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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2001
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to________________
Commission File No. 333-22997
Spectrum Organic Products, Inc.
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(Name of Registrant as specified in its Charter)
California 94-3076294
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
133 Copeland Street
Petaluma, California 94952
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (707) 778-8900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Without Par Value Common Stock
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(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
Check if there is no disclosure contained herein of delinquent filers pursuant
to Item 405 of Regulation S-K, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or by amendment to this
Form 10-K. (|X|)
As of March 5, 2002, 45,698,661 shares of the Registrant's common stock were
outstanding.
As of March 5, 2002, the aggregate market value of the Registrant's no par value
common stock, excluding shares held by affiliates, was $1,716,400 based upon a
closing bid price of $0.25 per share of common stock on the NASDAQ OTC Bulletin
Board System.
PART I
ITEM 1. BUSINESS
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Introduction
This Form 10-K of Spectrum Organic Products, Inc., ("SPOP", the "Company" or the
"Registrant") contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to risks and uncertainties that may cause actual results
to differ materially.
SPOP is a vertically integrated company focused on three revenue producing
areas: Food, Nutritional Supplements, and Industrial Ingredients. The Company is
the result of the October 1999 merger of Spectrum Naturals, Inc. ("SNI"),
Spectrum Commodities, Inc. ("SCI"), Organic Food Products, Inc. ("OFPI") and
Organic Ingredients, Inc. ("OI"), hereinafter defined as the "Merger". OFPI was
the Registrant prior to the Merger. However, the Merger was accounted for as a
reverse acquisition purchase with SNI as the accounting acquirer since former
SNI shareholders held more than 70% of the post merger common stock of the
Company. Following the closing of the Merger on October 6, 1999 SNI, SCI and OI
ceased to exist as separate legal entities, and the Company changed its name to
Spectrum Organic Products, Inc.
History
SNI was incorporated in 1980 to bring nutrition and quality into the vegetable
oil category. In the beginning, natural oils were manufactured and distributed
in bulk. Six years later the "Spectrum Naturals" brand was launched. Over time,
SNI expanded its product lines to include condiments and salad dressings under
the "Spectrum Naturals" brand and nutritional supplements under the "Spectrum
Essentials" brand. The brands are positioned as premium, healthy alternatives to
conventional products as a result of the organic sourcing of raw ingredients and
the chemical-free extraction of the oils. SNI has been a leading innovator in
the development and marketing of expeller-pressed and certified organic
vegetable oils. The Company has also been a leading proponent of testing and
verifying the absence of genetically modified organisms in its culinary oils.
SNI has produced and marketed canola mayonnaise since 1987, organic vinegar
since 1989 and low-fat or fat-free salad dressings since 1996. "Spectrum
Spread", a healthy alternative to butter or margarine was introduced in 1993.
The Company launched the first organic mayonnaise and the first organic
margarine in 2000.
Expanding into the nutritional supplement product category, SNI participated in
areas of nutritional research and product development, becoming the first
company to market organic flax oil in the United States. SNI also implemented
the proprietary technologies trademarked as SpectraVac and LOCET. SpectraVac,
created in 1989, is an organic method of fresh oil extraction without the use of
chemicals, that eliminates the impact of oxygen, light and heat. The result is a
true cold pressed nutritionally rich product. LOCET (or low oil content
extraction technology), brought on line in 2000, enables the Company to extract
oil from rare oil bearing nutraceuticals such as saw palmetto, evening primrose
and DHA from algae. LOCET employs conventional and certified organic benign
extraction methods to concentrate the lipid healing compounds in these
increasingly popular nutritional supplements.
In 1995 SNI formed Spectrum Commodities, Inc. to serve other natural food
manufacturers with similar bulk ingredient needs. SCI's mission was to improve
the integrity of ingredients used in food manufacturing. SCI offered expeller
pressed oils in place of those made with petroleum solvents. Organic and non-GMO
oils are often preferred over their conventional counterparts. SCI also secured
exclusive distribution rights to new products such as organic palm and coconut
oils. SCI works with a distribution network that has railcar pumping stations
and warehouses on both coasts. SCI provides industrial quantities of organic and
expeller pressed culinary and nutritional oils and organic vinegar to
manufacturers, co-packers, private label and food service accounts, both
domestically and for export.
