associated with agricultural products andcommodities;

 

•   natural disasters;

 

•   trade barriers orimport quotas;

 

•   weather conditions duringgrowing and harvesting seasons;

 

•   general growing conditions;

 

•    hanges in cost of steel used in manufacturing of cans; and

 

•   the effect of insects,plant diseases and fungi.

 

Increases in produce costs couldmaterially adversely affect our operating results. The raw material cost thatmost directly impacts our product cost is the price of green chiles. Hoopestoncurrently relies on two suppliers for purchases of green chiles. AlthoughHoopeston has not experienced any difficulty in obtaining green chiles fromthese suppliers, a sustained interruption in Hoopeston’s supply of green chilesfor any reason would seriously harm our business. Neither we

 

5

----

 

nor Hoopeston has any long-termcontracts with these suppliers, meaning that the price of green chiles sold tous may increase at any time or that the quantity of green chiles supplied to uscould be curtailed at any time. However, Hoopeston typically enters intoagreements with suppliers to furnish particular green chiles for an entireseason, which generally results in obtaining a fixed price for approximately oneyear. During 2004, Centennial entered into a direct contract with an unrelatedthird party for green chiles as a secondary supply. The volume of green chileswe require for production of our products is such that it would be difficult toeffectively hedge a large portion of our green chile costs, although we may beable to do so as our usage increases. Difficulties in obtaining green chiles orthe imposition of import quotas on agricultural products generally or greenchiles in particular could also materially harm our business or increase ouroperating costs.

While the Mexican food industry has generally soughtto compensate for the cost of increased raw material and ingredient pricesthrough price increases, the industry is highly competitive and we may not beable to recover excess raw material or ingredient costs through price increasesin the future. In addition, price increases may have a negative effect on salesvolume.

**Management Information Systems**

We currently maintain management information systemsthat include an electronic data interface capability and which generate dailyelectronic reports that address all aspects of purchasing, inventory levels andcustomer orders. We also have access through third party service providers,such as our outside warehouses and food brokers, to inventory, customer orderand promotional information. We intend to enhance our management informationsystems on an as-needed basis to continue to closely monitor purchasing, inventorylevels and customer order fulfillment.

**Competition**

Our ethnic Southwestern products compete on the basisof taste, flavor and quality, brand image and awareness, access to shelf space,advertising and promotion, packaging and package design and price. We believethe taste and flavor of our products, as well as those of our competitors’, arethe principal reasons why consumers buy these food products. Repeat purchasesby consumers and consumer loyalty are the main objectives of most foodmanufacturers. The entire Mexican food industry is highly competitive, with asignificant number of both large and small participants. We compete withnationally distributed brands such as:

•    Ortega, Old El Paso and Pacein sauces and other Mexican food products;

 

•    Rosarita and Taco Bell in refriedbeans; and

 

•    Hormel in chili products.

These brands are owned by major food companiesincluding Pepsico, Inc., General Mills, Inc., ConAgra Foods, Inc. andB&G Foods, Inc. We also compete with regional sauce brands including LasPalmas, La Victoria, 505 Southwestern, Hatch and La Preferida, someof which are also owned by major food companies. Nearly all of our existing andpotential competitors in the Mexican food industry have greater financialresources, a wider range of product offerings, longer operating histories andgreater brand recognition than we do. We cannot assure that we will besuccessful in maintaining our position against current and potentialcompetitors in our existing markets or in establishing a market presence in newmarkets we enter. We have experienced significant difficulty in attempting toestablish a market presence in the California market.

Competition for some products in our Ellis line comesfrom “private label” brands produced by or for the major supermarket chains.These brands generally sell at prices below those charged by us. Because thesebrands are owned by the retailer, they often receive preferential treatmentwhen retailers allocate available shelf space. The existence of private labelcompetition for some of our Ellis food products is one of the primary reasonswhy these products carry lower gross margins than our other products.  Strong price competition in these types ofcommodity products has led to a decrease in Ellis sales volumes.

 

6

----

 

Our ethnic Southwestern products compete not onlyagainst other brands in their respective product categories, but also againstproducts in similar or related product categories. For example, our tamales competenot only with other canned brands of tamales, but also with frozen and freshtamales found in the freezer, refrigerated and fresh food sections of grocerystores.

Food manufacturing is a highly regulated industry. Forcompanies not in our industry, the main barriers to entry are licensingrequirements and regulatory compliance necessary to open a production plant.Existing food manufacturers with their own production plant or access to a contract manufacturers face few barriers in enteringour market, but may have to spend significant amounts for product development,marketing and sales costs, as well as slotting fees.

**Regulation**

As a distributor of food products and as the owner ofour production facility, we are subject to regulation by the U.S. Food andDrug Administration, the U.S. Department of Agriculture, and to licensingand regulation by state and local health, sanitation, building, zoning, safety,fire and other authorities. Our product lines are subject to regulation underthe Federal Food, Drug and Cosmetic Act, the Federal Meat Inspection Act, thePoultry Products Inspection Act, the Perishable Agricultural Commodities Act,the Nutrition Labeling and Education Act of 1990, and the rules issued underthese laws. The FDA regulates manufacturing and holding requirements for foodsthrough its good manufacturing practice regulations, specifies the standards ofidentity for specified foods and prescribes the format and content ofinformation on food product labels. The USDA imposes standards for productquality and sanitation including the inspection, labeling and compliance ofmeat and poultry products and the grading and commercial acceptance of produceshipments from our suppliers.

In addition to laws relating to food products,Hoopeston’s operation of our production facility is subject to laws andoperating permits relating to environmental issues, workplace safety and workerhealth, principally the Occupational Safety and Health Act. We believeHoopeston’s regulatory compliance costs are material, but we do not receive aseparate accounting of these costs from Hoopeston.

Based on a review of Hoopeston’s compliance files andregulatory filings, we believe Hoopeston presently complies in all materialrespects with such laws and regulations, and maintains all material permits andlicenses necessary to its operation of our production plant. We believe we arecurrently in compliance in all material respects with governmental laws andregulations, and that we maintain all material permits and licenses relating toour business. However, we cannot assure you that we and Hoopeston are in fullcompliance with all such laws and regulations or that we will be able to complywith any future laws and regulations in a cost-effective and timely manner. Ifwe or Hoopeston fail to comply with applicable laws and regulations, we may besubject to civil remedies, including fines, injunctions, recalls or seizures,as well as potential criminal sanctions, any of which could seriously harm ouroperating results and financial condition.

**Employees**

At December 31, 2004, we employed three full-timeemployees and two part-time employees. Hoopeston employs approximately96 full-time personnel at our production plant. Neither we nor Hoopestonhave experienced any labor disputes or work stoppages, and do not have anycollective bargaining agreements. We believe that our relationships with ouremployees are good.

**Item2.****DESCRIPTION OF PROPERTY**

Our manufacturing and distribution facility at 5590High Street, Denver, Colorado, which we lease to Hoopeston, is a USDA certifiedfacility and is in good working order. The facility consists of220,000 square feet of space, including 120,000 square feet ofwarehouse space used to store our products and products co-packed by Hoopestonfor other customers. Hoopeston pays us a lease fee of approximately$35,000 per month for its lease of the facility from us. Hoopeston alsopays us approximately $19,000 per month as reimbursement for estimated propertytaxes and insurance. We pay Hoopeston a per case storage fee for all finishedproducts that we store in the warehouse for more than 30 days. Hoopestonhas a right to purchase the facility from us during the term of the lease,which extends for a continuing five year

 

7

----

 

renewal term ending January 26, 2010, subject to an extensionoption, which, if validly exercised, would extend the maturity date to January26, 2011, for fair market value.

We use five facilities fordistribution in Colorado, Southern California, Phoenix and Salt Lake City thatare called “in and out” warehouses. These warehouses are used by us and otherfood manufacturers to store products pending delivery to retailers.Arrangements with these warehouses are informal and terminable at any time. Ingeneral, these warehouses receive, store and deliver food products to grocerychains and charge a per-pallet or handling fee for each pallet of products thatthey store or handle. These arrangements allow flexibility in the amount ofspace used and do not require us to commit to the use of warehouse space forany particular period of time.

We also lease administrativeoffice space from an unaffiliated party for our corporate headquarters at 10700E. Geddes Ave., Suite 170, Centennial, Colorado.

The warehouse and office facilities we lease or useare described in the table below:

 
|                                         |       |                                |       |        | ** ** | **Monthly**       |       |           |       |           |
|----------------------------------------------|------------|-------------------------------------|------------|-------------|------------|-------------------|------------|----------------|------------|----------------|
|                                         |       |                                |       |        | ** ** | **Mortgage,**     | ** ** | **Owned,**     | ** ** | **Leased or**  |
|                                         | ** ** | **Type of**                         | ** ** | **Square**  | ** ** | **Rental or Use** | ** ** | **Lease or**   | ** ** | **Renewal**    |
| **Location**                                 | ** ** | **Facility**                        | ** ** | **Feet**    | ** ** | **Payment**       | ** ** | **Contracted** | ** ** | **Expiration** |
|                                         |       |                                |       |        |       |              |       |           |       |           |
| 5590  High Street

Denver,  Colorado         |       | Manufacturing and Distribution |       | As required |       | Per usage         |       | Owned          |       | N/A            |
| 5055 E.  41st Ave.Denver, Colorado           |       | Distribution                        |       | As required |       | Per usage         |       | Contracted     |       | N/A            |
| 4012  West Turney Street

Phoenix,  Arizona  |       | Distribution                        |       | As required |       | Per usage         |       | Contracted     |       | N/A            |
| 1415  South 3200 West

Salt  Lake City, Utah |       | Distribution                        |       | As required |       | Per usage         |       | Contracted     |       | N/A            |
| 6565  Knott Avenue

Buena  Park, CA          |       | Distribution                        |       | As required |       | Per usage         |       | Contracted     |       | N/A            |
| 10700 E.  Geddes Ave.

Centennial,  Colorado |       | Administrative                      |       | 2,845       |       | $3,319            |       | Leased         |       | 4/30/07        |

 

We believe our currentfacilities will be suitable and adequate and have sufficient capacity to meetour expected space requirements for 2005.

**Item3.****LEGAL PROCEEDINGS**

In February 2005, our tenant and sole supplier,Hoopeston, filed a lawsuit in Adams County Colorado District Court against ourwholly owned subsidiary, Stokes Canning Company (“Stokes”), seeking to recovercosts the tenant paid for construction of a wastewater treatment system at theplant owned by Stokes. Additionally, the tenant contends that the costs ofcertain future improvements for the facility should be paid for by Stokes. Webelieve that the costs for the wastewater treatment project as well as futureimprovements for the facility are the responsibility of the tenant and wedispute the tenant’s claims. We will vigorously defend any and all claims bythe tenant.

In March 2005, we answered the Hoopeston lawsuit andfiled various counterclaims as part of that answer. The counterclaims relate tocertain breaches of contract by Hoopeston regarding the series of agreementsoriginally entered into on January 26, 2001, as amended.

 

8

----

 

**Item 4.****SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

No matters were submittedto a vote of our security holders during the fourth quarter of the fiscal yearended December 31, 2004.

**PART II**

**Item 5.****MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED SHAREHOLDER MATTERS**

Our common stock trades on the Nasdaq SmallCap Marketunder the trading symbol “CHLE.” The following table sets forth, for theperiods indicated, the range of high and low bid prices of the common stock on theNasdaq SmallCap Market. These quotations reflect inter-dealer prices, withoutretail mark-up, mark-down or commissions and may not represent actualtransactions.

| ** **                                                   | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|---------|------------|
| ***For  the year ended December 31, 2004***                  |       |     |       |    |       |
| First Quarter                                                |       | $        | 3.85       |    | $          | 2.00 |   |
| Second Quarter                                               |       | $        | 2.70       |    | $          | 1.70 |   |
| Third Quarter                                                |       | $        | 2.29       |    | $          | 1.18 |   |
| Fourth Quarter                                               |       | $        | 1.74       |    | $          | 0.98 |   |
|                                                         |       |     |       |    |       |
| ***For  the year ended December 31, 2003***                  |       |     |       |    |       |
| Fourth Quarter  (October 29, 2003 through December 31, 2003) |       | $        | 4.91       |    | $          | 3.30 |   |

As of February 20, 2005, our common stock was held byapproximately 15 shareholders of record. Management estimates that we have over500 beneficial owners of our common stock.

In March 2005, we received a notice from thestaff of The Nasdaq Stock Market (the “Staff”) stating that the bid price forour common stock had closed below the minimum $1.00 per share requirement forcontinued inclusion pursuant to Marketplace Rule 4310(c)(4) (the “Rule”). Inaccordance with the Rule, Nasdaq informed us that itwill have until August 29, 2005 to regain compliance with the Rule. In order toregain compliance with the Rule, the bid price for our common stock must closeat, or above, $1.00 per share for at least 10 consecutive business days. Ifcompliance with the Rule is not demonstrated by August 29, 2005, we may beprovided an additional 180 calendar days by Nasdaq toregain compliance if we meet the initial listing requirements as set forth inMarketplace Rule 4310(c), except for bid price. If we are not eligible for anadditional compliance period, the Nasdaq staff willprovide us with written notification that our securities will be delisted. Atthat time we may appeal the Nasdaq staff’sdetermination to delist our securities to a Listing Qualifications Panel.

**Recent Sales of Unregistered Securities**

None.

 

9

 

**Use of Proceeds**

We registered and sold1,550,000 shares of our common stock to the public at an aggregate offeringprice of $7,750,000, or $5.00 per share, pursuant to a registration statementthat was declared effective on October 29, 2003. The offering was completed andhas terminated. The lead underwriter of the offering was J.P. Turner & Company, L.L.C. Net proceeds to us were $5.79 million afterdeduction of underwriters’ commissions and other issuance costs. ThroughDecember 31, 2004, we applied our net proceeds as follows: 
| ** **                                  | ** ** | **Intended  use of proceeds** | ** ** | **Actual  use of proceeds through December 31, 2004** | ** ** |
|---------------------------------------------|------------|-------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                  | ** ** | **(in millions)**             |       | **(in millions)**                                     |       |
| ** **                                  | ** ** | ** **                    |       | ** **                                            |       |
| Retirement of  plant mortgage               |       | $                             |  3.60 |                                                  | $          |  3.60 |   |
| Payment of  slotting fees                   |       | .81                           |       | .55                                                   |       |
| Marketing,  advertising and promotion costs |       | .95                           |       | .95                                                   |       |
| Working capital                             |       | .43                           |       | .43                                                   |       |
|                                        |       | $                             |  5.79 |                                                  | $          |  5.53 |   |

**Dividend Policy**

We have never declared or paid cash dividends on ourcommon stock. We currently intend to retain all available funds and any futureearnings to fund the development and growth of our business and, therefore, wedo not anticipate paying any cash dividends on our shares of common stock inthe foreseeable future. In addition, the preferred stock issued to our majoritystockholder contains restrictions on our payment of dividends or otherdistributions in respect of our common stock. The senior revolving creditfacility we obtained in March 2004, which has subsequently been amended inMarch 2005, also restricts our ability to pay dividends. Our future dividendpolicy will also depend on the requirements of any future financing agreementsto which we may be a party and other factors considered relevant by our boardof directors, including the provisions of the Delaware General Corporation Lawthat govern corporations.

The Delaware General Corporation Law generallyprovides that distributions may not be made if after any distribution we wouldnot be able to pay our debts as they become due in the usual course of businessor our total assets would be less than the sum of our total liabilities plusany amounts needed to satisfy the preferential rights of stockholders if wewere dissolved at the time of the distribution. The preferential rights of theSeries A preferred stock issued to our majoritystockholder could have the effect of limiting or eliminating dividends on thecommon stock.

Our Series A preferred stock includes annualcumulative dividends equal to $.50 per share. The dividend is fixed and payablein quarterly installments of $.125 per share at the end of each calendarquarter, so long as funds are legally available to pay the dividend and thepayment is not otherwise prohibited. We paid $250,000 of preferred stockdividends for the three months ended March 31, 2004. We have $750,000 ofpreferred stock dividends in arrears as our board of directors did not declare,and therefore did not pay, preferred stock dividends for the three months endedJune 30, 2004, the three months ended September 30, 2004 or the three monthsended December 31, 2004. In 2003, no dividends were paid on the Series A preferred stock, although dividends were paid in January2004 relating to the period from November 3, 2003 through December 31, 2003.

 

10

----

 

**Equity Compensation Plan Information**

We currently maintain two equity compensation plans,the 2003 Non-Employee Directors’ Stock Option Plan (the “Directors Plan”) andthe 2004 Stock Incentive Plan (the “Incentive Plan”). The Directors Plan wasapproved by the shareholders of Centennial in 2003 and the Incentive Plan wasapproved by the shareholders in August of 2004. The following table containsinformation regarding our equity compensation plans as of December 31, 2004. 
| **Plan Category**                                                        | ** ** | **(a)**

**Number  of securities to be issued upon exercise of outstanding options, warrants and  rights(1)** | ** ** | **(b)**

**Weighted-average  exercise price of outstanding options, warrants and rights** | ** ** | **(c)**

**Number  of securities remaining available for future issuance under equity  compensation plans (excluding securities reflected in column (a))** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders (Directors Plan) |       | 80,000                                                                                                        |       | $                                                                                         | 4.25       |                                                                                                                                                       | 70,000     |   |
| (Incentive Plan)                                                         |       | 0                                                                                                             |       | $                                                                                         | 0          |                                                                                                                                                       | 500,000    |   |
| Equity  compensation plans not approved by security holders              |       | 0                                                                                                             |       | 0                                                                                         |       | 0                                                                                                                                                          |       |
| Total                                                                    |       | 80,000                                                                                                        |       | $                                                                                         | 4.25       |                                                                                                                                                       | 570,000    |   |

----

(1) Thetotal number of securities to be issued upon exercise of the options is stated,regardless of whether the options are currently vested.