2
OFPI (formerly traded under the stock symbol "OFPI") was incorporated in 1987 as
S&D Foods, Inc. Since 1987 OFPI has manufactured and marketed organic and
all-natural pasta sauces, salsas and condiments under the brand names "Garden
Valley Naturals" and "Parrot". In 1995 OFPI changed its name to Garden Valley
Naturals, Inc. In 1996 Garden Valley Naturals entered into a reverse merger
with Organic Food Products, Inc., which also marketed organic pasta sauces,
salsas, condiments and children's meals under the "Millina's Finest" brand name.
OFPI went public in August 1997 and was traded on the NASDAQ Small Cap Market
until being delisted in May 1999 due to non-compliance with the net tangible
assets requirement. Since then the Company's common stock has traded on the
NASDAQ OTC Bulletin Board System.
In June 2001 SPOP sold its tomato-based products and children's meals marketed
under the Garden Valley Naturals, Parrot and Millina's Finest brand names to an
unrelated third party in order to raise additional working capital.
OI, operating under the name "Organic Ingredients, Inc.", is a supplier of
industrial organic ingredients, including fruit and vegetable juices, fruit and
vegetable juice concentrates, fruit and vegetable purees, individually
quick-frozen or "IQF" frozen fruits and vegetables and apple cider vinegar. In
addition, OI has private label programs and packs products for retail chains. OI
sources its raw materials from the Western states of the United States as well
as Mexico, Canada, South America, Eurpoe and China. OI, formed in July of 1996
as a limited liability company, was incorporated in December 1997 and, combined
with SCI, comprise SPOP's Industrial Ingredients product lines.
The Company, through its Consumer Brands and Industrial Ingredients sales
forces, offers its products here in the U.S. as well as internationally to
natural and mainstream retailers and manufacturers. Retail products are sold in,
but not limited to, stores such as Safeway, A&P, Trader Joe's, Whole Foods,
Raley's and Wild Oats.
CONSUMER BRANDS PRODUCT LINES
The Company introduces and discontinues products on a regular basis, consistent
with customary practices of other firms in the processed food industry. The
Company's current product lines, which include organic and Orthodox Union
Certified products, include the following:
Culinary Oils
The Company's largest consumer branded product line is olive oil. SPOP markets
organic and conventional olive oil in refined and unrefined states in various
sizes. There are also olive oils offered from various geographic regions
including Greece, Italy and California.
SPOP also markets other refined, unrefined, blended and organic cooking oils
under the Spectrum Naturals brand. The other culinary oils include Almond,
Apricot, Avocado, Canola, Coconut, Corn, Peanut, Grapeseed, Safflower, Sesame,
Soy, Sunflower and Walnut.
Condiments
The Company also markets condiments under the Spectrum Naturals brand name.
There is both a "lite" and a regular mayonnaise made from expeller pressed
canola oil. The Company introduced the first organic mayonnaise during 2000.
SPOP also markets a vinegar line that is third party certified organic which
includes: apple cider, brown rice, red wine, white wine and balsamic. There is
also non-organic balsamic vinegar from Modina, Italy. SPOP also markets two
types of spreads: Spectrum Naturals Canola Spread, and Essential Omega Spread
made with organic flax and soy oils. SPOP also introduced the first organic
margarine during 2000.
3
Salad Dressings
The Company also markets organic salad dressings in both fat-free and low-fat
versions in various flavors and sizes. The salad dressing line also includes
three Omega-3 vinaigrettes, which are functional full-fat dressings made with
organic flax and soy oil to help consumers achieve recommended daily allowances
of Omega-3 essential fatty acids in a tasteful product.
Cooking Sprays
There are two cooking sprays that compete with their mass-market counterpart
"Pam." The Spectrum Super Canola Skillet Spray is made from high oleic canola
oil. The second spray, Spectrum Organic Skillet Spray, is made from a blend of
organic extra virgin olive oil and organic canola oil. Both skillet sprays are
low fat cooking products.
Shortening
SPOP markets a non-hydrogenated organic palm shortening that can be used in any
cooking application where butter, margarine or shortening is called for. The
Spectrum Naturals shortening is a healthy alternative to hydrogenated shortening
and partially hydrogenated oils.
IQF Whole Frozen Fruits and Vegetables
There are seven IQF whole frozen fruits offered by the Company: raspberries,
strawberries, peaches, mango, papaya, blueberries and pineapple. IQF whole
vegetables include peas and corn.
Nutritional Supplements
SPOP markets essential fatty acid supplements under the Spectrum Essentials
brand. The supplements come in both liquid and capsule forms. The essential
fatty acid supplement oils include Flax, Borage, Evening Primrose, Norwegian
Fish and Wheat Germ oils in various mixtures and flavors. The Spectrum
Essentials brand also includes a fiber supplement for colon care.
INDUSTRIAL INGREDIENT PRODUCT LINES
The Company offers a wide variety of certified organic and non-organic
industrial ingredients to other food manufacturers, which include the following:
Culinary Oils
Included in this product line are olive oils and numerous other vegetable
cooking oils in both organic and conventional forms as well as refined and
unrefined states.
Condiments
Included in this product line are vinegar, mayonnaise and spread products in
both organic and conventional forms.
Nutritional Oils
This product line consists mainly of flax oil sold in institutional sizes.
Citrus Products
Included in this product line are single strength juices, concentrates, and
citrus by-products including oils, pulps and essences. All citrus products are
made from orange, lemon, grapefruit, lime and tangerine fruits.
4
Fruit Juices and Juice Concentrates
This product line includes apple, pineapple, orange, lemon, lime, grapefruit,
blackberry, cranberry, pear, peach, raspberry, strawberry and white grape juices
and concentrates.
Fruit Puree and Concentrates
This product line includes various fruits in puree and concentrate form. Among
these are apple, apricot, blackberry, kiwifruit, mango, nectarine, peach, pear,
strawberry and raspberry.
Vegetable Juices and Concentrates
This product line includes beet, bell pepper, carrot, celery, lettuce, parsley,
spinach, watercress, tomato, cabbage, cucumber, broccoli, garlic and
cauliflower.
Vegetable Purees
The Company also markets vegetable purees, including butternut squash, cabbage,
carrot, celery, eggplant, garlic, onion and spinach. These purees can be used in
various products, the most popular being baby food.
Essences
The Company also offers apples, blackberries, peaches, raspberries and
strawberries in their essence forms.
Fresh Bulk Fruit and Vegetables
This product line includes fresh apricots, apples, blackberries, grapes, pears,
kiwifruit, peaches, raspberries, strawberries, nectarines and limes as well as
beets, bell peppers, carrots, celery, lettuce, parsley, spinach, butternut
squash, watercress, garlic, tomato paste and diced tomatoes.
The Industrial Ingredient product lines also include private label programs for
organic food retailers. These programs include frozen juice concentrates,
bottled single-strength juices, applesauce and apple-blended sauces, various
fruit juices and IQF fruits and vegetables.
Sales and Distribution
SPOP sells its consumer branded products primarily through distributors,
independent commissioned food brokers and specialty food brokers to natural food
and specialty food stores, club stores, retail chains and independent grocery
stores. Currently SPOP products are offered in over 6,000 health food stores
nationwide and 2,000 grocery stores located throughout the U.S. and in the Far
East, Canada, and Europe. In order to increase its distribution and sales, SPOP
offers special promotional pricing and occasionally may pay "slotting fees,"
which are payments made by food processors and distributors to retail stores in
order to acquire retail shelf space for their food products.
In 2001 United Natural Foods, Inc. accounted for approximately 36% of the
Company's gross sales, versus 27% in 2000 and 18% in 1999. The loss of this
customer would have a material adverse effect on SPOP's operations. This
customer's percentage of sales continues to increase as a result of acquisitions
and their success as the largest distributor in the organic and all-natural
foods industry.
The Industrial Ingredient product lines historically have been sold to food
manufacturers worldwide. From time to time, OI has utilized the services of food
brokers.
A broker incentive plan has been implemented based on semi-annual quotas to
motivate brokers to increase their sales of SPOP products. SPOP has also entered
into arrangements with certain retail store chains to obtain closer working
relationships and enhanced retail merchandising and promotional support.