 

**Item 6.****MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

*The following discussion and analysis should be read inconjunction with the consolidated financial statements of Centennial and thenotes thereto included elsewhere in this report on Form 10-KSB. Some ofthe information contained in this discussion and analysis or set forth elsewherein this Form 10-KSB, including information with respect to our plans andstrategies for our business, includes forward-looking statements that involverisk and uncertainties. Forward-looking statements are statements not based onhistorical information and which related to future operations, strategies,financial results or other developments. Forward-looking statement s arenecessarily based upon estimates and assumptions that are inherently subject tosignificant business, economic and competitive uncertainties and contingencies,many of which are beyond our control and many of which, with respect to futurebusiness decisions, are subject to change. These uncertainties andcontingencies can affect actual results and could cause actual results todiffer materially from those expressed in any forward-looking statements madeby or on our behalf. We disclaim obligation to update forward-lookingstatements.*

 

**OVERVIEW**

We are a specialty branded foodcompany seeking to expand distribution and sales of our ethnicSouthwestern sauces and food products in the growing Mexican food segment ofthe domestic food industry. Our Stokes and Ellis labels, two Southwesternbrands, are each now nearly 100 years old and are well-recognized in ourprimary market of Colorado. Our best-selling products are our Stokes Green ChileSauces, offered in five varieties, four of which are ranked in retailsales as the most popular Mexican sauces in Colorado and which are among the25 best selling Mexican food products retailed in Colorado, according to InformationResources, Inc., an independent market research firm. Our products arecurrently sold in leading grocery retailers, superstores and club stores suchas Kroger, Safeway, Wal-Mart, Sam’s Club, Albertson’s and Costco, throughlocations primarily in Colorado, Arizona, California and in a small number ofmajor metropolitan markets in adjoining states. Sales of our products inColorado continue to be strong, where, as noted above,our sauces are the market leaders. In the California market, which was thesignificant part of our 2004 expansion plan, sales of our products have beenvery slow and some of our products have been discontinued in that market.

 

11

----

 

**CONSOLIDATED RESULTS OF OPERATIONS**

The following table setsforth, for the years ended December 31, 2004 and 2003, the percentage of netsales represented by the specified items included in our consolidatedstatements of operations. We have included this comparison because we believeit provides a more meaningful basis for period-to-period comparisons. Thisfinancial data should not be viewed as a substitute for our historicalconsolidated results of operations determined in accordance with generallyaccepted accounting principles and does not purport to be indicative of futureresults of operations. 
| ** **                                    | ** ** | **Consolidated**

**Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                       | ** ** | **2003** | ** ** |
|                                          |       |                                           |       |   |   |
| Net sales                                     |       | 100.0                                          | %          | 100.0 | % |
|                                          |       |                                           |       |   |   |
| Cost of goods  sold (1)                       |       | 74.0                                           |       | 63.8 |   |
| Gross profit                                  |       | 26.0                                           |       | 36.2 |   |
| Selling, general  and administrative expenses |       | 56.7                                           |       | 41.9 |   |
| Income (loss)  from operations                |       | (30.7                                          | )          | (5.7 | ) |
| Total other  income                           |       | 2.0                                            |       | 6.8 |   |
| Income taxes  (expense)                       |       | 10.6                                           |       | (0.3 | ) |
| Net income  (loss)                            |       | (18.1%                                         | )          | 0.8 | % |

----

(1)These percentages reflect cost of goods sold as a percentage of net sales,which included slotting fees paid. Cost of goods sold as a percentage of net salesbefore slotting fees were 66.2% and 63.5% for 2004 and 2003, respectively.

**YearEnded December 31, 2004 Compared to Year Ended December 31, 2003**

 

    *Net Sales*

Our net sales are comprised of gross sales reduced bypromotional allowances, billback discounts, cash discounts and slotting fees. Thefollowing table sets forth these components to provide a more thoroughunderstanding of net sales. 
| ** **                                                           | ** ** | **For the Year Ended**

**December 31,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                           | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
|                                                                 |       |                                     |       |   |   |
| Sales — Stokes                                                  |       | $                                        | 4,553,195  |   | $ | 3,755,171 |   |
| Sales — Ellis                                                   |       | 1,471,001                                |       | 2,169,276 |   |
| Sales — Greene’s  Farm (1)                                 |       | —                                   |       | 44,433 |   |
| Gross sales                                                          |       | 6,024,196                                |       | 5,968,880 |   |
| Less:  Promotional allowances, billback discounts and cash discounts |       | 1,091,728                                |       | 912,506 |   |
| Net sales before  slotting fees                                      |       | 4,932,468                                |       | 5,056,374 |   |
| Less: Slotting  fees                                                 |       | 516,611                                  |       | 23,817 |   |
|                                                                 |       |                                     |       |   |   |
| Net sales                                                            |       | $                                        | 4,415,857  |   | $ | 5,032,557 |   |

----

(1) Discontinuedproduct line in 2003.

12

----

 

•                  **Sales - Stokes** — Sales of our Stokes Green Chile Sauces increased$0.8 million or 21.3% for 2004 over 2003. This increase was a result of our expansionefforts into California and Arizona and primarily reflected initial sales toretailers in the Northern and Southern California markets. Sales of our Stokessauces continue to be strong in our core markets, especially Colorado, wherethe Stokes products continue to be a market leader.  Strong competition throughout the Californiamarket has resulted in very slow sales. These slow sales have translated intolimited reorders from new retail customers throughout California. Subsequent toDecember 31, 2004, two California retailers representing approximately 500stores have notified us that our Stokes Green Chile Sauces are beingdiscontinued. We are currently evaluating the California market in order to determine alternativestrategies which may include placing our products with specialty distributorsor reduced shelf distribution. As a result of the weak sales in the Californiamarket and discontinuance of our products by California retailers as discussedabove, we expect decreased sales for 2005.

•                  **Sales — Ellis** — Sales of our Ellis branded products decreased $0.7 million or 32.2% asa result of our efforts to reduce sales of low-margin products. Cost increasesfrom our supplier as well as strong price competition in the commodity productscategory, in which many Ellis products are classified, resulted in some of theEllis products no longer generating positive sales margins within certainmarkets and customers. We made a concerted effort to eliminate sales of suchproducts within those markets and customers, which has resulted in decreasedsales of Ellis products. We anticipate sales of our Ellis products willcontinue to decrease somewhat during 2005 as we continue to focus on our core,higher-margin products. We expect to continue offering the Ellis line ofproducts to markets and customers that achieve positive sales margins. We alsoexpect to explore new sales opportunities of Ellis branded products that can beachieved on a positive-margin basis.

•                  **Promotional allowances, billback discounts and cash discounts** — Promotional allowances and discountsincreased $0.2 million or 19.6% for 2004 compared to 2003. This increase wasprimarily attributable to an increase in billback discounts and the estimatedreserve for billback discounts. Billback discounts are performance baseddiscounts in which retailers are given discounts once products are sold throughstore registers. A billback reserve has been established in anticipation ofheavy discounting which will probably be required in respect of retailers inthe California markets who discontinued our products. This reserve consists ofnet margins recognized on the initial sale of the product. We expectpromotional allowances and billback discounts to decrease somewhat during 2005as we do not anticipate heavy discounting in our core markets.

•                  **Net sales before slotting fees** — Net sales before slotting fees decreased $0.1million in 2004 compared to 2003. This decrease was primarily a result ofreduced sales of the Ellis line of products as well as the increased billbackdiscounts and reserve for billback discounts. We sold 298,243 cases of allproducts in 2004 compared to 331,331 cases in 2003. This decrease in cases soldreflected our focus on the premium Stokes green chile sauces while reducingsales of low margin Ellis branded products. Average net sales price beforeslotting fees for 2004 increased approximately $1.35 per case over 2003. Thiswas further indicative of our sales focus on higher margin products,specifically, the premium Stokes Green Chile Sauces. We expect net sales beforeslotting fees will decrease somewhat during 2005 as we anticipate a lower levelof sales in the California market compared to what we experienced during 2004.

•                  **Slotting fees** — Slotting fees increased significantly in 2004 compared to 2003primarily as a result of our expansion efforts into the California market. Wepaid slotting fees totaling $0.5 million to obtain shelf space in retailgrocery stores in new markets compared to a nominal amount during 2003. We didnot actively pursue slotting new items in 2003 prior to our public offering dueto our focus on developing consumer and brand programs. We do not anticipate wewill pay significant slotting fees over the next 12 to 18 months due to thedifficulty in recovering slotting fees in the markets we attempted to expandinto in 2004.

•                  **Net sales**- Net sales for 2004 decreased $0.6 million compared to 2003. Thisdecrease was primarily a result of $0.5 million in slotting fees paid in 2004to obtain shelf space in retail grocery stores in expansion markets. We expectnet sales will increase during 2005 as we have reduced proposed slotting feesand heavy promotional discounting.

 

13

----

 

 

   *Costof goods sold*

Cost of goods sold increased $0.05 million in2004 compared to 2003. As a percentage of net sales, cost of goods sold were 74%for 2004 compared to 64% for 2003. This increase was primarily attributable to reducednet sales due to increased promotional discounts and allowances offered in theCalifornia expansion market and payment of slotting fees. This increase waspartially offset by an emphasis on higher profit, key products being sold,which directly reduced cost of goods sold as a percentage of net sales. Cost ofgoods sold as a percentage of net sales before slotting fees were 66.2% and63.5% for 2004 and 2003, respectively. We expect that our cost of goods sold in2005 will be more reflective of the 2003 level because we do not expect to paysignificant slotting fees in 2005; however, cost of goods sold will increaseover 2003 levels as a result of recent price increases implemented byHoopeston.

   *Grossprofit*

Gross profit decreased $0.7 million, or 36.9% in 2004compared to 2003. This decrease was primarily attributable to $0.5 million inslotting fees paid and the increased promotional discounts and allowances offeredin our expansion efforts in California.

   *Selling,general and administrative expenses*

Selling, general and administrative expenses increased$0.4 million, or 18.9%, to $2.5 million in 2004 from $2.1 million in2003. This increase was attributable to increased selling and marketingspending of $0.2 million associated with our attempted expansion into newmarkets. Further, directors and officers insurance, shareholder relations andaccounting and legal fees increased $0.4 million as a result of additionalcosts associated with being a public company. These increases were offset by adecrease of $0.2 million in consulting fees. We expect selling, general andadministrative expenses to increase during 2005 as a result of increased legalfees associated with the legal proceeding initiated against us by our tenantand sole supplier. As stated previously, we have filed certain counterclaimsagainst our tenant and sole supplier in response.

Recently enacted and proposed changes in the laws andregulations affecting public companies, including the provisions of theSarbanes-Oxley Act of 2002 and rules proposed by the SEC, will result inincreased audit fees and administrative costs to us as we respond to theirrequirements. The SEC’s recent announcement delays the effective date ofcompliance under Rule 404 of the Sarbanes-Oxley Act for us until the yearending December 31, 2006. The new rules could make it more difficult for us toobtain certain types of insurance, including director and officer liabilityinsurance, and we may be forced to accept reduced policy limits and coverage orincur substantially higher costs to obtain coverage we consider to be adequate.The impact of these events could also make it more difficult for us to attractand retain qualified persons to serve on our board of directors, our boardcommittees, or as executive officers. At this point, we cannot estimate theamount of additional costs we will incur.

   *Income(loss) from operations*

Loss from operations increased $1.1 million to $1.4million for the year ended December 31, 2004 compared to 2003. This increasewas primarily attributable to slotting fees of $0.5 million, increased selling,general and administrative expenses of $0.4 million and increased promotionaldiscounts and allowances offered in expansion markets. 

*   Otherincome and (expenses)*

Other income consisted of production facility income. Productionfacility income included rental income and EBITDA sharing income, which wasreduced by production shortfall fees, all of which are related to the Lease Agreementand Co-Pack & Warehousing Agreement with Hoopeston. Production facility incomedecreased $0.5 million for the year ended December 31, 2004 compared to 2003 asa result of recording $0.3 million in production shortfall fees during 2004 andHoopeston not generating any EBITDA sharing income during 2004. We hadpreviously recorded approximately $0.06

 

14

----

 

million in June 2004 in expected EBITDA sharing, which hassubsequently been reversed due to revised operating results from Hoopeston. Werecorded $0.2 million of EBITDA sharing income during 2003.

Other expenses were comprised entirely of interestexpense and decreased $0.2 million for the year ended December 31, 2004compared to 2003. This decrease was a direct result of retiring the mortgage onour production plant using initial public offering proceeds and repaying loansfrom our majority stockholder and other individual lenders using lower interestrate funds from our revolving line of credit we obtained in March 2004. 

   *Netincome (loss) before income taxes*

Net loss before income taxes increased $1.3 millionin 2004 compared to 2003 primarily as a result of the reasons set forth above.

 

**LIQUIDITY AND CAPITAL RESOURCES**

**Cash Requirements**

The following data summarizes our contractualobligations and commitments as of December 31, 2004: 
| ** **                          | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **         | ** ** | ** **     | ** ** | ** **  | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------|------------|--------------------|------------|----------------|------------|-------------|------------|
| ** **                          | ** ** | **Payments  due by periods** | ** ** |
| ** **                          | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **         | ** ** | ** **     | ** ** | ** **  | ** ** |
| ** **                          | ** ** | ** **                   |       | **Within** |       |               |       |           |       | **After**   |       |
| ** **                          | ** ** | **Total**                    | ** ** | **1 Year** | ** ** | **2-3  Years**     | ** ** | **4-5  Years** |       | **5 Years** |       |
|                                |       |                         |       |       |       | **(In thousands)** |       |           |       |        |       |
| ** **                          |       |                         |       |       |       |               |       |           |       |        |       |
| Contractual  obligations:           |       |                         |       |       |       |               |       |           |       |        |       |
| Long-term debt                      |       | $                            | 2,436      |       | $          | —             |       | $              | 2,436      |        | $          | — |   | $ | — |   |
| Operating lease                     |       | 101                          |       | 42         |       | 59                 |       | —         |       | —      |       |
| Purchase  obligations               |       | 510                          |       | 510        |       | —             |       | —         |       | —      |       |
| Production obligations              |       | 2,451                        |       | 540        |       | 936                |       | 936            |       | 39          |       |
|                                |       |                         |       |       |       |               |       |           |       |        |       |
| Total  contractual cash obligations |       | $                            | 5,498      |       | $          | 1,092              |       | $              | 3,431      |        | $          | 936 |   | $ | 39 |   |

 

*Long-term debt:*Long-term debt at December 31, 2004 consisted of $2.4million in advances under our senior revolving line of credit. We intend to usethis line of credit to fund our working capital requirements. In March 2005, weamended our loan and security agreement for this line of credit with our bank. Asa result of this amendment, the total amount available under the line of creditwas reduced from $5.0 million to $4.0 million until certain covenant levels are

 

15

----

 

achieved. As of December 31, 2004, we had $2.6 millionavailable under the line of credit to fund operations. As a result of our loanamendment, this availability level has been reduced by $1.0 million.

*Operating leases:*Operating leases at December 31, 2004 consisted ofoffice space leased for our headquarters in Centennial, Colorado.

*Purchase obligations:*Purchase obligations above include $0.26million of costs of inventory items we have requested and authorized Hoopestonto produce for us as of December 31, 2004 which have not been billed to us byHoopeston. The product has not been billed to us because Hoopeston has eithernot yet produced the inventory or, if product has been produced, it has notbeen released from its 5 day production hold. Purchase obligations also includean outstanding purchase commitment with an unaffiliated party as of December 31,2004 of $0.25 million for diced green chile, the primary ingredient in ourgreen chile sauces.

*Production obligations:*Production obligations relate to the minimumproduction requirements under our co-pack contract with Hoopeston. We arerequired to purchase a minimum of 585,053 cases from Hoopeston in any contractyear. If we fall below the 585,053 case minimum, then we are required to pay apenalty of $0.80 for each case by which we fall short of the 585,053 caseminimum. As we have production completed by Hoopeston, this shortfallproduction obligation is reduced. We paid Hoopeston $81,871 and $16,841 inshortfall penalties for the contract years ended June 30, 2004 and 2003,respectively. We expect shortfall penalties will be incurred for the contractyear ending June 30, 2005 and, accordingly, we have accrued approximately$251,000 of such penalties as of December 31, 2004.

We do not anticipate any significant capital expenditurerequirements for 2005.

**Sources and Uses of Cash**

Our principal sources of liquidity as of December 31,2004 consisted of $0.4 million in cash and cash equivalents and $2.6 millionavailable under our senior revolving line of credit. Subsequent to yearend, weamended the maximum borrowing level under our revolving line of credit from$5.0 million to $4.0 million until certain covenant levels are met. Accordingly,the availability under our line of credit as of March 2005 has been reduced by$1.0 million. We generate cash through sales of product and the lease of our plantand equipment. We require capital to finance inventory and accounts receivable,pay slotting fees to grocery chain retailers, pay operating costs, pay interest on our existing debt obligations and paydividends on our preferred stock. We believe we have sufficient cash andliquidity available to meet our operating needs for 2005, even taking intoconsideration the amended maximum borrowing level. As part of the amendment ofour loan and security agreement with our bank, we are restricted from payingdividends on our preferred stock until we meet certain covenant levels, andthen we can pay dividends only to the extent of one-half of net income eachyear. We do not anticipate that we will pay dividends for the next twelvemonths.

*Operating:*We experienced $2.5million in negative cash flow from operations of for the year ended December31, 2004 primarily as a result of our build-up of inventory for our anticipatedexpansion efforts as well as mitigation of risk of an interruption in supplydue to uncertainty and issues with our tenant and sole supplier, payment ofslotting fees in expansion markets, payment of aged accounts payable toHoopeston in order to avoid finance charges, payment of accrued interest onshareholder and other individual lenders’ notes and payment of related partypayable outstanding at December 31, 2003. These costs were funded throughadvances on our revolving line of credit. We anticipate we will generatepositive cash flow from operations during 2005, as we convert existinginventory through sales to customers. The amount of positive cashflow generatedwill be affected by legal fees, which could be significant, associated withlitigation involving our tenant and sole supplier.