5
Following the Merger, SPOP has focused on its core natural foods distribution
network, and will enter into new distribution arrangements with mass-market
accounts where profitable. Management believes there is an opportunity to enter
conventional supermarkets as they become more committed to providing a variety
of organic and natural food products, and as consumers become more health
conscious.
Marketing and New Product Development
SPOP's product marketing emphasizes organic, all natural and generally low fat
content, except for healthy fat cooking oils, as a healthful and tasteful
alternative to similar traditional food products. Each brand is targeted toward
specific consumer segments with appropriate products, flavor variations, images
and messages. SPOP promotes all its brands to natural food and health food
stores and the specialty or gourmet departments of grocery stores. SPOP utilizes
a pricing strategy in which its organic food products are offered at prices only
slightly higher than their non-organic counterparts through strategic everyday
value pricing programs with key retailers.
The Company primarily uses outside resources in developing its new consumer
branded products. Research and development expenses are included in general and
administrative expense and have not been significant since the Merger.
Manufacturing Facilities and Suppliers
SPOP manufactures and bottles the Spectrum Essentials product line and bottles
the Company's culinary oils in a leased facility located at 133 Copeland Street,
Petaluma, California. The Company's corporate headquarters is a leased facility
located at 1304 South Point Boulevard, Suite 280, Petaluma, which contains the
sales, marketing and executive offices. The Company's finance, human resource,
administration, and operations personnel are housed in the Copeland Street
facility. The Industrial Ingredients sales force is headquartered in Aptos,
California and the related research and development center is located in a
separate leased facility in Aptos.
SPOP also uses co-packers to process and package its vinegars, condiments,
dressings, mayonnaise, shortening, spreads, and encapsulated nutritional
products. In July 2000 SPOP consolidated its warehousing and distribution of
all branded consumer products at a third party facility in Tracy, CA.
Warehousing and distribution of industrial oils continues to be handled at the
Copeland Street facility.
The Company's industrial products are produced in co-pack arrangements under a
contract with the processor or under a fee arrangement for one-time production
runs, depending on the product, commodity, and market conditions. The Company's
primary manufacturer of branded products represented approximately 6% of the
cost of goods sold in 2001 versus 9% in 2000 and 10% in 1999. While a change in
manufacturers could cause a delay in production and a possible loss of sales,
the Company believes other manufacturers are available who could provide
processing at similar prices and terms.
While many raw materials are available from a number of sources, SPOP currently
purchases its organic and conventional products from two primary suppliers and
has written agreements covering the majority of its anticipated purchases. The
Company had one vendor that supplied approximately 6% of SPOP's raw material
purchases in 2001 versus 9% in 2000 and 15% in 1999. The Company believes that
other suppliers are available who could provide products at similar prices and
terms. A change in suppliers, however, could cause a delay in manufacturing and
a possible loss of sales, which could adversely affect operating results.
Competition
The natural food and health food industries in general and the condiment,
culinary oil, supplement and fruit juice businesses in particular, are highly
competitive, and there are numerous multinational, regional and local firms that
currently compete, or are capable of competing, with SPOP. Competitors in the
non-organic condiments market include H.J. Heinz Company, Reckitt & Colman Inc.,
which markets French's mustard, and International Home Foods, which markets
6
Gulden's mustard as well as Best Foods Mayonnaise. SPOP competes with numerous
brands in the non-organic vegetable oil category including Puritan and Wesson.
In the natural foods category SPOP's principal competitor is Hain Pure Foods.
The Company also faces competition in the natural food condiment market from
Eden, Canoleo, Nasoya, Annie's, and Braggs. In the organic culinary oil
category, competitors include Colavita, Hain and Dal Raccolto. The nutritional
supplement competitors include Health From The Sun and Barleans.
Competitive factors in the specialty foods industry include price, quality,
brand image and flavor. SPOP positions its product lines to be slightly more
expensive than their non-organic food counterparts but consistent with prices
charged by other organic food marketers. Management believes its products
compete favorably against other organic foods with respect to quality and
flavor.
Trade Names and Trademarks
The Company has federal registration for its Spectrum Naturals, Spectrum
Essentials, Spectrum Spread and Veg Omega-3 trademarks. However, there can be no
assurance that any trademark or trade name will not be copied or challenged by
others.
Government Regulation
The Company is subject to various federal, state and local regulations relating
to cleanliness, maintenance of food production equipment, food storage and food
handling, and the Company is subject to unannounced on-site inspections of its
manufacturing facilities. As a manufacturer and distributor of foods, the
Company is subject to regulation by the U.S. Food and Drug Administration
("FDA"), state food and health boards and local health boards in connection with
the manufacture, handling, storage, transportation, labeling and processing of
food products. In order to offer organic food products, the Company is also
subject to inspection and regulation by third party certification agencies.
Regulations in new markets and future changes in the regulations may adversely
impact the Company by raising the cost to manufacture and deliver the Company's
products and/or by affecting the perceived healthfulness of the Company's
products. A failure to comply with one or more regulatory requirements could
interrupt the Company's operations and result in a variety of sanctions,
including fines and the withdrawal of the Company's products from store shelves.
The Company holds all material licenses and permits required to conduct its
operations.
The Company is also subject to federal and state laws establishing minimum wages
and regulating overtime and working conditions.
Employees
As of March 5, 2002 SPOP had 79 full-time employees. SPOP's employees are not
covered by a collective bargaining agreement and the Company considers its
employee relations to be satisfactory.
ITEM 2. PROPERTY
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The Company leases two facilities in Petaluma, California to house
manufacturing, warehousing, administrative offices and the corporate
headquarters. The Petaluma facilities occupy a total of 47,300 square feet at a
monthly rate of $28,000. The Company also leases 1,600 square feet at a cost of
$3,100 per month in Aptos, California to house the Organic Ingredients sales
force. An additional 1,600 square foot space in Aptos is leased at a monthly
cost of $1,600 to house the Organic Ingredients/Private label research and
development center.
Management believes that these facilities are adequate for the Company's needs.
However, additional efficiencies could be achieved with a consolidated facility.
7
ITEM 3. LEGAL PROCEEDINGS
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In February 1998 OFPI acquired the natural fruit juice and water bottling
operations of Sunny Farms Corporation for cash and 566,667 shares of common
stock. Half of the common stock consideration was held in escrow, contingent
upon earn-out factors for the year following the acquisition. Sunny Farms sought
voluntary relief pursuant to Chapter 7 of the U.S. Bankruptcy Code in November
1998. A Trustee was duly appointed shortly thereafter to protect the Chapter 7
estate of Sunny Farms. The Company reported its calculations under the earn-out
provisions in early 1999, which Sunny Farms disputed. In October 2000, attorneys
for the Trustee filed a complaint against the Company in the U.S. Bankruptcy
Court for the Northern District of California, challenging the Company's
earn-out calculations and requesting that a portion of the common stock held in
escrow be released.
The Company and the Sunny Farms bankruptcy trustee reached an agreement on
October 9, 2001 regarding the earn-out calculations and subsequent shares to be
released from escrow, which was approved by the Bankruptcy Court on December 6,
2001. Accordingly, the Company has retired the escrowed shares and issued
118,000 shares of restricted common stock to the Trustee in final settlement of
this matter.
In November 1998 Global Natural Brands, Ltd. ("Global") and its four principals
filed a lawsuit against OFPI and its four principals, alleging unpaid wages and
seeking money damages and injunctive relief. Global had provided managerial
services to OFPI from April 1998 to October 1998, when OFPI terminated its
services.
SPOP assumed the litigation in connection with the Merger and reached a
settlement and release with Global in April 2000, and the case has been
dismissed. Under the terms of the settlement and release, SPOP paid Global cash
consideration of $145,000, and issued 400,000 shares of SPOP stock, which were
valued at the closing market price on the date of settlement. In addition, SPOP
issued to Global options to purchase 225,000 common shares at $2.25 per share
over an option term that expires on October 31, 2002.