*Financing:*Net cash used by financingactivities was $3.2 million for the year ended December 31, 2004 and wascomprised of retirement of all outstanding long-term debt using proceeds fromthe initial public offering and revolving line of credit, as well as payment ofpreferred stock dividends for the fourth quarter of 2003 and first quarter of2004.

We entered into a senior credit agreement withHeartland Bank in March 2004, for borrowings up to an aggregate amount of $5.0million, which has subsequently been amended to $4.0 million as of March 2005. Underthe senior credit

 

16

----

 

agreement, the lender has advanced us $2.4 million as ofDecember 31, 2004 through a senior secured revolving credit facility, which wasused to retire promissory notes payable to various individuals, including our majoritystockholder. At the same time we obtained the senior revolving line of credit,we also retired the existing first mortgage on our production facility, thentotaling $3.5 million, using proceeds of our initial public offering. The seniorsecured revolving credit facility matures on December 31, 2006.

Borrowings under this facility bear interest, payablemonthly, at Heartland Bank’s base lending rate plus 1.5%, however, the ratewill never be lower than 5.5% per annum. At December 31, 2004, the interestrate was 6.75%. Under the terms of the loan facility, we can borrow up to thesum of 70% of the appraised value of the production facility owned by theCompany, 75% of eligible accounts receivable and 50% of finished goodsinventory. The facility also calls for an unused line of credit commitment feeof 0.5% per annum which is paid quarterly in an amount equal to the averagedaily unused portion of the revolving credit facility times 0.5% per annum.

We may prepay borrowings under the senior creditagreement in whole or in part, in minimum amounts and subject to otherconditions set forth in the amended and restated senior credit agreement. Weare required to make mandatory prepayments to the lenders from:

• the net cash proceeds from asset salesin particular circumstances specified in the senior credit agreement; and

 

• the net cash proceeds from newdebt issuances in particular circumstances specified in the senior creditagreement.

Our obligations under the revolving credit line aresecured by a first mortgage on the production plant, a security interest insubstantially all of its assets and an assignment of our co-packing agreementwith Hoopeston.

The senior credit agreement includes two financialcovenants enforceable at the end of each month, which wereamended in March 2005. As amended, Centennial cannot permit:

• ourconsolidated net worth (stockholders’ equity less treasury stock) to be lessthan $6.4 million;

 

• our ratio of consolidated seniordebt service plus dividends paid to consolidated EBITDA for the trailing fourquarters to exceed the ratio of 1.5 to 1. Compliance under this covenant doesnot commence until the quarter ending December 31, 2005 and only then includesthe trailing quarters beginning with the quarter ending December 31, 2005. Furthermore,compliance under this covenant only applies to the extent the total outstandingprincipal balance under the revolving credit facility has exceeded $4.0million.

The senior credit agreement also contains customarycovenants, including limitations on our ability to incur debt, and events ofdefault, including a change of control, as defined in the senior creditagreement. The senior credit agreement also limits our ability to pay dividendsunder specified circumstances.

**Debt Instruments, Guaranteesand Related Covenants**

Except as otherwise described in this Form 10-KSB, wedo not have debt instruments, guarantees or related covenants.

**Cash Management**

We believe that cash on hand, the $1.6 million in cashavailable under our senior revolving line of credit and cash flow fromoperations will be adequate for us to meet our anticipated working capitalrequirements for 2005. Although the line of credit adds to our financialflexibility, we do not anticipate that we will need to utilize the full amountavailable to meet our cash needs for 2005. It should be noted however, that ifwe were to incur significant operating losses during the next twelve monthsresulting in a consolidated net worth of less than $6.4 million, the bank couldrestrict access to the line of credit availability due a covenant default.

 

17

----

 

The interest rate on the revolving line of credit was6.75% at December 31, 2004, which was considerably below the 12% rate we werecharged by our majority stockholder and the 10% to 12% rates we were charged bythe other individual lenders before we repaid these loans using proceeds fromthe revolving line of credit in March 2004. Following our initial publicoffering, we were able to attain lower interest rates based upon our improvedliquidity. This resulted in interest expense savings of $0.2 million for the yearended December 31, 2004.

**ExploringAlternatives**

Our Board of Directors has authorized an explorationof strategic alternatives to maximize value for our shareholders. Given thepoor performance in the California market, we are evaluating our business planand beginning to review other alternatives, which may include other financingarrangements, mergers, acquisitions and joint ventures. While we believe wehave sufficient liquid resources available to continue our current operations,we recognize that any further significant expansion will require greatercapital resources than we currently have available. In addition, the costs ofmaintaining a public company in today’s environment are significant for a smallcompany, especially given the Sarbanes-Oxley reporting requirements. Accordingly,we have begun preliminary discussions with various groups to review otheralternatives to grow or enhance our operations, however, no definitive plans oragreements have been reached.

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

The consolidated financial statements of the Companywere prepared in conformity with accounting principles generally accepted inthe United States. Certain of our accounting policies, including the estimatedlives of our depreciable assets and the evaluation of assets for impairment,require that management apply significant judgment in defining the appropriateassumptions integral to financial estimates. Judgments are based on historicalexperience, terms of existing arrangements, industry trends and informationavailable from outside sources, as appropriate. However, by their nature,judgments are subject to an inherent degree of uncertainty and, therefore,actual results could differ from our estimates. As of and for the years endedDecember 31, 2004 and 2003, management does not believe there are anymatters or other underlying assumptions that would have a material effect onthe financial position or results of operations of Centennial if actual resultsdiffer from our estimates. We believe the following critical accountingpolicies affect our more significant judgments and estimates used in thepreparation of our consolidated financial statements. 

      ***Revenue recognition***

We generate revenues from sales of our products togrocery chains, superstores and club stores, as well as wholesalers that inturn sell to these customers. Net sales represent gross revenues less estimatedreturns and allowances. Revenues from the sale of our products to our customersare recognized at the time of shipment. When a food broker assists in the saleof products to grocery chains, superstores, or club stores, the food brokerdoes not take title to our products and shipment takes place only as directedby the customer. Wholesalers take title to products they purchase and direct uswhen to make shipment. Most retailers and wholesalers have the right to returnproducts to us that are damaged, beyond their shelf life or are discontinued.Such returns were approximately 1% of net sales for 2004 and 2003. Managementmonitors returns on a regular basis and as we implement our sales initiatives,we may increase our estimates for damaged, expired shelf life or discontinuedproducts subject to return. Although we have legal rights to deny our retailersthe right to return products that are salable, as a practical matter we couldbe forced to accept returns from retailers that insisted on returning productsto us.

We have the right to return any spoiled orcontaminated products to Hoopeston for credit. These returns have beenimmaterial in the past.

Food manufacturers, including us, have historicallypaid promotional allowances and offered “billback” discounts to groceryretailers, food service companies and wholesalers. Billback discounts aregenerally offered for monthly or quarterly purchases of food or beverageproducts reaching predetermined volumes. These allowances and discounts may bepermissible if in writing and so long as the food manufacturer does not engagein discriminatory or unfair pricing in violation of applicable antitrust law.The SEC has announced formal investigations and informal inquiries ofaccounting practices at several national food service companies and wholesalersthat are centered on the payment of, and accounting

 

18

----

 

treatment given to, promotional allowances and billbackdiscounts. We estimate that less than 5% of our sales for the years endedDecember 31, 2004 and 2003 were to food service companies. Shipments towholesalers account for approximately 20% of our sales. We are not currentlyaware of any regulatory inquiry involving promotional allowances or billbackdiscounts offered by us to our limited base of food service customers orwholesalers and we believe promotional allowances and billback discounts wehave paid in the past conformed to applicable law. We have paid promotionalallowances, as well as slotting allowances to secure shelf space in grocerystores, and have offered billback discounts to customers in the past. We expectto offer such allowances and discounts in the future to customers thatcustomarily seek such allowances and discounts, in a manner consistent withapplicable antitrust and other laws. These promotional allowances, billbackdiscounts and slotting fees are netted against revenues in the period incurred.As billback discounts are based upon retailer sales, we are required toestimate billback discounts. We estimate these discounts based upon historicaltrends and estimated retailer sales during billback promotional periods.

In November 2001, the Emerging Issues Task Force, orEITF, of the Financial Accounting Standards Board issued EITF 01-09, “Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products),” codifying certain other previously issued EITFpronouncements. This pronouncement requires that discounts such as off-invoicepromotions and coupons, and amounts paid to retailers to advertise a company’sproducts such as fixed trade promotions, be recorded as a reduction of sales.We are recording our off-invoice promotions and fixed trade promotions amountsas a reduction of sales in accordance with the EITF. EITF 01-09 neitherprevents nor allows for capitalization of slotting fees. Slotting fees are paidto obtain shelf space in retail locations and such fees are netted againstrevenue as they are incurred. Slotting fees that were netted totaled approximately$0.5 million in 2004 and $0.02 million in 2003.

The EITF has reached a consensus with respect to IssueNo. 00-14, “Accounting for Certain Sales Incentives,” including point ofsale coupons, rebates and free merchandise. The consensus included a conclusionthat the value of such sales incentives that results in a reduction of theprice paid by the customer should be netted against sales and not classified asa sales or marketing expense. We have classified coupon expense as a reductionof sales and include free merchandise in cost of goods sold as required by thenew EITF consensus. 

   ***Accounts Receivable***

The majority of our trade accounts receivables are duefrom large, national grocery chains. We assess the recoverability of tradeaccounts receivable based on estimated losses resulting from the inability ofcustomers to make required payments. Our estimates are based on the aging ofaccounts receivable balances and historical write-off experience, net ofrecoveries. We review trade accounts receivable for recoverability regularlyand whenever events or circumstances, such as deterioration in the financialcondition of a customer, indicate that additional allowances might be required.We have historically not had to write-off material accounts receivable,although this is subject to change. 

   ***Inventories and related allowance for slow-moving, excess,discontinued and shelf life expired inventory***

Inventories are stated atthe lower of cost, on a first-in, first-out basis, or market value and are reducedby an allowance for slow-moving, excess, discontinued, shelf life expiredinventories and an estimate for re-label costs associated with introduction ofour newly redesigned labels for Stokes Green Chile Sauces. Our estimate forsuch allowance is based on our management’s review of inventories on handcompared to estimated future usage and demand for our products. If actualfuture usage and demand for our products are less favorable than thoseprojected by our management, inventory write-downs may be required. We closelymonitor our inventory and related shelf lives and have historically rarelyexperienced occurrences of obsolete inventory. We have recorded an estimatedallowance for retailer inventories that may be returned to us if our productsare discontinued by retailers in the California market.

   ***Long-Lived Assets***

The Company depreciates long-lived assets principallyby the straight-line method over the estimated useful lives of these assets.Estimates of useful lives are based on the nature of the underlying assets aswell as the Company’s experience with similar assets. Estimates of useful livescan differ from actual useful lives due to the inherent uncertainty in making

 

19

----

 

these estimates, particularly in the Company’s significantlong-lived assets such as land improvements, buildings and equipment. Factorssuch as the conditions in which the assets are used, availability of capital toreplace assets and frequency of maintenance can influence the useful lives ofthese assets. The Company incurred depreciation expense of approximately $0.2 millionin fiscal years 2004 and 2003.

The Company reviews long-lived assets to be held andused for impairment whenever events or changes in circumstances indicate thatthe carrying amount may not be recoverable. If an evaluation of recoverabilityis required, the estimated total undiscounted future cash flows directlyassociated with the asset is compared to the asset’s carrying amount. If thiscomparison indicates that there is an impairment, theamount of the impairment is calculated by comparing the carrying value todiscounted expected future cash flows expected to result from the use of theasset and its eventual disposition or comparable market values, depending onthe nature of the asset. 

***Accounting for Goodwill and Other Intangible Assets***

In June 2001, the Financial Accounting StandardsBoard, or FASB, issued Statement of Financial Accounting StandardsNo. 142, or SFAS No. 142, “Goodwill and Other Intangible Assets.”This pronouncement continues to require recognition of goodwill and otherunidentifiable intangible assets with indeterminate lives as long-term assets,but requires such assets to be tested for impairment using a fair value-basedapproach. Our ownership interest in Stokes Canning Company has been reflectedat the cost basis of Stokes Canning Company which included goodwill, and doesnot reflect any adjustment to record the fair value of the assets. We areobligated to evaluate the carrying value of goodwill for impairment each yearin accordance with SFAS No. 142. The assessment of impairment is based onthe estimated fair value of Stokes Canning Company compared to the carryingvalue of the net assets. If the estimate fair value is less than the carryingvalue, a write-down will be recorded, measured by the amount of the differencebetween the carrying value and the fair value of the net assets. We havedetermined that there was no impairment as of December 31, 2004.

   ***Accruals for estimated liabilities***

Accruals for estimated liabilities resulting from thenormal course of business will be recorded in the period in which the liabilityarises. The adequacy of these accruals will be evaluated periodically andrevised as necessary based on events and circumstances present at the time,known facts, historical experience and other relevant considerations. We haverecorded an estimated production shortfall penalty payable to Hoopeston of$251,000 for the contract year ended June 30, 2005.

   ***Research and development***

Research and development expenses include costsassociated with the formulation, development, and testing of our Stokes andEllis products. Research and development costs are expensed as incurred andincluded in selling, general and administrative expenses. Such costs werenominal for each of the years ended December 31, 2004 and 2003. 

   ***Income taxes***

Stokes Ellis Foods and Centennial previously electedfor federal and state income tax purposes to be treated as subchapter Scorporations under the Internal Revenue Code and comparable state tax laws. Thecompletion of the initial public offering caused the automatic conversion ofCentennial from a subchapter S corporation to a C corporation. Any subchapter Scorporation income tax benefits or detriments of Stokes Ellis Foods, Inc. haveaccrued to the pre-initial public offering stockholders and do not belong tous.

Deferred income taxes are recognized for the taxconsequences in future years of temporary differences between financial statementcarrying amounts and the income tax bases of assets and liabilities. TheCompany regularly reviews its deferred income tax assets to determine whetherfuture taxable income will be sufficient to realize the benefits of theseassets. A valuation allowance is provided for deferred income tax assets forwhich it is deemed more likely than not that future taxableincome will not be sufficient to realize the related income tax benefits fromthese assets. The amount of the

 

20

----

 

net deferred income tax asset that is consideredrealizable could, however, be adjusted if estimates of future taxable incomeare adjusted.

** **

**FORWARD-LOOKING STATEMENTS**

Certain statements includedin “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” including “ - Critical Accounting Policies and Estimates,” “ -Results of Operations,” “ - Recent Accounting Pronouncements,” and “Liquidityand Capital Resources,” and elsewhere in this report, including certainstatements set forth under the captions “Business - Industry,” “Business —Regulation,” and “Market for Registrant’s Common Equity and Related ShareholderMatters” are “forward-looking statements” within the meaning of the SecuritiesAct of 1933 and the Securities Exchange Act of 1934, as amended by the PrivateSecurities Litigation Reform Act of 1995 (the “Reform Act”). Forward-lookingstatements include Centennial’s expectations with respect to industry growthtrends, effect of changes in the retail grocery industry on our sales, use ofestimates for revenue recognition, other estimates used for accountingpurposes, corporate cost structure, our entry into new markets, our ability to obtain newgrocery, superstore and club store customers and expanding our sales toexisting and new customers, our ability to secure and keep shelf spaceallocated to our products, the impact of operational difficultiesexperienced by Hoopeston and related increases in our costs of production,effect of adoption of recent accounting pronouncements, overall operatingresults and the availability of capital.

Forward-looking statements are not statements ofhistorical fact. Forward-looking statements involve risks, uncertainties andother factors that may cause our or our industry’s actual results, levels ofactivity, performance or achievements to be materially different from anyfuture results, levels of activity, performance or achievements expressed orimplied by these forward-looking statements. You can identify forward-looking statements by terminology such as “may,”“should,” “project,” “would,” “could,” “believe,” “expect,” “anticipate,” “estimate,”“intend,” “plan,” “continue” or the negative of these terms or other comparableterms.

Although we believe that the statementswe have made are based on reasonable assumptions, they are based on currentinformation and beliefs and, accordingly, Centennial can give no assurance thatits expectations will be achieved. In addition, these statements are subject tofactors that could cause actual results to differ materially from thosesuggested by the forward-looking statements. These factors include, but are notlimited to, factors identified below under the caption “Factors That May AffectFuture Operating Results, Financial Condition or Business.” All forward-lookingstatements attributable to us are expressly qualified by the cautionarystatements set forth in such Factors. We caution you not to place unduereliance on our forward-looking statements. Except asrequired by law, we do not intend to update or revise any of ourforward-looking statements to conform these statements to actual results.

**FACTORS THAT MAYAFFECT FUTURE OPERATING RESULTS, FINANCIAL CONDITION OR**

****BUSINESS****

As discussed under thecaption “Forward-Looking Statements,” Centennial provides the following riskfactor disclosures in connection with its continuing efforts to qualify itswritten and oral forward-looking statements for the safe harbor protection ofthe Reform Act and any other similar safe harbor provisions. Important factorscurrently known to management that could cause actual results to differmaterially from those in forward-looking statements include, but are notlimited to, the following:

**As a result of a reduction in availability of funds under our line ofcredit, we may not have enough liquidity to provide for operations**

As part of the amendment ofour loan and security agreement, effective March 21, 2005, our bankreduced the availability under our line of credit from $5.0 million to $4.0million until certain covenant levels are achieved. To the extent we incursignificant unanticipated capital or operating expenses, we may fully utilize fundsavailable under our revolving line of credit and not have liquidity to providefor day to day operating expenses. In addition, a financial covenant existsrequiring consolidated net worth (stockholders’ equity less treasury stock) tonot be less than $6.4 million.

21

----

 

To the extent operating losses decrease consolidatednet worth below that level, availability under theline of credit could be restricted.