In October 2000 the Company was notified by counsel for GFA Brands, Inc. that
nutritional claims pertaining to Spectrum Naturals Organic Margarine were
infringing upon two patents issued in the United States that pertain to
particular fat compositions suitable for human ingestion. The patent holder
exclusively licensed each of these patents to GFA Brands. Management believes
that the margarine does not infringe upon either patent, and further, that the
patents are unenforceable. Management engaged legal counsel that specialize in
this area and received an opinion letter in February 2001 confirming that, in
the opinion of counsel, the manufacture or sale of Spectrum Naturals Organic
Margarine does not infringe upon the GFA patents, either literally or under the
doctrine of equivalents.
The Company filed a complaint against GFA Brands for declaratory judgment of
non-infringement and invalidity of the two patents on August 28, 2001 in the
U.S. District Court for Northern California. The Complaint requests a
declaratory judgment that the margarine does not infringe either patent, a
declaratory judgment that both patents are invalid, that GFA Brands be enjoined
from threatening or asserting any action for infringement of either patent, and
attorney's fees.
Management believes the Company has meritorious defenses and that a loss is not
probable on the patent infringement complaint at this time. Accordingly, no
provision for loss has been recorded at December 31, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
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The Company's common stock was traded on the NASDAQ Small Cap Market under the
symbol "OFPI" from August 1997 to May 1999 when it was delisted due to
non-compliance with the minimum net book value requirement. Thereafter it traded
on the NASDAQ OTC Bulletin Board System and still does under the new symbol
"SPOP."
The following table sets forth the range of high and low closing prices of the
Company's common stock as reported by NASDAQ for the periods indicated.
Price
-----
High Low
---- ---
Fiscal Year Ended December 31, 2001
First Quarter $0.50 $0.25
Second Quarter 0.41 0.22
Third Quarter 0.27 0.19
Fourth Quarter 0.48 0.14
Fiscal Year Ended December 31, 2000
First Quarter 1.00 0.38
Second Quarter 1.00 0.28
Third Quarter 0.88 0.30
Fourth Quarter 0.75 0.31
Fiscal Year Ended December 31, 1999
First Quarter 1.69 0.56
Second Quarter 1.50 0.53
Third Quarter 1.06 0.63
Fourth Quarter 1.00 0.38
The last recorded sale price of the Company's common stock was $0.25 per share
on the NASDAQ OTC Bulletin Board System on March 6, 2002.
As of March 1, 2002 the Company had approximately 750 record and beneficial
stockholders.
Dividend Policy
The Company has not in the past nor does it intend to pay cash dividends on its
common stock in the future. The Company intends to retain earnings, if any, for
use in the operation and expansion of its business. The amount of future
dividends, if any, will be determined by the Board of Directors based upon the
Company's earnings, financial condition, capital requirements, general economic
conditions and such other factors as the Board deems relevant. Moreover, the
Company's credit and security agreement with its primary lender, Wells Fargo
Business Credit, Inc. prohibits the payment of dividends without the prior
approval of the lender.
9
Shares Issued During the Years Ended December 31, 2001, 2000 and 1999
During the years ended December 31, 2001 and 2000, the Company issued
unregistered restricted shares of its common stock as follows for the reasons
indicated:
Cash and
Date Shares Non-Cash
Issued Issued Proceeds
------ ------ --------
Year Ended December 31, 2001:
Shares issued to Thomas B. Simone, a non-
executive Director of the Company, under a
private sale Feb 14, 2001 160,000 $ 50,000
Shares issued to Charles A. Lynch and Phillip L. Moore, both
non-executive Directors of the Company, in lieu of cash
compensation for Board fees earned during CY 2000 Feb 15, 2001 64,000 20,000
Shares issued to four note holders under the private placement
conversion offer to convert the notes to equity Various 630,000 168,200
Common stock purchase warrants exercised by the note holders
under the private placement completed in October 1999 Various 230,883 --
Shares issued to the Chapter 7 estate of Sunny Farms Corp. in
final settlement of litigation (see Legal Proceedings) Dec. 2001 117,950 93,700
--------- --------
Totals for Year Ended December 31, 2001 1,202,833 $331,900
========= ========
Year Ended December 31, 2000:
Shares issued to Global Natural Brands, Ltd. in connection with
the settlement of litigation (see Legal Proceedings) April 2000 400,000 $318,800
Common stock purchase warrants exercised by the note holders
under the private placement completed in October 1999 Various 181,642 1,400
--------- --------
Totals for Year Ended December 31, 2000 581,642 $320,200
========= ========
There were no unregistered shares issued by the Company during 1999.
All the shares except those issued to the Chapter 7 estate of Sunny Farms Corp.
were issued under Regulation D of the Securities Act of 1933 (the "Act"), with
resale of such shares permitted only pursuant to Rule 144 of the Act. All
certificates representing the unregistered shares were endorsed with restrictive
legends identifying them as unregistered under the Act.
10
ITEM 6. SELECTED FINANCIAL DATA
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The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and the consolidated financial statements of the
Company and the notes thereto included in Item 8 of this Form 10-K.
Years Ended December 31,
------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Operating Data:
Gross Sales $44,822 $45,582 $31,418 $23,951 $20,392
Gross Profit 11,374 10,466 8,660 6,500 5,670
EBITDA, as Adjusted 2,442 1,189 1,417 1,492 1,516
Income (Loss) from Operations (4,251) (688) 762 1,144 1,199
Net Income (Loss) (5,206) (2,002) (113) 403 471
Weighted Average Shares Outstanding 45,279 44,234 35,095 32,336 32,336
Net Income (Loss) per Share $ (0.12) $ (0.05) $ (0.00) $ 0.01 $ 0.02
Cash Dividends Declared per Share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
As of December 31,
------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Working Capital (Deficit) $(1,030) $(4,257) $(3,323) $ 413 $ 251
Total Tangible Assets 12,776 13,057 14,654 6,866 6,539
Total Assets 14,300 22,841 24,974 7,226 6,957
Total Long-term Debt 1,708 2,001 2,788 2,811 2,637
Total Stockholders' Equity (Deficit) 2,098 6,850 8,413 141 (140)
As described in Note 1 to the financial statements, the Company was formed on
October 6, 1999 by the Merger of Spectrum Naturals, Inc., its affiliate Spectrum
Commodities, Inc. and Organic Ingredients, Inc. with and into Organic Food
Products, Inc. Effective with the Merger the newly combined entity changed its
name to Spectrum Organic Products, Inc. Since a controlling interest in the
combined Company is held by former SNI stockholders, the Merger was accounted
for as a reverse acquisition, with SNI as accounting acquirer and OI and OFPI as
accounting acquirees.
Accordingly, the selected financial data presented above reflects the historical
results of SNI and SCI only for all periods presented through October 5, 1999
and the combined entity from the October 6, 1999 Merger date forward. EBITDA, as
adjusted reflects earnings from operations before interest, taxes, depreciation,
amortization, and non-cash losses on asset writedowns and the sale of product
lines. Management believes this is the most relevant measure of the Company's
operating performance, however, EBITDA, as adjusted may not be comparable to
similar measures presented by other companies. The number of shares outstanding
and per-share amounts have been retroactively restated where applicable for all
periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report. The
financial results reported herein are not necessarily indicative of the
financial results that may be achieved by the Company in any future period.
Introduction
On October 6, 1999 Spectrum Naturals, Inc. ("SNI") and its affiliate, Spectrum
Commodities, Inc. ("SCI"), and Organic Ingredients, Inc. ("OI"), all California
corporations, were merged with and into Organic Food Products, Inc., also a
California corporation (the "Registrant"), (collectively "SPOP" or the
"Company"), pursuant to the Agreement and Plan of Merger and Reorganization,
dated May 14, 1999 (the "Merger").
11
As a result of the Merger, SNI stockholders received 4,669.53 shares of OFPI
stock in exchange for each share of SNI stock previously held, for a total of
32,336,495 shares representing approximately 73.8% of the outstanding common
stock after the Merger. OI stockholders received 39.5 shares of OFPI stock in
exchange for each share of OI stock previously held, for a total of 3,950,000
shares representing approximately 9.0% of the outstanding common stock after the
Merger. Existing OFPI stockholders held 7,275,665 of the outstanding shares, or
approximately 17.2% of the common stock outstanding after the Merger. Since a
controlling interest in the combined Company is held by former SNI stockholders
after the Merger, the transaction was accounted for as a reverse acquisition,
with SNI as accounting acquirer and OFPI and OI as accounting acquirees.