**Uncertainty surrounding our current litigation with our tenant and solesupplier may have a significant negative impact on our operations and liquidity**

Our tenant and sole supplierhas filed suit against our wholly owned subsidiary, Stokes Canning Company,seeking to recover costs paid by the tenant for construction of a wastewatertreatment system at the plant we own and lease to the tenant. Additionally, the tenant contends that thecosts of certain future improvements for the facility should be paid for byStokes. The Company contends that the costs for the wastewater treatmentproject as well as future improvements for the facility are the responsibilityof the tenant and disputes the tenant’s claims. If we were to lose thislawsuit, it could have a significant negative impact on our working capital andliquidity.

**Consumeracceptance of our products in new markets is key toour expansion strategy**

Our expansion efforts in new markets have beendisappointing and our current levels of sales there do not justify payment ofslotting and additional marketing and promotional spending. Subsequent toDecember 31, 2004, we have been notified by certain customers that, due to lowlevels of sales, our products have been discontinued and will be removed fromthe retailers’ shelves. We will incur costs associated with returning theproducts to our warehouses. As a result of these customers discontinuing ourproducts, our sales in 2005 will be negatively impacted. In the event more of ourproducts are discontinued in any of the stores in our new markets, sales of ourStokes Green Chile Sauces will be further negatively impacted.

**Possibledelisting of our common stock by The Nasdaq StockMarket will affect trading of our common stock**

We received a notice from the staff of The NasdaqStock Market (the “Staff”) stating that the bid price for our common stock hadclosed below the minimum $1.00 per share requirement for continued inclusionpursuant to Marketplace Rule 431(c)(4) (the (“Rule”). In accordance with theRule, Nasdaq informed us that we have until August 29,2005 to regain compliance with the Rule or our common stock will be delisted. Ifour common stock is delisted from Nasdaq, we wouldlikely be subject to the penny stock rules of the SEC, which generally have theeffect of reducing the level of trading activity for stock.  An investor could find it more difficult todispose of, or to obtain accurate quotation as to the market value of, ourcommon stock. Additionally, if our common stock is delisted from the Nasdaq, an active and liquid trading market will not besustained, which could limit the ability of our stockholders to sell theircommon stock at a desired price. In order to regain compliance with the Rule,the bid price for our common stock must close at, or above, $1.00 per share forat least 10 consecutive business days. If compliance with the Rule is notdemonstrated by August 29, 2005, we may be provided an additional 180 calendardays by Nasdaq to regain compliance if we meet theinitial listing requirements as set forth in Marketplace Rule 4310(c), exceptfor bid price. We may be able to meet these initial listing requirements. If weare not eligible for an additional compliance period, the Nasdaqstaff will provide written notification that our common stock will be delisted.At that time we may appeal the Nasdaq staff’sdetermination to delist our common stock to a Listing Qualifications Panel, butwe cannot assure that we would prevail in any appeal.

**Groceryworker strikes in any of our markets will have a negative impact on our sales**

The four and one-half month Southern Californiagrocery worker strike during the first quarter of 2004 had a significant impacton the retailers in Southern California.   Thestrike delayed our ability to efficiently and effectively get our productsplaced on the retailers’ shelves due to retailer staffing constraints. Certainof the largest retailers in the Colorado market are in negotiations with theColorado grocery worker’s union. The parties are continuing their negotiations,but we cannot be sure that a strike will be avoided. If the workers strike inColorado or any of our other markets, sales of our products could be negativelyimpacted as the retailers may not have staffing to keep the shelves adequatelystocked. Furthermore, some grocery shoppers may be reluctant to cross picketlines to shop at the retailers’ stores.

22

----

 

**Our businessdepends on a limited number of customers. The loss of a large customer wouldhave a material adverse impact on our operating results**

Our customers can generally stop purchasing productsfrom us at any time and on minimal or no notice. For the year endedDecember 31, 2004, we derived approximately 70% of our sales from fourcustomers, Kroger, Safeway, Wal-Mart/Sam’s Club and Albertson’s. We expect thateach of these customers will account for in excess of 10% of our sales duringthe year ended December 31, 2005. The loss of any of these customers wouldhave a significant negative impact on our business and results of operations.

# **We have only operated Stokes CanningCompany since November 2003 and if we are not successful in doing so for anyreason, our operating results may suffer and we could incur losses**

We were formed in February 2003 andacquired Stokes Canning Company (Stokes) in October 2003 as a result of ourmerger with Stokes Ellis Foods, Inc. Part of our management team had no priorexperience in operating Stokes and our chief executive officer has done so onlyfor approximately four years. Our management team may not be able to workeffectively to run Stokes or it may take us longer than anticipated toimplement our growth plan.

# **We may not be able to generate enoughsales of our Stokes and Ellis products to offset preferred stock dividends, ourplanned marketing costs and general and administrative expenses and, if we areunable to do so, our operating results will suffer**

Our marketing and sales initiativesin new markets substantially increased our selling, general and administrativeexpenses. We are also required to pay preferred stock dividends of $.25 millionper quarter to our preferred stockholder. If we cannot pay such dividends dueto a lack of capital or any restrictions under the senior credit facility, thedividends will accumulate until they are paid. We deferred such dividends in2004 in the amount of $750,000. Our sales, market share and earnings may notrise to the extent necessary to offset dividends, marketing and salesexpenditures and additional salary expenses. Specific factors that might causeus to fail to reach targeted growth include, but are not limited to:

### •market acceptance of ourbranded products;

### •consumer responsiveness to ouradvertising and promotions;

### •changes in productionefficiencies or costs which affect prices charged by Hoopeston;

### •fluctuations in raw material costswhich affect prices charged by Hoopeston;

### •changes in distribution orinventory holding costs;

### •competitors’ marketing andpromotion responses;

### •market conditions affectingthe price of our products; and

### •our ability to fosterbrand loyalty among consumers of ethnic Southwestern sauces and foods.

If our sales do not increase, wecould be forced to curtail selling, general and administrative expenses orimplement other cost reduction measures. In this event, our sales could furtherdecrease.

Our growth strategy depends inlarge part on our ability to secure shelf space within stores and then successfullymaintain shelf space through achieving sufficient sales volumes for ourproducts. To do so, we must pay slotting fees to some retailers, which are feesthe retailer gets from food and beverage manufacturers to secure shelf spacefor products. We also have to participate in advertising and promotion programsrun by some retailers. If the costs of slotting fees, advertising and promotionexceed budgeted amounts or if sales at the consumer level do not meetexpectations, we may not be able to achieve our planned growth or sustain ourfinancial performance. If we were forced as a result to raise additional

 

23

----

 

capital, we may not be ableto obtain such capital when needed or, if obtained, the cost of such capitalmay be significantly higher than the cost of capital from our existing sources.

# **We face significant competition in theethnic Southwestern sauce and food sector of the Mexican food industry, whichcould adversely affect our future operating results, financial condition andliquidity and our ability to grow our business**

The Mexican food industry is highlycompetitive, with a significant number of national and regional manufacturersand distributors. We compete directly with manufacturers and distributors ofethnic Southwestern sauces and food products, and compete generally withmanufacturers and distributors of Mexican sauces and food products and otherethnic foods. Among others, brands such as Ortega, Old El Paso, Pace, Rosarita,Taco Bell, Hormel, Hatch, Las Palmas, LaVictoria, 505 Southwestern andLaPreferida offer products that compete with ours. Some of our competitors arepart of large, diversified food companies which have greater financialresources and a wider range of product offerings than we do. If these largercompetitors choose to introduce products similar to ours at lower prices, ourmarket share in our existing markets could decline and our margins wouldsuffer. We do not have sufficient resources to advertise and promote our productson the scale that certain of our larger competitors use to foster brandrecognition of their products. If we are unable to effectively promote ourbrands and products, the resulting lack of consumer demand could cause ourcustomers to reduce shelf space allocated to our ethnic Southwestern products. Anyloss of shelf space could have a significant negative impact on our operatingresults. As we enter new markets, we may encounter competition from regionalmanufacturers and distributors not active in our existing markets. If thesecompetitors use price promotions or advertising campaigns to stimulate demandfor their products, we could be forced to compete using similar programs,thereby increasing our costs and reducing our margins. The competitive environmentfor our ethnic Southwestern products could adversely affect our future salesand profits, financial condition and liquidity and our ability to grow ourbusiness. We cannot assure you that we will compete effectively in our existingmarkets or in new markets we enter or seek to enter.

# **Our business depends on sales of ethnicSouthwestern products to four retailers that accounted for 70% of Stokes EllisFoods’ sales in 2004, and if we fail to increase the number of stores thatoffer our products and lose any of these customers, our sales and operatingresults will decline**

Approximately 70% of our 2004 saleswere accounted for by four customers, Kroger, Safeway, Wal-Mart/Sam’s Club andAlbertson’s. We currently sell to four Wal-Mart distribution regions and oneCostco distribution region. Because purchasing decisions by these customers areoften made at the national and regional levels with input from the store level,acceptance of our products in one region does not assure us of acceptance inothers, nor does it assure us that individual stores will carry all or part ofour product line. If we are unsuccessful in gaining entry to other regions orin convincing individual stores to carry our product line, our sales will notincrease. Retailers continually evaluate the sales performance of products theycarry and if sales of our products do not meet expectations, one or more of ourcustomers may discontinue carrying our product line. There are approximately 12national grocery and club store chains and a small number of regional chainswhich represent significant target customers for our products. If we fail toobtain new customers and lose one of our existing customers, our sales wouldsuffer and our operating results would be harmed.

# **If sales of our ethic Southwesternproducts do not meet retailer expectations or if retailers add a number of newproducts to their shelves, we may lose shelf space for Stokes or Ellis productsor lose favorable shelf positions that will cause our sales to fall**

Retailers have a finite amount ofshelf space in each of their stores on which food and beverage products arestocked. Food produced by smaller manufacturers such as us are more likely tobe removed from store shelves than food produced by bigger manufacturers, sincelarger companies can afford more expansive promotions and advertisingcampaigns. Ultimately, however, the decision about whether to remove orrelocate a product will depend on its sales and retail margins, and how thesecompare to existing or new food products. We cannot assure you that ourproducts will continue to compare favorably in sales and retail margins toexisting or new food products that may be introduced in the future. Also,retailers can at their discretion relocate our products to lower or higher shelfspace that may make it more difficult for consumers to see or find ourproducts. If we lose shelf space or our products are given less favorable shelflocations, our sales could decline.

 

24

----

 

# **Changes in retail distributionarrangements can result in the temporary loss of retail shelf space and disruptsales of our Stokes and Ellis products, which can cause our sales to fall**

From time to time, retailers changedistribution centers that supply some of their retail stores or change foodbrokers that are responsible for stocking and maintaining products in parts oftheir stores. If the new distribution center has not had our products approvedfor distribution in its region, or if the food broker is not familiar with ourproducts, it can sometimes take several months to get the retailer’sdistribution center to begin distributing our products in a new region or toget a food broker to represent and stock our products. For example, we lostdistribution of our products in a store outside metropolitan Denver in 2003when the retailer shifted the store to a new distribution region that did notinventory our products. Even though we received approval fromthe retailer to have our products distributed in the new region, our salessuffered as a result of the temporary loss of shelf space at that store.If we do not obtain approval to have our products offered innew distribution regions or if obtaining this approval takes longer thanwe plan, our operating results may suffer. Likewise, if we cannot establish arelationship with a food broker with responsibility for Southwestern foods inone or a number of stores, or if we temporarily lose shelf space during thetime it takes to do so, our sales may decline.

# **We depend on independent food brokers toorder, stock and replenish our ethnic Southwestern sauces and food products formost of our customers, and our sales and operating results could be harmed ifthey fail to do so effectively**

Most of our grocery chain customersrely on distributors and independent food brokers to assist in ordering,stocking and reordering our products. If the food brokers we use overestimatedemand for our products, we may experience higher rates of product returns orhave to sell our products at lower prices. Conversely, if food brokersunderestimate demand for our products, we may forego sales and ourrelationships with retailers carrying our products may suffer. In addition, ifwe are forced to order production runs on short notice, our manufacturing anddelivery costs would likely increase and our margins would fall. Because wehave a limited product line, we will generally rely on smaller, specialty foodbrokers who may not have the staffing and other resources available to largerfood brokers. If food brokers we use do not provide acceptable levels ofservice to retailers carrying our products, we may lose shelf space,advantageous shelf locations, or customers, any of which would reduce our salesand harm our operating results.

# **We depend on Co-Sales Company, our leadfood broker, to help us in marketing and selling our ethnic Southwesternproducts to retailers, and if Co-Sales’ performance declines or if we areforced to change our lead food broker for another reason, our sales could falland our operating results may be harmed**

Since 1998, we have used Co-SalesCompany as our lead food broker to assist us in marketing and selling our foodproducts to retailers throughout our existing markets. We have no contract withCo-Sales and either of us may terminate our brokerage relationship at any time.If Co-Sales’ performance did not meet our expectations or if Co-Sales decidedto terminate its representation of our products, we would in all likelihoodlook to replace Co-Sales with another lead broker. If doing so took longer thananticipated, or if a new lead food broker was not able to maintain our productdistribution through existing retail locations, sales of our products couldfall, particularly if retailers felt their stores were not being serviced properly.

# **We rely on Hoopeston to operate theproduction facility we own and as a result can experience cost increases,financial penalties, inventory fluctuations and operating disruptions, any ofwhich can increase our costs or cause us to lose sales**

Since January 2001, ourproducts have been produced by Hoopeston under a Co-Pack and Warehousing Agreementwhich obligates Hoopeston to produce and warehouse Stokes and Ellis productlines for a period that currently extends until January 26, 2010, with additionalautomatic one-year extensions that occur on June 30th of each yearunless either party elects to terminate the automatic one year extensions. Werely on Hoopeston to manufacture our products. Hoopeston leases the productionfacility and equipment we own to make our products and those of others. Thesearrangements subject us to a variety of risks, including:

 

25

----

 

## *Our productionand ingredient costs are subject to increase*

If Hoopeston’s production or ingredientcosts increase during the agreement’s term, the agreement allows Hoopeston toincrease the product costs to us on an annual basis under certain conditions. Agriculturalcommodity prices can fluctuate widely due to weather and other factors. Anymaterial increase in production or ingredient costs that we cannot recoverthrough price increases to our customers will reduce our margins and harm ouroperating results.

## *We are liable forshortfall payments if our production requirements fall below a pre-determinedlevel*

We agreed to purchase fromHoopeston a minimum of approximately 585,000 cases of our products during eachyear of our co-pack agreement. If we fail to do so, we must pay Hoopeston aper-case fee of $.80 multiplied by the difference between the actual number of cases produced and the minimum number called forin the agreement. We fell below the minimum production level in 2004 and 2003and paid Hoopeston a shortfall payment of approximately $82,000 and $16,000,respectively, as a result. We currently estimate a shortfall payment ofapproximately $250,000 for the contract year ending June 30, 2005. If we continueto be obligated to pay this fee in the future, it would have a significantnegative impact on our operating results.

## *Our operationswould be severely affected if Hoopeston was prevented from or ceased operatingour facility for any reason*

If Hoopeston was prevented fromoperating our production facility as a result of regulatory or other actionstaken by third parties, or if Hoopeston ceased operating the facility for anyreason, the resulting interruption or cessation of production would severelyaffect our operations. We may not be able to assume operation of the plant on atimely basis or identify another third party to operate the plant if Hoopestonfailed or was unable to do so, or the cost of doing so could result in anoverall increase in our production costs. Alternatively, we may not be able tofind a third party that would agree to manufacture our products at theirfacility. If our production facility is idled due to causes not attributed toHoopeston, our reduced production volume could trigger our obligation to makepayments to Hoopeston for failing to meet minimum production volumes. We couldalso be forced to sell the facility to a third party if we were unsuccessful inoperating it ourselves. We believe that a sustained inability to deliverproducts would result in the loss of our customers, which would harm ourbusiness to a much greater extent than the benefits available under ourinsurance policy.

## *Hoopeston’s inability to effectively manage and operate ourproduction facility could result in higher product costs to us*

IfHoopeston experienced a prolonged period of management turmoil, or if itsoperations were ineffectively managed, our production costs could increase orwe could experience production delays that could adversely impact availabilityof our products at the store level.

## *Our operationsand Hoopeston’s production of products for us are subject to FDA and USDAgovernmental regulation and there is no assurance that we will be in compliancewith all regulations*

Our operations are subject toextensive regulation by the United States Food and Drug Administration, theUnited States Department of Agriculture and other national, state and localauthorities. For example, we and Hoopeston are currently subject to the Food,Drug and Cosmetic Act and regulations adopted by the FDA, and Hoopeston isobligated to make prompt payment of accounts owed to produce suppliers inaccordance with the Perishable Agricultural Commodities Act. The FDA’scomprehensive regulatory program governs, among other things, themanufacturing, composition and ingredients, packaging and safety of food. Underthis program, the FDA regulates manufacturing practices for foods through itscurrent “good manufacturing practices” regulations and specifies the contentsfor some foods. Our production plant and Hoopeston’s operation of the plant aresubject to periodic inspection by federal, state and local authorities. Webelieve that we and Hoopeston are in compliance with currently applicable lawsand regulations but we and Hoopeston may not be able to comply with any or allfuture laws and regulations. Moreover, we do not control Hoopeston. IfHoopeston failed to comply with applicable laws and regulations, themanufacture of our products could be interrupted or delayed and our plant couldbe temporarily closed by regulatory action, any of which could harm ourreputation and severely harm our operating results. In addition, failure by usor by Hoopeston to comply with applicable laws and regulations could subject

 

26

----

 

us to civil remedies, includingfines, injunctions, recalls or seizures, as well as potential criminalsanctions, which could materially harm our business, financial condition oroperating results.

## *We could beliable for costs and damages if Hoopeston manufactures contaminated productsthat result in product liability claims*

While Hoopeston has contractuallyindemnified us for any failure to comply with the terms of the Co-Pack &Warehousing Agreement, including any failure to comply with applicable laws,Hoopeston’s production of contaminated food products could subject us to legalaction, thereby exposing us to substantial defense costs and damage awards. IfHoopeston’s insurance and financial resources were exceeded by the amount ofany damages, our indemnity rights may be of negligible value. Although wemaintain our own product liability insurance in amounts we consider to be commercially reasonable, our insurance may not beadequate in all events. Any underinsured or uninsured loss experienced by uscould harm our business, perhaps significantly.

*Because Hoopeston produces andinventories food for us and other branded manufacturers, we must correctlyanticipate demand for particular varieties of our ethnic Southwestern products,or our production costs will increase and we may lose sales*

Our agreement with Hoopestonrequires us to provide a rolling multi-week production plan that is used toestablish firm production schedules ahead of actual production. Followingproduction, Hoopeston must inventory canned food for at least a 5 dayincubation period to allow USDA inspectors to test the product for contaminationor spoilage. For these reasons, it is difficult to produce our food products onshort notice. Although Hoopeston can add shifts to increase short-termproduction, the use of additional shifts increases production costs thatHoopeston passes through to us and other manufacturers it serves. As weimplement our plan, we will need to plan ahead for our product requirements,inventory levels and expected consumer demand for our different product lines. Ifwe do not do so successfully or if consumer preferences in one market differsignificantly from others, we may be forced to seek short-term increases inproduction that will increase our costs and reduce our margins. We may losesales if we lack inventory of our products when ordered and production, incubationand delivery times result in a product being out of stock on a customer’sshelves.

## *We use only oneproduction facility and if this facility were to experience a fire, flood orother calamity, our operations could be substantially harmed*

The plant operated by Hoopeston isthe only facility that we currently use to produce our ethnic Southwesternproducts. Although we believe other production facilities could manufacture ourproducts, we may not be able to find an alternate facility that could meet ourproduction requirements on short notice. Even if an alternate facility werefound, our production costs could increase, particularly if we needed to sourceproducts on short notice. A natural disaster or other event that resulted inthe destruction or loss of part or all of the Hoopeston facility couldinterrupt or stop production, which would significantly harm our business andoperations. We have business interruption insurance, but we believe that a lossof our customers due to production interruptions would harm our business to amuch greater extent than the benefits available under our insurance policy.

## *Our right toreceive override payments from Hoopeston may be affected if Hoopeston operatesour plant inefficiently or if Hoopeston exercises its option to purchase theproduction facility*

Our agreements with Hoopeston willentitle us to receive, at least annually, an override payment equal to aportion of Hoopeston’s earnings before interest, income taxes, depreciation andamortization, or EBITDA. The override payment is to be calculated following theend of Hoopeston’s fiscal year, which ends on June 30 of each calendar year. Theoverride payment for the period through June 2003, isto be paid in the form of a promissory note from Hoopeston. In March 2004, weagreed to transfer the note, when issued, to our majority stockholder in fullsatisfaction of the related liability to the stockholder, since such income wasearned by Stokes prior to its acquisition by the Company. We have been informedby Hoopeston that it does not anticipate an override payment for the contractyear ended June 30, 2004. If Hoopeston’s EBITDA fails to increase due to:

### •operating difficultiesor disruptions in production, including the effect of any regulatory actionconcerning the production facility;

 

27

----

 

### •mismanagement;

### •loss of othermanufacturers’ production business;

### •reductions in our productionrequirements;

### •interruptions in the supply of rawmaterials;

### •inability to secure newmanufacturing customers; or

### •increases in non-recoverableproduction costs,

then we may never receive an override payment. We do not own Hoopeston and donot make its production decisions, meaning that we have no control over the dailyoperating decisions that will likely determine the amount, if any, of ourfuture override payment. We cannot assure you that we will receive overridepayments in future years, or the amount of any such payment. Hoopeston is alsoallowed to offset against the override payment any monetary damages it incursin the event we breach our Co-Pack & Warehousing Agreement, property andequipment leases, and some related agreements. Any such breach that results inthe exercise of Hoopeston’s offset rights could reduce substantially anyoverride payment we might otherwise be eligible to receive. Our rights toreceive any override payment and Hoopeston’s obligation to continuemanufacturing our products may be affected if Hoopeston decides to exercise itsright to purchase our production facility. Our agreements with Hoopeston do notclearly address the effect on the override payment agreement, the co-packagreement or any other agreement if Hoopeston exercises its option to purchasethe production facility. If Hoopeston stopped producing our products afterpurchasing our facility, we would be forced to find another manufacturer forour products. We have identified an alternative manufacturer to produce ourproducts if needed.

## *The loss of asignificant supplier of raw materials to Hoopeston, a price increase ordisruption in supplies of green chiles, or other disruptions in supplies of rawmaterials may impair Hoopeston’s ability to timely and cost-effectively makeour products*

The principal ingredients used tomake our products are green chiles, beef, pork, chicken, corn, beans,seasonings and packaging material. Hoopeston chooses suppliers of our rawmaterials and does not have any long-term arrangements with any suppliers ofour raw materials. In order to ensure consistency of flavor, Hoopestonpurchases, to the extent practicable, all of the produce and commodities neededto produce our sauces and foods from a limited number of significant suppliers.The loss of a significant supplier for any reason could result in delays inproduction or raw material cost increases, either of which could harm ouroperating results.

Hoopeston currently relies on twosuppliers for its purchases of green chiles. A significant increase in greenchile prices or a sustained interruption in the supply of green chiles for anyreason would seriously harm our business. Neither we nor Hoopeston have anylong-term contracts extending beyond one season with green chile suppliers,meaning that the price of green chiles sold to us may increase at any time orthat the quantity of green chiles supplied to us could be curtailed at anytime. The volume of green chiles that Hoopeston purchases for our products issuch that it would be difficult to effectively hedge a large portion of ourgreen chile costs. Difficulties in obtaining green chiles or the imposition ofimport quotas on agricultural products generally or green chiles in particularcould also materially harm our business or increase our operating costs.

The failure of suppliers of keyingredients to meet our quality standards or delivery schedules could delay orhinder Hoopeston’s manufacturing of our products. In particular, a suddenscarcity, a substantial price increase, or the unavailability of productingredients could harm Hoopeston’s ability to produce our sauces and foods on atimely and cost-effective basis, and could result in an increase in ourproduction costs.

 

28

----

 

## *If Hoopeston’sfinancial condition is or were to become unstable or it were to file for protectionunder applicable bankruptcy laws at some future time, our production could beinterrupted and our operating results could decline; a bankruptcy filing byHoopeston could make the enforceability of our agreements uncertain and allow atrustee to reject or affirm any or all of our agreements with Hoopeston to ourdisadvantage*

Hoopeston is a privately-heldcompany and we are not provided with all of their financial information. IfHoopeston’s financial condition is or were to become unstable for any reason inthe future and if it filed for protection under applicable bankruptcy laws, its is possible that all or part of our agreements withHoopeston could be rejected by a trustee appointed in any bankruptcy proceedingor Hoopeston could cease operations. For example, we could be forced to findanother manufacturer and our production could be interrupted if the trusteerejected our Co-Pack & Warehousing Agreement with Hoopeston. Any productioninterruptions we experience could negatively affect our operating results.

If a trustee affirmed our exclusivelicense agreement with Hoopeston and rejected our other agreements, we mightnot be able to transfer the production of our products to another manufacturerwithout exposing ourselves to potential liability. As a practical matter, ifthe exclusive license agreement were affirmed to the exclusion of all our otheragreements, we could be forced to violate the exclusive license agreement tomeet our customers’ requirements, which could subject us to damage claims.

# **If we fail to maintain and strengthen ourStokes and Ellis brands in existing markets or establish these brands in othermarkets we enter, sales of our ethnic Southwestern products may decrease**

To be successful, we must maintainand strengthen our Stokes and Ellis brands in existing markets and establishour branded ethnic Southwestern products as preferred choices with consumersand retailers in new markets. We believe that brand recognition will becomemore important in the future as we implement our growth strategy and seek toreach consumers through store locations in new market areas. If we are unableto establish, strengthen and maintain our brands, the attractiveness of ourproducts to consumers and retailers may decrease and our business, financialcondition and operating results could be materially and adversely affected.

# **We depend on consumers’ purchases of ourSouthwestern food products and general economic conditions, terrorism, war, orother factors affecting consumer spending may harm our operating results**

Our operating results depend onconsumer spending, which is influenced by general economic conditions. Thestrength and profitability of our business will depend on consumer demand forMexican food in general and for the ethnic Southwestern products we offer. Theterrorist attacks of September 11, 2001, and ongoing turmoil in Iraq andthreats or occurrences of terrorist activities both inside and outside theUnited States, as well as the responses to such activities, have had a negativeimpact on consumer confidence. Our business and sales could be negativelyaffected by poor economic conditions and any related decline in consumer demandfor discretionary items such as our products.

# **We have a limited product line ofSouthwestern sauces and foods from which we expect to derive substantially allof our future sales. Expansion of our limited product line has not resulted insignificant sales in new markets and we may not have sufficient sales toachieve profitability given existing overhead costs and public company costs.**

We derive substantially all of oursales from 10 varieties of Stokes sauces, chile and bean products and 13 Ellistamale, chile and bean products. We expect that these products will account forsubstantially all of our sales in the near future, with sauces accounting foran increasing portion of our total sales. The limited nature of our productline makes our future prospects difficult to predict. This difficulty iscompounded as our entry into new markets has not been successful. The cost ofholding our inventory has increased and some of our products may be returnedafter their shelf life expires, meaning that we may be forced to write-off thecosts of such products. Without increased sales revenue from our products, ourability to be profitable on an operating basis may be impaired given ourexisting overhead level and public company costs. In particular, the failure tosell sufficient quantities of Stokes Green Chile Sauces would have adisproportionate impact on our operating margins.

 

29

----

 

**Increases inthe prices of commodities used in our products could cause our product costs toincrease and our margins to decline significantly**

If prices of commodities used inour products were to increase, Hoopeston has the right to annually adjust ourproduct cost based upon their actual cost for the prior year. This would resultin higher product costs to us.

# **A disruption of shipping or the additionof fuel surcharges could cause our operating costs to increase and our marginsto decline significantly**

We rely on common carriers to shipvirtually all of our ethnic Southwestern products to our customers and tosecondary distribution facilities we use in Phoenix, Arizona, Buena Park,California and Salt Lake City, Utah. These common carriers also shipingredients, raw materials, cans and labels to Hoopeston from its suppliers. Anydisruption or slowdown in deliveries of our products, ingredients or suppliescaused by labor strikes, other labor disputes, weather conditions or othercauses could significantly harm our business. Recent increases in diesel andother energy costs have led some common carriers to propose or implement fuelsurcharges on some longer delivery routes. If fuel costs remain at currentlyhigh levels or rise, and more common carriers implement or increase fuelcharges, our operating costs may increase and our margins may suffer.

# **If we acquire other ethnic Southwestern orMexican food brands or companies that make these products, our business couldbe disrupted, your ownership could be diluted or our operating results could beharmed**

We may evaluate opportunities fromtime to time to acquire other ethnic Southwestern or Mexican food brands orcompanies that produce these foods. We are considering potential acquisitionsof other brands or companies, as we explore alternatives to maximizing companyvalue. We have begun preliminary discussions with various groups; however, nodefinitive plans or agreements have been reached. We may not complete anyacquisitions in the future, and any acquisitions we do complete could disruptour business. If we fail to assimilate successfully any acquired brand orcompany and the products or personnel of the acquired operations, our businessmay be harmed and our management team could be distracted. The issuance ofequity for any acquisition could dilute the ownership of our existingshareholders and the issuance of debt could increase our interest expense andother acquisition-related costs.

# **The disclosure or unauthorized use of ourconfidential trade secrets, including our recipes and production processes ofour ethnic Southwestern products, would have an adverse impact on our businessby allowing our competitors to promote and sell products comparable to ours**

Our products are made usingtraditional Southwestern recipes and through production processes that weconsider to be trade secrets. It is possible that a third party could obtainour recipes and production processes through unauthorized means or couldattempt to duplicate our products. In this event, we could lose any competitiveadvantage we currently possess and our business could be adversely affected. Wehave confidentiality clauses in our production and license agreements withHoopeston, but such clauses may not be sufficient to give us effectiveprotection from unauthorized disclosure of confidential trade secrets.

# **Our majority stockholder and his wife willcontinue to exert a controlling influence on our decisions and may makedecisions that are not in the best interest of all stockholders**

James E. Lewis owns approximately42% of our outstanding common stock, and Mr. and Mrs. Lewis hold the 2,000,000shares of our outstanding Series A preferred stock. After giving effect to theLewises’ preferred stock voting rights, the Lewises vote approximately 58.2% ofour outstanding capital stock at any meeting of our stockholders. As apractical matter, the Lewises will be able to elect the members of our board ofdirectors and determine the outcome of all matters submitted to a vote of ourstockholders. These matters include the power to prevent or cause a change incontrol of Centennial. The Lewises could seek to change the composition of ourboard of directors or management team through calling a stockholder meeting. TheLewises’ interests may be different from the interests of other stockholders,including with respect to:

### •the composition of ourboard of directors and, through it, any determination with respect to ourbusiness direction and policies, including the appointment and removal ofofficers;

 

30

----

 

### •any determinations withrespect to mergers, other business combinations, or changes in control;

### •our acquisition ordisposition of assets;

### •our financing activities;and

### •the payment of dividendson their preferred stock.

The Lewises’ ownership of ourcapital stock could depress the market price of our common stock or delay orprevent a change in control of Centennial. The Lewises are not prohibited fromselling a controlling interest in us to a third party and can do so withoutrequiring a buyer to acquire the common stock sold in our IPO. The Lewises mayalso sell all or a portion of the preferred stock they hold without ourconsent.

# **Our stock price may be highly volatile dueto factors that have little or nothing to do with our performance**

The trading price of ourcommon stock has been volatile. The market for our common stock may experiencesignificant price and volume fluctuations in response to a number of factorsincluding actual or anticipated quarterly variations in operating results,changes in expectations of future financial performance, our success orinability to obtain analyst research coverage of our stock, changes inestimates of any securities analysts who begin to follow our stock, marketpenetration we achieve in existing and new markets, competitive developmentsamong our retailer customers, effectiveness of our advertising and promotionactivities, changes in consumer tastes, introduction of new products orpromotions of existing products that are competitive to ours, regulatory actionconcerning Hoopeston, our production plant, or our products, and other factors,many of which are beyond our control. Furthermore, the stock market in generaland the market for small capitalization stocks in particular, has experienced extreme volatility that often has beenunrelated to the operating performance of publicly traded companies. Thesebroad market and small capitalization stock fluctuations may adversely affectthe trading price of our common stock, regardless of actual operatingperformance.

# **Our indemnification of the Lewises foractions they take in their capacities as our majority stockholders may causeadditional conflicts of interest to arise between us and the Lewises in thefuture and could subject us to considerable damages and expenses**

We have entered into anindemnification agreement with the Lewises under which we have agreed toindemnify them to the same extent that we indemnify our officers and directors.The indemnification protects the Lewises from individual liability to us fordamages from any action or failure to act unless the conduct amounted to abreach of any fiduciary duty or involved intentional misconduct, bad faith, fraudor a knowing violation of law. The indemnification agreement also obligates usto advance expenses of any related proceeding before its final resolution if wehave an undertaking from the Lewises to repay such advances if they areultimately determined not to be entitled to indemnification. The indemnityobligation may in the future create additional conflicts of interest betweenus, our stockholders and the Lewises, or may expose us to damages and expensesthat would otherwise not be our obligation. If these damages and expenses weresubstantial, our financial condition may be harmed, perhaps significantly.

# **Substantial amounts of our common stockcould be sold in the near future, which could depress Centennial’s stock price**

The 3,500,000 shares of our commonstock that were issued prior to our initial public offering are “restrictedsecurities” under the Securities Act. These shares are eligible for future salein the public market at prescribed times pursuant to Rule 144 under theSecurities Act, or otherwise. Sales of a significant number of these shares ofcommon stock in the public market could reduce the market price of our commonstock. Messrs. Nieder, Beckwith and Lewis agreed not to sell 2,950,000 of theirshares for a period of four years ending October 29, 2007 other than two andone-half percent of those shares per quarter, beginning October 29, 2005, orupon our common stock becoming a “covered security” as defined under thesecurities laws. Sales of shares held by these persons after expiration of thelock-up agreements may likewise cause a decline in the market price of ourstock.

 

31

----

 

Item 7. FINANCIAL STATEMENTS

 

**REPORTOF INDEPENDENT REGISTERD PUBLIC ACCOUNTING FIRM**

** **

Board of Directors and Stockholders

CentennialSpecialty Foods Corporation and Subsidiary

Centennial,Colorado

 

We haveaudited the accompanying consolidated balance sheet of Centennial SpecialtyFoods Corporation and its Subsidiary as of December 31, 2004, and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for the years ended December 31, 2004 and 2003. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

Weconducted our audits in accordance with standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall consolidated financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of CentennialSpecialty Foods Corporation and its Subsidiary as of December 31, 2004, and theresults of their operations and their cash flows for the years ended December31, 2004 and 2003 in conformity with accounting principles generally acceptedin the United States of America.

 

                Ehrhardt Keefe Steiner &Hottman PC

 

March 4,2005 (except for Note 10 as to which the date is March 21, 2005)

Denver,Colorado

 

32

----

 

**CENTENNIAL SPECIALTY FOODS CORPORATION AND SUBSIDIARY**

**ConsolidatedBalance Sheet**

 
| ** **                                                                                                                                                  | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Assets**                                                                                                                                                  |       |                  |       |
| Current assets                                                                                                                                              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                  |       | $                     | 415,597    |   |
| Accounts  receivable, net of allowance for doubtful accounts of $25,483                                                                                     |       | 341,671               |       |
| Income taxes  receivable                                                                                                                                    |       | 14,478                |       |
| Inventory, net                                                                                                                                              |       | 1,894,927             |       |
| Prepaid expenses                                                                                                                                            |       | 153,219               |       |
| Total current  assets                                                                                                                                       |       | 2,819,892             |       |
|                                                                                                                                                        |       |                  |       |
| Non-current  assets                                                                                                                                         |       |                  |       |
| Property, plant  and equipment, net                                                                                                                         |       | 5,914,186             |       |
| Goodwill, net                                                                                                                                               |       | 1,634,079             |       |
| Other assets                                                                                                                                                |       | 56,488                |       |
| Total  non-current assets                                                                                                                                   |       | 7,604,753             |       |
|                                                                                                                                                        |       |                  |       |
| Total assets                                                                                                                                                |       | $                     | 10,424,645 |   |
|                                                                                                                                                        |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                               |       |                  |       |
| ** **                                                                                                                                                  |       |                  |       |
| Current  liabilities                                                                                                                                        |       |                  |       |
| Accounts payable  — trade                                                                                                                              |       | $                     | 394,830    |   |
| Accrued  liabilities                                                                                                                                        |       | 800,473               |       |
| Total current  liabilities                                                                                                                                  |       | 1,195,303             |       |
|                                                                                                                                                        |       |                  |       |
| Long-term debt                                                                                                                                              |       | 2,436,387             |       |
| Deferred tax  liability                                                                                                                                     |       | 77,015                |       |
| Total long-term  liabilities                                                                                                                                |       | 2,513,402             |       |
| Total  liabilities                                                                                                                                          |       | 3,708,705             |       |
|                                                                                                                                                        |       |                  |       |
| Commitments and  contingencies                                                                                                                              |       |                  |       |
|                                                                                                                                                        |       |                  |       |
| Stockholders’  equity                                                                                                                                  |       |                  |       |
| Preferred stock  (liquidation preference $10,750,000), 3,000,000 shares authorized, 2,000,000  shares issued and outstanding, $5 stated value, 10% dividend |       | 2,334,785             |       |
| Common stock,  $0.0001 par value, 20,000,000 shares authorized, 5,050,000 shares issued and  outstanding                                                    |       | 505                   |       |
| Additional  paid-in capital                                                                                                                                 |       | 5,794,036             |       |
| Accumulated  deficit                                                                                                                                        |       | (1,413,386            | )          |
| Total  stockholders’ equity                                                                                                                            |       | 6,715,940             |       |
| Total  liabilities and stockholders’ equity                                                                                                            |       | $                     | 10,424,645 |   |

 

See notes toconsolidated financial statements.

 

33

----

 

**CENTENNIAL SPECIALTY FOODS CORPORATION AND SUBSIDIARY**

**ConsolidatedStatements of Operations**

 
| ** **                                                    | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
|                                                          |       |                                      |       |   |   |
| Net sales                                                     |       | $                                         | 4,415,857  |   | $ | 5,032,557 |   |
|                                                          |       |                                      |       |   |   |
| Cost of goods  sold                                           |       | 3,266,756                                 |       | 3,211,905 |   |
|                                                          |       |                                      |       |   |   |
| Gross profit                                                  |       | 1,149,101                                 |       | 1,820,652 |   |
|                                                          |       |                                      |       |   |   |
| Selling, general  and administrative expenses                 |       | 2,504,237                                 |       | 2,106,328 |   |
|                                                          |       |                                      |       |   |   |
| Loss from  operations                                         |       | (1,355,136                                | )          | (285,676 | ) |
|                                                          |       |                                      |       |   |   |
| Other income  (expense)                                       |       |                                      |       |   |   |
| Interest expense                                              |       | (226,983                                  | )          | (463,301 | ) |
| Production  facility income                                   |       | 314,230                                   |       | 804,323 |   |
| Total other  income                                           |       | 87,247                                    |       | 341,022 |   |
|                                                          |       |                                      |       |   |   |
| Income (loss)  before income taxes                            |       | (1,267,889                                | )          | 55,346 |   |
|                                                          |       |                                      |       |   |   |
| Income tax  benefit (expense) - current                       |       | 14,478                                    |       | (21,482 | ) |
| Income tax  benefit - deferred                                |       | 454,768                                   |       | 4,171 |   |
| Total income tax  benefit (expense)                           |       | 469,246                                   |       | (17,311 | ) |
|                                                          |       |                                      |       |   |   |
| Net income  (loss)                                            |       | $                                         | (798,643   | ) | $ | 38,035 |   |
|                                                          |       |                                      |       |   |   |
| Net income  (loss) before preferred stock dividend            |       | $                                         | (798,643   | ) | $ | 38,035 |   |
|                                                          |       |                                      |       |   |   |
| Preferred stock  dividends — paid                        |       | (250,000                                  | )          | (172,603 | ) |
| Preferred stock  dividends — in arrears                  |       | (750,000                                  | )          | — |   |
| Total preferred  stock dividends                              |       | (1,000,000                                | )          | (172,603 | ) |
|                                                          |       |                                      |       |   |   |
| Net loss  available to common shareholders                    |       | (1,798,643                                | )          | (134,568 | ) |
| Basic and  diluted net loss per common share                  |       | $                                         | (0.36      | ) | $ | (0.04 | ) |
| Basic and  diluted weighted average common shares outstanding |       | 5,050,000                                 |       | 3,629,452 |   |

 

See notes to consolidatedfinancial statements.

 

34

----

 

**CENTENNIAL SPECIALTY FOODSCORPORATION AND SUBSIDIARY**

**Consolidated Statements of Changes in Stockholders’ Equity**

**for****the Years EndedDecember 31, 2004 and 2003**

 

 
| ** **                                                                        | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional Paid-in- Capital** | ** ** | **Accumulated Deficit** | ** ** | **Total Stockholders’ Equity** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|---------------------------------|------------|-------------------------|------------|-------------------------------------|------------|
| ** **                                                                        | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**                      | ** ** | **Amount**              | ** ** | ** **                          | ** ** | ** ** |
| ** **                                                                        | ** ** | **(000)**           | ** ** | ** **       | ** ** | **(000)**                       | ** ** | ** **              | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance -  December 31, 2002                                                      |       | —              |       | —           |       | 2,100                           |       | $                       | 210        |                                | $          | 5,134,083 |   | $ | (2,129,247 | ) | $ | 3,005,046 |   |
| Issuance of  common stock in Centennial Specialty Foods Corporation               |       |                |       |             |       | 1,400                           |       | 140                     |       |                                |       |   |   | 140 |   |
| Acquisition of  Stokes, net of deferred taxes of $670,051                         |       | 2,000               |       | 2,334,785        |       |                            |       |                    |       | (5,134,083                          | )          | 2,129,247 |   | (670,051 | )  |
| Distribution of  pre-acquisition earnings of Stokes net of tax effect of $135,218 |       |                |       |             |       |                            |       |                    |       |                                |       | (230,176 | )  | (230,176 | )  |
| Net proceeds  from Initial public offering                                        |       |                |       |             |       | 1,550                           |       | 155                     |       | 5,794,026                           |       |   |   | 5,794,181 |   |
| Sale of common  stock warrants                                                    |       |                |       |             |       |                            |       |                    |       | 10                                  |       |   |   | 10 |   |
| Preferred stock  dividends — paid                                            |       |                |       |             |       |                            |       |                    |       |                                |       | (172,603 |  ) | (172,603 | )  |
| Net income                                                                        |       |                |       |             |       |                            |       |                    |       |                                |       | 38,035 |   | 38,035 |   |
| Balance -  December 31, 2003                                                      |       | 2,000               |       |             | 2,334,785  |                            | 5,050      |                    |       | 505                                 |       |   | 5,794,036 |   |   | (364,744 | ) |   | 7,764,582 |   |
| Preferred stock  dividends — paid                                            |       |                |       |             |       |                            |       |                    |       |                                |       | (250,000 |  ) | (250,000 | )  |
| Net loss                                                                          |       |                |       |             |       |                            |       |                    |       |                                |       | (798,642 | ) | (798,642 | ) |
| Balance -  December 31, 2004                                                      |       | 2,000               |       | $                | 2,334,785  |                            | 5,050      |                    | $          | 505                                 |       | $ | 5,794,036 |   | $ | (1,413,386 | ) | $ | 6,715,940 |   |

 

See notes to consolidatedfinancial statements.

 

35

----

 

**CENTENNIAL SPECIALTY FOODSCORPORATION AND SUBSIDIARY**

**Consolidated Statements of Cash Flows**

** **
| ** **                                                                                                            | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
|                                                                                                                  |       |                                      |       |   |   |
| Cash flows from  operating activities                                                                                 |       |                                      |       |   |   |
| Net income  (loss)                                                                                                    |       | $                                         | (798,642   | ) | $ | 38,035 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities                              |       |                                      |       |   |   |
| Depreciation and  amortization                                                                                        |       | 238,101                                   |       | 231,813 |   |
| Deferred income  taxes                                                                                                |       | (454,768                                  | )          | (4,171 | ) |
| Production  facility income                                                                                           |       | —                                    |       | (170,000 | ) |
| Changes in  assets and liabilities                                                                                    |       |                                      |       |   |   |
| Accounts  receivable                                                                                                  |       | (37,823                                   | )          | 3,536 |   |
| Income taxes  receivable                                                                                              |       | (14,478                                   | )          | — |   |
| Inventory                                                                                                             |       | (851,387                                  | )          | (12,383 | ) |
| Prepaid expenses                                                                                                      |       | 32,867                                    |       | (116,935 | ) |
| Accounts payable  — trade                                                                                        |       | (627,438                                  | )          | 118,910 |   |
| Accrued  liabilities                                                                                                  |       | 243,821                                   |       | (68,183 | ) |
| Related party payable                                                                                                 |       | (195,394                                  | )          | — |   |
| Income taxes  payable                                                                                                 |       | (20,361                                   | )          | 21,482 |   |
|                                                                                                                  |       | (1,686,860)                               |       | 4,069 |   |
| Net cash  provided (used) by operating activities                                                                     |       | (2,485,502                                | )          | 42,104 |   |
|                                                                                                                  |       |                                      |       |   |   |
| Cash flows from  investing activities                                                                                 |       |                                      |       |   |   |
| Purchase of  property, plant and equipment                                                                            |       | (18,889                                   | )          | (33,200 | ) |
| Net cash used in  investing activities                                                                                |       | (18,889                                   | )          | (33,200 | ) |
|                                                                                                                  |       |                                      |       |   |   |
| Cash flows from  financing activities                                                                                 |       |                                      |       |   |   |
| Net proceeds  from revolving line of credit                                                                           |       | 2,436,387                                 |       | — |   |
| Payments on  long-term debt                                                                                           |       | (4,253,704                                | )          | (116,301 | ) |
| Proceeds from  (payments on) note payable — stockholder                                                          |       | (908,900                                  | )          | 35,000 |   |
| Payment of  financing costs                                                                                           |       | (7,671                                    | )          | (25,000 | ) |
| Dividends paid                                                                                                        |       | (422,603                                  | )          | — |   |
| Net proceeds  from the issuance of stock                                                                              |       | —                                    |       | 5,794,331 |   |
| Net cash  provided (used) by financing activities                                                                     |       | (3,156,491                                | )          | 5,688,030 |   |
|                                                                                                                  |       |                                      |       |   |   |
| Net increase  (decrease) in cash                                                                                      |       | (5,660,882                                | )          | 5,696,934 |   |
|                                                                                                                  |       |                                      |       |   |   |
| Cash and cash  equivalents - beginning of year                                                                        |       | 6,076,479                                 |       | 379,545 |   |
|                                                                                                                  |       |                                      |       |   |   |
| Cash and cash  equivalents - end of year                                                                              |       | $                                         | 415,597    |   | $ | 6,076,479 |   |
|                                                                                                                  |       |                                      |       |   |   |
| **Supplemental  Disclosure of Cash Flow Information:**                                                                |       |                                      |       |   |   |
| Interest paid                                                                                                         |       | $                                         | 366,930    |   | $ | 387,786 |   |
| Income taxes  paid                                                                                                    |       | $                                         | 20,361     |   | $ | — |   |
|                                                                                                                  |       |                                      |       |   |   |
| **Supplemental  Disclosure of Non-Cash Activities:**                                                                  |       |                                      |       |   |   |
| Assignment of  rights to note receivable to majority stockholder in satisfaction of related  party payable            |       | $                                         | 170,000    |   | $ | — |   |
| Recognition of  deferred tax liability associated with the purchase of Stokes Ellis Foods,  Inc. with Preferred Stock |       | $                                         | —     |   | $ | 534,833 |   |
| Accrual of  financing costs                                                                                           |       | $                                         | —     |   | $ | 45,000 |   |
| Accrual of  pre-acquisition Stokes earnings distribution                                                              |       | $                                         | —     |   | $ | 365,394 |   |
| Accrual of  preferred stock dividends                                                                                 |       | $                                         | —     |   | $ | 172,603 |   |
|                                                                                                                       |            |                                           |            |  |  |  |  |  |  |  |

 

See notes to consolidated financialstatements.

 

36

----

 

**CENTENNIAL SPECIALTY FOODSCORPORATION AND SUBSIDIARY**

 

**Note 1 - Description of Business andSummary of Significant Accounting Policies**

CentennialSpecialty Foods Corporation (Centennial) is a holding company that was formedunder Delaware law in February 2003 for the purpose of acquiring Stokes EllisFoods, Inc. and its wholly owned subsidiary Stokes Canning Company(collectively Stokes). Effective October 29, 2003, Centennial acquired Stokesconcurrent with its initial public offering. From inception through October 29,2003, Centennial’s activities consisted of planning the initial public offeringas well as developing plans for operations after the initial public offeringwas completed. Centennial’s costs and expenses through October 2003 consistedof salaries to its officers and market research costs, which totaledapproximately $412,314, as well as the costs associated with the offeringtotaling $1,955,819. These costs were paid on behalf of Centennial by Stokesand through proceeds of the public offering. The only sources of capital forCentennial were advances made by Stokes and proceeds from the offering.

StokesEllis Foods, Inc. was a holding company incorporated in the state of Delawareduring August 1998, for the purpose of acquiring Stokes Canning Company. StokesEllis Foods, Inc. was formerly known as Lewis Foods, Inc. until it changed itsname in May 2003.

StokesCanning Company was formed in 1974 under Colorado law. It markets, sells anddistributes branded ethnic Southwestern canned sauces and food products in theMexican food segment of the domestic food industry. The products are currentlysold through superstores, club stores, and grocery retailers throughoutColorado, Arizona, California and a small number of major metropolitan marketsin adjoining states. Centennial’s operations are conducted from its facilitieslocated in Centennial, Colorado.

Principles of Consolidation

The accompanying consolidated financial statements includethe accounts of Centennial Specialty Foods Corporation, Stokes Ellis Foods,Inc. and subsidiary, Stokes Canning Company (collectively the Company). Allintercompany accounts and transactions have been eliminated in consolidation.

The purchase of Stokes wasaccounted for as a reorganization of companies under common control inaccordance with SFAS 141, in a manner similar to reverse acquisitionaccounting. After completion of the offering and issuance of preferred stock,the primary stockholders of Stokes and Centennial have voting control ofapproximately 58.2% of the outstanding capital stock. For this reason, Stokesand Centennial are treated as being under common control for financialstatement reporting purposes. Accordingly, no goodwill has been recorded as aresult of this business combination. In addition, the Consolidated Statementsof Operations, Consolidated Statements of Changes in Stockholders’ Equity andConsolidated Statements of Cash Flows have been consolidated for the year endedDecember 31, 2003 under the provisions of Interpretation 46.

Cash and Cash Equivalents

The Company continually monitors its positions with, and thecredit quality of, the financial institutions it invests with. As of December31, 2004, balances of cash maintained at financial institutions exceeded thefederally insured limit by approximately $301,326. In addition, cashequivalents consisted of funds in a money market account which was not FDICinsured.

Concentrations of Credit Risk

TheCompany grants credit in the normal course of business to customers in theUnited States. The Company periodically performs credit analysis and monitorsthe financial condition of its customers to reduce credit risk.

TheCompany had four customers that accounted for 28%, 16%, 13% and 13% of totalsales for the year ended December 31, 2004 and four customers that accountedfor 28%, 16%, 13% and 10% of total sales for the year ended December 31, 2003. Threeof these customers accounted for 35%, 16% and 16% of total accounts receivableat December 31, 2004.

 

37

----

 

Inventories

Inventoriesconsist of canned food products and labels and are stated at the lower ofaverage cost or market, determined using the first-in, first-out method (FIFO).

Property, Plant and Equipment

Property,plant and equipment are stated at cost. Depreciation is provided utilizing thestraight-line method over the estimated useful lives for owned assets, rangingfrom 5 to 40 years. Depreciation expense for the years ended December 31, 2004and 2003 was $216,918 and $231,813, respectively.

 

In January 2001, the Company entered into a lease and aco-pack and warehouse agreement with an unrelated party (Note 6). As part ofthis lease, the Company leases nearly all of its property, plant and equipmentunder an operating lease to the unrelated party. The income from thistransaction is recorded as rent income.

Goodwill

TheCompany accounts for goodwill using Statement of Financial Accounting Standards(“SFAS”) No. 142, *Goodwill and Other Intangible Assets*.Goodwill is tested annually for impairment in accordance with SFAS No. 142. TheCompany determined that there was no impairment as of December 31, 2004.

Other Assets

Otherassets consist of loan commitment fees and costs related to the seniorrevolving credit line described in Note 4. Such costs are amortized over theterm of the revolving line of credit.

Income Taxes

The Company provides for income taxesutilizing the liability method. Under the liability method, current income taxexpense or benefit represents income taxes expected to be payable or refundablefor the current period. Deferred income taxes are recognized for the taxconsequences in future years as a result of differences between the tax andfinancial reporting bases of assets and liabilities and for the expected futuretax benefit to be derived from tax credit and loss carry-forwards. Valuationallowances are established when necessary to reduce deferred tax assets to theamounts management believes are more likely than not to be realized in futuretax returns. Tax rate changes are reflected in the period such changes areenacted.

Priorto the effective date of its initial public offering, the Company elected to betreated as a subchapter S corporation for income tax purposes. Accordingly,taxable income and losses of the Company prior to the public offering isreported on the income tax returns of the Company’s stockholders.

Fair Value of Financial Instruments

Thecarrying amounts of financial instruments including cash, receivables,prepaids, accounts payable and accrued expenses are carried at cost, whichmanagement believes approximates fair value because of the short-term maturityof these instruments.

Thecarrying amount of the revolving line of credit approximates fair value as ofDecember 31, 2004 as the interest rate on this instrument approximates marketinterest rates.

Revenue Recognition

TheCompany recognizes revenue upon the shipment of canned food products to thecustomer. Provisions are made for estimated product returns and salesallowances.

 

38

----

 

Billback Discounts, Promotional Allowances, Cash Discountsand Slotting Fees

The Company offers various discountsand promotional allowances to customers. These amounts are recorded as adecrease to sales in the period incurred. The Company offers performance basedbillback discounts in which retailers are given discounts once products aresold through store registers. In addition, the Company pays slotting fees tocustomers to obtain shelf space in retail locations. These one-time fees arenon-refundable and are netted against sales in the period incurred.

Discounts, promotional allowances andslotting fees are summarized below for the years ended December 31, 2004 and2003.
| ** **                        | ** ** | **For the Year Ended**

**December 31,** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
|                              |       |                                     |       |   |   |
| Billback  discounts               |       | $                                        | 424,757    |   | $ | 75,116 |   |
| Promotional  allowances           |       | 566,708                                  |       | 751,416 |   |
| Cash discounts                    |       | 100,263                                  |       | 85,974 |   |
| Total discounts  and Allowances   |       | 1,091,728                                |       | 912,506 |   |
| Slotting Fees                     |       | 516,611                                  |       | 23,817 |   |
| Total  adjustments to gross sales |       | $                                        | 1,608,339  |   | $ | 936,323 |   |

 

Shipping Expense

          Shipping and handling expense iscomprised of costs to store, move, prepare and ship product to customers andhas been included in cost of goods sold.

 

Advertising Costs

 

            The Company expensesadvertising costs as incurred. Advertising expense for the years ended December31, 2004 and 2003 was $313,231 and $110,900, respectively.

 

Use of Estimates

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts in the financialstatements and the accompanying notes, and the amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

                Basicand Diluted Earnings (Loss) Per Common Share

Inaccordance with SFAS No. 128 *Earnings per Share*,basic earnings (loss) per share are computed based upon the weighted averagenumber of common shares outstanding during the period. Diluted earnings (loss)per share reflects the potential dilution to basic earnings (loss) per sharethat could occur upon the conversion or exercise of dilutive securities,options, warrants or other similar items to common shares using the treasurystock method based upon the weighted-average fair value of the Company’s commonshares outstanding during the period. As the Company has incurred a net lossavailable to common shareholders for the years ended December 31, 2004 and 2003,the Company has excluded the effects of the common shares issuable upon theexercise of warrants or stock options since their effect is anti-dilutive.

                StockBased Compensation

TheCompany has adopted both SFAS No. 123 *Accounting for Stock-BasedCompensation*, which requires disclosure of the fair value and othercharacteristics of stock options, and SFAS No. 148 *Accountingfor Stock-Based*

 

39

----

 

*Compensation— Transition and Disclosure*, which requires more prominentdisclosure about the effects of an entity’s accounting policy decision withrespect to stock based compensation on reported netincome. The Company has chosen under the provisions of SFAS No. 123 to continueusing the intrinsic-value method of accounting for employee stock compensationin accordance with Accounting Principles Board Opinion No. 25 *Accounting for Stock Issued to Employees* (APB 25). Accordingly,no compensation cost has been recorded for the stock option plans. Hadcompensation cost for the Company’s option plan been determined based on thefair value at the grant date for awards consistent with the provisions of SFASNo. 123, the Company’s net loss and basic and diluted loss per common sharewould have been changed to the pro forma amounts indicated below:
| ** **                                                                | ** ** | **For the years ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                                                | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net loss  available to common shareholders — as reported             |       | $                                    | (1,798,642 | ) | $ | (134,568 | ) |
|                                                                      |       |                                 |       |   |   |
| Employee  stock-based compensation determined under the fair value method |       | —                               |       | (136,818 | ) |
|                                                                      |       |                                 |       |   |   |
| Pro forma net  loss available to common shareholders                      |       | $                                    | (1,798,642 | ) | $ | (271,386 | ) |
|                                                                      |       |                                 |       |   |   |
| Basic and  diluted loss per common share — as reported               |       | $                                    | (0.36      | ) | $ | (0.04 | ) |
|                                                                      |       |                                 |       |   |   |
| Basic and  diluted loss per common share — pro forma                 |       | $                                    | (0.36      | ) | $ | (0.07 | ) |
|                                                                           |            |                                      |            |  |  |  |  |  |

 

Pro forma information regarding net loss is required by SFASNo. 123 and has been determined as if the Company had accounted for its stockoptions under the fair value method of SFAS No. 123. The fair value of eachoption grant was estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions as of December31, 2003: Approximate risk-free rate of 3.18%, average expected life of 10years, dividend yield of 0% and volatility of 33.83%.

Recently Issued Accounting Pronouncements

InDecember 2004, the FASB issued FASB No. 123(R), *Share BasedPayment*, which replaces SFAS No. 123, *Accountingfor Stock Based Compensation*, and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*. The new standardis applicable to the Company for the first interim or annual reporting periodthat begins after December 15, 2005. Among other items, the new standard will requirethe Company to expense future stock options issuances in the financialstatements.

**Note 2 - Balance Sheet Disclosures**

Property,plant and equipment consist of the following at December 31, 2004:
| Buildings                      |   | $          | 5,595,330 |   |
|--------------------------------|--------|------------|-----------|--------|
| Land                           |   | 737,925    |      |
| Equipment                      |   | 818,682    |      |
| Vehicles                       |   | 6,389      |      |
| Fixtures                       |   | 173,457    |      |
|                           |   | 7,331,783  |      |
| Less accumulated  depreciation |   | (1,417,597 | )         |
|                           |   | $          | 5,914,186 |   |

 

40

----

 

Accruedexpenses consist of the following at December 31, 2004:

 
| Accrued property  taxes            |   | $       | 118,739 |   |
|------------------------------------|--------|---------|---------|--------|
| Accrued  production shortfall fees |   | 250,778 |    |
| Accrued selling  expenses          |   | 377,926 |    |
| Accrued other                      |   | 53,030  |    |
|                               |   | $       | 800,473 |   |

**Note3 — Goodwill**

Effective January 1, 2002, the Company adopted SFAS No. 142. As ofJanuary 1, 2002, the Company had $1,634,079 in unamortized goodwill.  In accordance with the provisions of SFAS No.142, the Company has ceased amortization of goodwill from the acquisition ofStokes Canning Company. The Company completed its impairment test anddetermined that there is no impact on the Company’s financial position andresults of operations, as goodwill is not impaired. Goodwill will be testedannually and whenever events and circumstances occur indicating that goodwillmight be impaired.

 

Goodwillis summarized as follows at and December 31, 2004:

 
| Goodwill                       |   | $        | 1,782,710 |   |
|--------------------------------|--------|----------|-----------|--------|
| Less accumulated  amortization |   | (148,631 | )         |
|                           |   | $        | 1,634,079 |   |

**Note 4 - Long-Term Debt**

At December 31, 2004, long-term debtconsists of a $5,000,000 ($4,000,000 as amended) senior revolving line ofcredit. The revolving line of credit matures December 31, 2006 and accruesinterest at the bank’s base rate plus 1.5%, or 6.75% at December 31, 2004. Theborrowing base is limited to the sum of 70% of the appraised value of theproduction plant, 75% of eligible accounts receivable and 50% of finished goodsinventory. Based upon these allowable percentages and the amended credit limit,the Company had $1,563,613 in funds available under the revolving line ofcredit at December 31, 2004. The facility calls for an unused revolvercommitment fee of 0.5% per annum which is paid quarterly in an amount equal tothe average daily unused portion of the revolving credit facility times 0.5%per annum. The facility is collateralized by a first mortgage on the productionbuilding. The facility is also secured by substantially all assets of theCompany, including accounts receivable and inventory, and an assignment of theco-packing agreement with its supplier. The facility is also subject to certainrestrictive covenants.

In March 2004, the Company used proceeds from this revolverto retire various notes payable including a note payable to our majority stockholderin the amount of $908,900. In addition, the Company retired the existing firstmortgage note payable to a bank using initial public offering proceeds.

Maturitiesof long-term obligations are as follows:
| **Year Ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2005                         |       | $          | —     |   |
| 2006                         |       | 2,436,387  |       |
|                         |       | $          | 2,436,387  |   |
|                              |            |            |            |  |  |

 

41

----

 

Subsequent to year end, the Company and its bank amended the existingloan and security agreement. The material terms of the amendment are asfollows:

 

•           The total amount available underthe revolving line of credit was reduced to $4,000,000 until the Companyattains consolidated net worth of $7,000,000 for two consecutive quarter endsand minimum debt service coverage ratio is met for two consecutive quarterly measurementperiods.

 

•           The minimum consolidated networth covenant was reduced to $6,700,000 for the year ended December 31, 2004and $6,400,000 for periods subsequent to December 31, 2004. The minimum consolidatednet worth covenant will be a continuous measurement rather than at quarter end.

 

•           Dividends or distributions on thecapital stock of the Company will not be allowed until the consolidated networth of the Company reaches $7,000,000. Thereafter, dividends will be allowedonly to the extent of one-half of net income.

 

•           Unless the Company requests loanavailability in excess of $4,000,000, the minimum debt service ratio will notbe activated until the quarter ending December 31, 2005.

**Note 5 — Stockholders’ Equity**

Preferred Stock

The Company issued 2,000,000 shares of preferredstock in connection with the acquisition of Stokes Ellis Foods, Inc. in October2003. The preferred stock carries a 10% cumulative annual dividend and has aliquidation value of $5 per share plus dividends in arrears or a totalliquidation value of $10,750,000. This $10,750,000 value will only be realizedupon liquidation of the Company. The preferred stock is convertible into commonstock on a one-for-one basis. The preferred stock is valued at $2,334,785which, for financial reporting purposes, represents the predecessor cost basis(stockholders’ equity) net of associated deferred tax liability of Stokes atthe time of acquisition.

 

Subsequent to year end, the Company and its bank amended the existingloan and security agreement. As part of this amendment, the Company isrestricted from paying preferred stock dividends until the consolidated networth of the Company reaches $7,000,000. Thereafter, dividends will be allowedonly to the extent of one-half of net income. Dividends in arrears are includedin the liquidation value of the preferred stock.

 

Common Stock

During February 2003, Centennial sold 1,400,000 shares of its commonstock to shareholders with no previous ownership in the Company. These shareswere issued at $0.0001 per share.

 

Effective October 29, 2003, the Company completed its initial publicoffering of 1,550,000 common shares at $5 per share for $7,750,000 grossproceeds net of issuing costs of $1,955,819.

 

As a result of the acquisition of Stokes in October 2003, Stokesshareholders own 42% and vote approximately 58% of the outstanding capitalstock of Centennial. All share and per share amounts have been retroactivelyrestated to reflect the capital structure of Centennial.

 

Stock Escrow Agreements

Upon completion of the public offering, officers and directors placed200,000 shares of common stock owned by them in an escrow account under theterms of an agreement with the managing underwriter and Corporate StockTransfer, Inc. The common stock will be released from escrow on the earlier tooccur of:

•                  the Company’s netincome after tax exceeding $1.5 million in fiscal 2004;

•         the Company’s net income after tax exceeding $4.0 millionin fiscal 2005;

 

42

----

 

•                  if the Company is acquiredby, or merged with, an entity in which the Company’s stockholders own less than50% of the entity’s equity after the transaction or after which the Company isnot the surviving entity;

•                  all orsubstantially all of the Company’s assets are sold following approval by amajority of the Company’s stockholders excluding votes attributable to thestock in the escrow account; or

•                  October 29, 2010.

Stock Options

 

Centennialissued an option to purchase 40,000 shares to each of its two non-employeedirectors under its 2003 Non-Employee Directors’ Stock Option Plan. On October29, 2003 and December 31, 2003, 40,000 options were issued to directors at anexercise price of $5.00 and $3.50 per share, respectively. The options vestover 3 years with a term of 10 years.

 

Stock Purchase Warrants

 

As part of the initial public offering, the managingunderwriter paid $10 for warrants to purchase 155,000 shares of common stock atan exercise price of $7.00 per share for a period of five years from the effectivedate of the offering. These warrants may not be exercised for at least one yearand the warrants and underlying shares of common stock will be restricted fromsale, transfer, assignment or hypothecation for a period of one year from thedate of the offering, except to the managing underwriter, other underwriters,selling group members and their officers or partners. The fair value of thewarrants estimated upon the date of grant using the Black-Scholesoption-pricing model was $132,844 using the following weighted averageassumptions: Approximate risk-free rate of 3.18%, average expected life of 5years, dividend yield of 0% and volatility of 33.83%.

 

Equity Incentive Plan

 

In August 2004, shareholders approved the 2004 StockIncentive Plan (the “Plan”), which provides for the grant of options of up to 500,000shares of common stock. Under the Plan, the Company may grant incentive stockoptions, nonqualified stock options and stock awards to employees, directorsand consultants. The exercise price of each option shall be determined by theCompensation Committee of the Board of Directors, however, the exercise priceof incentive stock options shall not be less than the fair market value of theshares on the date of grant, or 110% in the case of incentive stock optionsgranted to an individual with ownership in excess of certain limits. Fornonqualified stock options, the exercise price may not be less than 85% of thefair market value on the date of grant. The Company’s Compensation Committee ofthe Board of Directors determines the vesting and other provisions of optionsgranted under the Plan. No options were granted under the plan for the yearended December 31, 2004.

**Note 6 - Commitments and Contingencies**

Plantand Equipment Lease

In January 2001, the Company enteredinto a lease agreement with a lessee, the Company’s sole supplier and unrelatedparty, to lease the Company’s production plant and equipment. The lessee isusing the production plant and equipment to perform co-packing and warehousingoperations for both the Company and other non-related entities. Under the termsof the lease, the Company is to receive monthly payments of approximately$53,000, which includes reimbursement for property taxes and insurance. Thelease expires the later of January 26, 2006 or expiration or termination of theCo-Pack and Warehousing Agreement which has a current expiration of January 26,2011, reflecting the five year extension option. The Company received $634,323in lease payments in each of the years ended December 31, 2004 and 2003.

The Company and the lessee are alsoparties to a Lease Override Agreement which requires additional rent paymentsbased on profitability, as defined in the agreement, of the lessee’s co-packingand warehousing operations. For the year December 31, 2003, the Companyrecorded $170,000 in additional rent income for such additional payments to bereceived from the lessee related to the lessee’s fiscal year ended June 30,2003. During June 2004,

 

43

----

 

the Companyrecorded approximately $57,000 of additional rent income related to its shareof the lessee’s estimated operating profits from its co-packing and warehousingoperations for the fiscal year ended June 30, 2004. The final amount due the Companyis based upon the lessee’s audited financials which were not finalized atDecember 31, 2004; however, the lessee has informed the Company it no longerexpects to generate an operating profit from its co-packing and warehousingoperations for the fiscal year ended June 30, 2004. Accordingly, the Companyreversed the previously recorded additional rent income during December 2004. Forthe period July 1, 2004 through December 31, 2004, it is estimated by thelessee that the additional rent income based on profitability due the Companywas not significant and, therefore, no amount was accrued as of December 31,2004.

 

ContractAmendments

 

The Company and its lessee amendedcertain terms of the existing Lease and Lease Override Agreements in March2004. As part of these amendments, the Company agreed to receive payment duefrom its lessee for additional rent owed under the Lease Override Agreement forthe twelve months ended June 30, 2003 in the form of a $170,000 notereceivable. The note receivable matures November 1, 2004, but may be extendedto April 30, 2006. Interest does not begin accruing until certain events occur,after which point the note will accrue interest at 7% per annum payablequarterly. In March 2004, this note was assigned to the Company’s majoritystockholder in full satisfaction of the related $170,000 liability to thestockholder as such income was earned by Stokes prior to its acquisition by theCompany.

 

Co-Packand Warehousing Agreement

 

In conjunction with the plant andequipment lease, the Company entered into a Co-Pack and Warehousing Agreementwith the same lessee. Under the terms of the agreement, the lessee willproduce, package, and warehouse the products the Company sells and distributes.As part of the agreement, the Company must purchase 585,053 12-pack (15 oz.)equivalent cases of product during each contract year or pay a shortage fee of$0.80 for every 12-pack (15 oz.) equivalent case short. The Company recordedshortage fees of $81,874 and $16,841 for the contract years ended June 30, 2004and 2003, respectively. As of December 31, 2004, the Company has recorded anestimated $251,000 in shortage fees related to the contract year ended June 30,2005 as the Company has determined it will not meet required throughput requirementas a result of current inventory levels. The Company must also pay a $0.033 percase fee per month if storage of product based upon the pack plan exceeds 30days due to the Company’s shipping schedule. The agreement has a currentexpiration date of January 26, 2010, but is automatically renewed for oneadditional year at June 30 of each year unless either party elects to terminatethe renewal feature.

 

Dependencyon Supplier

 

As discussed above, one supplier manufactures all of theCompany’s products. If there were to be an interruption in the delivery ofproducts from the supplier, the Company could suffer a significant disruptionto its operations that may have a material effect on its financial conditionand results of operations. In the event of an interruption in the delivery ofproducts from the supplier, the Company believes it can have its productsproduced elsewhere.

 

Purchase Commitments

 

The Company had outstanding purchasecommitments for finished inventory as of December 31, 2004 of approximately $262,000.The Company also had an outstanding purchase commitment as of December 31, 2004of $248,000 for diced green chile, the primary ingredient in its green chilesauces.

 

OtherMatters

 

In February 2005, the Company’stenant and sole supplier filed a lawsuit in Adams Country Colorado DistrictCourt against the Company’s wholly owned subsidiary, Stokes Canning Company (“Stokes”),seeking to recover costs paid by tenant for construction of a wastewatertreatment system at the plant owned by Stokes. Additionally, the tenantcontends that the costs of certain future improvements for the facility shouldbe paid for by Stokes. The Company contends that the costs for the wastewatertreatment project as well as future improvements for the facility

 

44

----

 

are theresponsibility of the tenant and disputes the tenant’s claims. The Company willvigorously defend any and all claims by the tenant. In March 2005, the Companyfiled various counterclaims against the Company’s tenant and sole supplier.

 

OperatingLease

 

In May2004, the Company entered into a lease agreement with an unaffiliated party foroffice space for its headquarters in Centennial, Colorado. Under the terms ofthe lease, the Company must make monthly lease payments which range from $3,319to $3,793 per month for a term of three years.

**Note 7 — Income Taxes**

Thenet long-term deferred tax liability in the accompanying balance sheet includesthe following at December 31, 2004:

 

| Long-term  deferred tax assets        |   | $        | 681,299 |   |
|---------------------------------------|--------|----------|---------|--------|
| Long-term  deferred tax liability     |   | (758,314 | )       |
| Net long-term  deferred tax liability |   | $        | (77,015 | )      |

 

Temporarydifferences giving rise to the net long-term deferred tax liability were asfollows at December 31, 2004:

 

| Organizational  costs             |   | $       | 116,960  |   |
|-----------------------------------|--------|---------|----------|--------|
| Other asset                       |   | 73,124  |     |
| Net operating  loss carryforward  |   | 491,215 |     |
| Long-term  deferred tax assets    |   | $       | 681,299  |   |
|                              |   |    |     |
| Property and  equipment           |   | $       | (758,314 | )      |
| Long-term  deferred tax liability |   | $       | (758,314 | )      |

 

AtDecember 31, 2004, the Company had a federal net operating loss carryforward ofapproximately $1,367,000 that will expire in 2024, unless previously utilized.

 

Thefollowing is a reconciliation of the statutory federal income tax rate appliedto pre-tax accounting net income (loss) compared to the income tax benefit (expense)in the consolidated statements of operations:

 

| ** **                          | ** ** | **For the years ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Current:                            |       |                                 |       |   |   |
| Federal                             |       | $                                    | 14,478     |   | $ | (19,371 | ) |
| State and other                     |       | —                               |       | (2,111 | ) |
|                                |       | 14,478                               |       | (21,482 | )  |
|                                |       |                                 |       |   |   |
| Deferred:                           |       |                                 |       |   |   |
| Federal                             |       | 429,283                              |       | — |   |
| State and other                     |       | 25,485                               |       | 4,171 |   |
|                                |       | 454,768                              |       | 4,171 |   |
|                                |       |                                 |       |   |   |
| Total income tax  benefit (expense) |       | $                                    | 469,246    |   | $ | (17,311 | ) |

 

**45**

----

** **

**Note 8 - Related Party Transactions**

Acompany owned by a member of senior management provided management andpersonnel services to the Company totaling $343,500 for the year ended December31, 2003. The services were provided on a month-by-month basis to the Company. Subsequentto December 31, 2003, no further services have been provided to the Companyunder this relationship.

During 2004, the Company paid a related party payabletotaling $365,394. This payable represented subchapter S corporation earningsprior to October 29, 2003, which are owed to the majority stockholder. Suchearnings included additional rent totaling $170,000 due under the productionfacility lease and Stokes operating income totaling $195,394. The Company madepartial payments of $195,394 to the majority stockholder associated with thisrelated party payable during 2004 and assigned the rights to the notereceivable of $170,000 due from its supplier to the majority stockholder inMarch 2004.

The Company had previously entered into a note with themajority stockholder of the Company with interest at 12% in the amount of$908,900. During 2004, the Company repaid the stockholder all outstandingprincipal of $908,900 and accrued interest of $129,866 through proceeds fromthe senior revolving line of credit described in Note 4.

The Company’s majority stockholder is a member of a twoperson management committee for the party that is leasing our building andequipment to perform co-packing and warehousing operations. This committee isresponsible for approving the party’s annual budget for capital expendituresand is responsible for overseeing certain calculations including monitoring theoperating and production expenses used in the calculations. There were notransactions between the Company’s principal shareholder and the party except forthe serving on the committee for which the shareholder receives nocompensation.

During 2004, the Company purchased services from a researchfirm that employs one of its outside directors. Total services purchased fromthis firm were $8,190 for the year ended December 31, 2004.

**Note 9 — Subsequent Events**

As described in Note 6, the Company’s tenant and solesupplier filed a lawsuit in February 2005 in Adams Country Colorado DistrictCourt against the Company’s wholly owned subsidiary, Stokes Canning Company (“Stokes”),seeking to recover costs paid by tenant for construction of a wastewatertreatment system at the plant owned by Stokes. Additionally, the tenantcontends that the costs of certain future improvements for the facility shouldbe paid for by Stokes. The Company contends that the costs for the wastewatertreatment project as well as future improvements for the facility are theresponsibility of the tenant and disputes the tenant’s claims. The Company willvigorously defend any and all claims by the tenant. In March 2005, the Companyfiled various counterclaims against the Company’s tenant and sole supplier.

InMarch 2005, the Company received anotice from the staff of The Nasdaq Stock Market (the “Staff”) stating that thebid price for the Company’s common stock had closed below the minimum $1.00 pershare requirement for continued inclusion pursuant to Marketplace Rule4310(c)(4) (the “Rule”). In accordance with the Rule, Nasdaqinformed the Company that it will have until August 29, 2005 to regaincompliance with the Rule. In order to regain compliance with the Rule, the bidprice for the Company’s common stock must close at, or above, $1.00 per sharefor at least 10 consecutive business days. If compliance with the Rule is notdemonstrated by August 29, 2005, the Company may be provided an additional 180calendar days by Nasdaq to regain compliance if itmeets the initial listing requirements as set forth in Marketplace Rule4310(c), except for bid price. If the Company is not eligible for an additionalcompliance period, the Nasdaq staff will providewritten notification that the Company’s securities will be delisted. At thattime the Company may appeal the Nasdaq staff’sdetermination to delist its securities to a Listing Qualifications Panel.

 

46

----

 

**Note 10 — Subsequent Events — Line ofCredit**

In March 2005, the Company and its bank amended certainprovision of its loan and security agreement which are outlined in Note 4.

 

47

----

 

**Item 8.****Changes in andDisagreements With Accountants on Accounting andFinancial Disclosure**

                In February 2003, we engagedEhrhardt Keefe Steiner & Hottman PC as our independent certifiedpublic accountants. Our financial statements were unaudited before we engagedEhrhardt Keefe Steiner & Hottman PC. Prior to the board’s decision toengage Ehrhardt Keefe Steiner & Hottman PC, we did not consult, andStokes Ellis Foods has represented to us that it did not consult, EhrhardtKeefe Steiner & Hottman PC with respect to the application ofaccounting principles to a specified transaction, either completed or proposed,or the type of audit opinion that might be rendered on our financialstatements, or any other matters or reportable events as set forth inItems 304(a)(2)(i) and (ii) of Regulation S-B.

**Item 8A.****Controls and Procedures**

                        Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit to the Securities and Exchange Commission under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified by the Commission’s rules and forms, and thatinformation is accumulated and communicated to our management, including ourprincipal executive officer and principal financial officer (who we refer to inthis periodic report as our Certifying Officers), as appropriate to allowtimely decisions regarding required disclosure. Our management evaluated, withthe participation of our Certifying Officers, the effectiveness of ourdisclosure controls and procedures as of a date within 90 days prior to thefiling of this Form 10-KSB, pursuant to Rule 13a-15(b) under the Exchange Act.Based upon that evaluation, our Certifying Officers concluded that, as ofDecember 31, 2004, our disclosure controls and procedures were effective.

        Therewere no changes in our internal control over financial reporting that occurredduring our year ended December 31, 2004 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

        In connectionwith the audit of the year ended December 31, 2004, there were no “Reportable Events”within the meaning of Item 304(a)(1)(v) of Regulation S-K.

**Item 8B.****Other Information**

                        None

**PART III**

**Item 9.****DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

The information required to be furnished pursuant tothis item with respect to directors and executive officers of Centennial willbe set forth under the captions “Election of Directors” in our proxy statement(the “Proxy Statement”) to be furnished to stockholders in connection with thesolicitation of proxies by Centennial’s Board of Directors for use at the 2005Annual Meeting of Stockholders to be held in or after June 2005, and isincorporated herein by reference.

The information required to be furnished pursuant tothis item with respect to compliance with Section 16(a) of the Exchange Actwill be set forth under the caption “Section 16(a) Beneficial OwnershipReporting Compliance” in the Proxy Statement, and is incorporated herein byreference.

**Item 10.****EXECUTIVE COMPENSATION**

The information required to be furnished pursuant tothis item will be set forth under the caption “Executive Compensation” in theProxy Statement, and is incorporated herein by reference.

 

48

----

 

**Item 11.****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

The information required tobe furnished pursuant to this item will be set forth under the captions “VotingSecurities,” “Security Ownership of Management” and “Equity Compensation PlanInformation” in the Proxy Statement, and is incorporated herein by reference.

**Item 12.****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

The information required tobe furnished pursuant to this item will be set forth under the caption “CertainRelationships and Related Party Transactions” in the Proxy Statement, and isincorporated herein by reference.

**Item 13.****EXHIBITS**

The following documents are filed as a part of thisreport on Form 10-KSB:

 

**Exhibits:**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                            | ** ** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 2.1.4*           |       | Form of Indemnification Agreement, effective at the closing  of the purchase of Stokes Ellis Foods, by and among James E. Lewis, Janis M.  Lewis and Centennial Specialty Foods Corporation.               |       |
| 2.1.6*           |       | Merger Agreement, to be effective at the closing of  the acquisition of Stokes Ellis Foods, by and between Stokes Ellis Foods,  James E. Lewis, Janis M. Lewis and Centennial Specialty Foods Corporation. |       |
| 3.1*             |       | Certificate of Incorporation of Centennial Specialty  Foods Corporation.                                                                                                                                   |       |
| 3.2*             |       | Bylaws of Centennial Specialty Foods Corporation.                                                                                                                                                          |       |
| 3.3*             |       | Amended and Restated Certificate of Incorporation of  Centennial Specialty Foods Corporation, as filed with the Delaware Secretary  of State on October 22, 2003.                                          |       |
| 3.4*             |       | Certificate of Merger of Stokes Ellis Foods and  Centennial Specialty Foods Corporation, as survivor, as filed with the  Delaware Secretary of State on November 3, 2003.                                  |       |
| 4.1*             |       | Specimen certificate for shares of Common Stock,  $0.0001 par value per share, of Centennial Specialty Foods Corporation.                                                                                  |       |
| 4.2*             |       | Form of Warrant for the purchase of Common Stock issued  to J.P. Turner & Company, L.L.C. on completion of the initial public  offering.                                                               |       |
| 4.3*             |       | Form of Lock-Up Agreement between J.P. Turner &  Company, L.L.C. and the officers, directors and 5 or more stockholders of  Centennial Specialty Foods Corporation.                                    | %          |
| 10.1*            |       | Lease Agreement, dated January 26, 2001, by and  between Hoopeston Foods Denver Corp. and Stokes Canning Company.                                                                                          |       |
| 10.1.1*          |       | Schedules to Lease Agreement.                                                                                                                                                                              |       |
| 10.2*            |       | Equipment Lease, dated January 26, 2001, by and  between Hoopeston Foods Denver Corp. and Stokes Canning Company.                                                                                          |       |
| 10.2.1*          |       | Schedules to Equipment Lease.                                                                                                                                                                              |       |
| 10.3*            |       | Exclusive License Agreement, dated January 26, 2001,  by and between Hoopeston Foods Denver Corp. and Stokes Canning Company.                                                                              |       |
| 10.4*@           |       | Co-Pack and Warehousing Agreement, dated January 26,  2001, by and between Hoopeston Foods Denver Corp. and Stokes Canning Company.                                                                        |       |
| 10.4.1*@         |       | Schedules and Exhibits to Co-Pack and Warehousing  Agreement.                                                                                                                                              |       |
| 10.5*@           |       | Lease Override Agreement, dated January 26, 2001, by  and between Hoopeston Foods Denver Corp. and Stokes Canning Company.                                                                                 |       |
| 10.6*            |       | EBITDA Committee Agreement, dated January 26, 2001,  by and between Hoopeston Foods Denver Corp. and Stokes Canning Company.                                                                               |       |
| 10.6.1*@         |       | Schedules to EBITDA Committee Agreement                                                                                                                                                                    |       |

 

49

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                      | ** ** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.7*           |       | Amendment Agreement, dated March 15, 2004, by and  between Hoopeston Foods Denver Corp. and Stokes Canning Company.                                                                                                  |       |
| 10.7.1*         |       | Hoopeston Foods Denver Corp. subordinated note.                                                                                                                                                                      |       |
| 10.7.2*         |       | Subordination, Attornment and Non-Disturbance  Agreement between Hoopeston Foods Denver Corp., Stokes Canning Company and  Heartland Bank.                                                                           |       |
| 10.9*+          |       | Employment Agreement, effective March 1, 2003, by  and between Centennial Specialty Foods Corporation and Jeffrey R. Nieder.                                                                                         |       |
| 10.10*+         |       | Employment Agreement, effective March 1, 2003, by  and between Centennial Specialty Foods Corporation and Robert A. Beckwith.                                                                                        |       |
| 10.11*          |       | Form of Escrow Agreement among Centennial Specialty  Foods Corporation, the officers and directors of Centennial Specialty Foods  Corporation, J.P. Turner & Company, L.L.C. and Corporate Stock Transfer,  Inc. |       |
| 10.12*          |       | Lease Agreement, dated February 1, 2003, by and  between HQ Global Workplaces and Centennial Specialty Foods Corporation.                                                                                            |       |
| 10.13*          |       | Charter of our Audit Committee.                                                                                                                                                                                      |       |
| 10.14*          |       | Charter of our Nominating Committee.                                                                                                                                                                                 |       |
| 10.15*          |       | Charter of our Compensation Committee.                                                                                                                                                                               |       |
| 10.16*          |       | Charter of our Disclosure Committee.                                                                                                                                                                                 |       |
| 10.17*          |       | Form of Director and Officer Indemnification  Agreement.                                                                                                                                                             |       |
| 10.18*+         |       | 2003 Non-Employee Directors’ Stock Option Plan.                                                                                                                                                                 |       |
| 10.19*          |       | Professional Services Agreement, dated August 28,  2003, by and between Centennial Specialty Foods Corporation and Sterling Rice  Group, Inc.                                                                        |       |
| 10.20.3*        |       | Loan and Security Agreement, dated March 15, 2004,  by and between Heartland Bank, Centennial Specialty Foods Corporation and  Stokes Canning Company                                                                |       |
| 10.21*          |       | Separation Agreement dated effective September 18,  2003 by and between J. Michael Miller and Centennial Specialty Foods  Corporation.                                                                               |       |
| 10.22*          |       | Form of Promotional Share Escrow Agreement by and  among the officers and certain stockholders of Centennial Specialty Foods  Corporation and Centennial Specialty Foods Corporation.                                |       |
| 10.23*+         |       | 2004 Stock Incentive Plan                                                                                                                                                                                            |       |
| 10.24*          |       | Amendment No. 1 to Loan and Security Agreement                                                                                                                                                                       |       |
| 10.25#          |       | Amendment No. 2 to Loan and Security Agreement                                                                                                                                                                       |       |
| 10.26+#         |       | Employment Agreement, effective February 28, 2005,  by and between Centennial Specialty Foods Corporation and Douglas L. Evans.                                                                                      |       |
| 11.1            |       | Statement Re: Computation of per Share Earnings (see  financial statements)                                                                                                                                          |       |
| 31.1#           |       | Rule 13a-14(a Certification of Chief Executive  Officer of Centennial Specialty Foods Corporation)                                                                                                                   |       |
| 31.2#           |       | Rule 13a-14(a Certification of Chief Financial  Officer of Centennial Specialty Foods Corporation.)                                                                                                                  |       |
| 32.1#           |       | Section 1350 Certification                                                                                                                                                                                           |       |
| 32.2#           |       | Section 1350 Certification                                                                                                                                                                                           |       |
| 99.1*           |       | Code of Ethics of Centennial Specialty Foods  Corporation.                                                                                                                                                           |       |

----

#               Filed herewith

*               Previously filed.

+               Identifies each management contract or compensatory plan orarrangement

@            Certain confidential portions of this Exhibit were omittedby means of redacting a portion of the text (the “Omitted Text”). The full textof this Exhibit will be filed separately with the Secretary of the Commissionwith the Omitted Text pursuant to the Registrant’s Application RequestingConfidential Treatment under Rule 406 under the Securities Act.

 

****Item 14.********PRINCIPAL ACCOUNTANT FEES AND SERVICES.****

The information required to be furnished pursuant tothis item will be set forth under the caption “Principal Accountant Fees andServices” in the Proxy Statement, and is incorporated herein by reference.

 

50

----

 

**SIGNATURES**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized. 
|           |   | CENTENNIAL SPECIALTY FOODS CORPORATION |     |
|----------------|--------|----------------------------------------|----------|
| March 31, 2005 | By:    | */s/JEFFREY R. NIEDER*                 |     |
|           |   | *Jeffrey R. Nieder,*                   | * * |
|           |   | *Chief Executive Officer*              | * * |

** **
|           |   | CENTENNIAL SPECIALTY FOODS CORPORATION |   |
|----------------|--------|----------------------------------------|--------|
| March 31, 2005 | By:    | */s/  DOUGLAS L. EVANS*      |   |
|           |   | *Douglas L. Evans ,*                   |   |   |   |
|           |   | *Chief Financial Officer*              |   |   |   |

 

51

----