Accordingly, operating results for fiscal year 1999 reflect SNI and SCI only
from January 1, 1999 through October 5, 1999 and the merged entity from
October 6, 1999 through December 31, 1999.
Upon the effective date of the Merger SNI, SCI and OI ceased to exist, the
Registrant continued as the surviving corporation and the Company changed its
name to Spectrum Organic Products, Inc. and its ticker symbol to SPOP.
The Company's operating results could vary from period to period as a result of
a number of factors. These factors include, but are not limited to, the
purchasing patterns of significant customers, the timing of new product
introductions by the Company and its competitors, the amount of slotting fees,
new product development and advertising expenses incurred by the Company,
variations in sales by distribution channel, fluctuations in market prices of
raw materials, competitive pricing policies, and situations that the Company
cannot foresee. These factors could cause the Company's performance to differ
from investor expectations, resulting in volatility in the price of the common
stock.
Investors should carefully consider the following information as well as other
information contained in this Report. Information included in this Report
contains "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. No assurance can be given that the
future results covered by the forward-looking statements will be achieved. The
following matters constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to vary materially from the future
results covered in such forward-looking statements. Other factors could also
cause actual results to vary materially from the future results covered in such
forward-looking statements.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Summary of Results:
Management believes that Earnings Before Interest, Taxes, Depreciation,
Amortization, Losses on Asset Disposals and Asset Writedowns ("EBITDA as
adjusted") is an important measure of the Company's operating performance. For
the year ended December 31, 2001 EBITDA as adjusted was $2,442,100 compared to
$1,189,400 for the prior year, an increase of $1,252,700 or 105%. The improved
performance in 2001 was primarily attributable to improved gross margins and
reduced operating expenses.
Revenues:
SPOP's gross sales for the year ended December 31, 2001 were $44,822,400
compared to $45,582,400 for 2000, a decrease of $760,000, or 1.7% versus 2000.
The decrease in 2001 was primarily due to the lost sales associated with the
disposed tomato-based product lines, partially offset by higher sales of branded
culinary products and nutritional supplements. Within the branded culinary
products, sales were significantly higher than the prior year in packaged oil
(12.1%), packaged mayonnaise (14.9%) and individually quick frozen fruits and
vegetables (a new product category this year). Branded nutritional supplement
sales increased 13.7% versus the prior year.
12
Comparable gross sales (after eliminating sales of disposed or discontinued
product lines from both years) increased by 5.6% versus the prior year.
During the years ended December 31, 2001 and 2000, gross sales by product line
were as follows:
2001 2000 % Change
---- ---- --------
Consumer Brands - Culinary $17,222,200 $15,274,900 +12.7%
Consumer Brands - Nutritional 9,262,700 8,144,000 +13.7%
Industrial Ingredients 14,189,600 14,848,300 -4.4%
Private Label/Other 2,285,200 2,411,200 -5.2%
Disposed/Discontinued Products 1,862,700 4,904,000 -62.0%
------------ ------------ --------
Total Gross Sales 44,822,400 45,582,400 -1.7%
Less Discounts and Allowances 3,438,400 3,092,300 +11.2%
------------ ------------ --------
Net Sales $41,384,000 $42,490,100 -2.6%
============ ============ ========
Foreign sales comprised 6% of the Company's gross sales during 2001 versus 10%
during 2000. The largest foreign market was Canada, which comprised 5% and 8% of
gross sales for 2001 and 2000, respectively.
Discounts and allowances as a percent of gross sales increased to 7.7% of gross
sales for 2001 compared to 6.8% in 2000. The increase was primarily the result
of increased promotion levels during 2001 on the disposed product lines, and
changes in the sales mix in 2001, which featured lower sales of industrial
ingredients and private label products which do not entail discounting.
Cost of Goods Sold:
The Company's cost of goods sold decreased as a percent of gross sales for the
year ended December 31, 2001 to 67.0% compared to 70.3% for 2000. The decrease
was due primarily to lower costs on the nutritional supplement oils and packaged
dairy case products, as well as lower cost of goods associated with the disposed
product lines as a result of the Morgan Hill plant closure in July, 2000. Also
contributing to the improvement in 2001 was the change in the sales mix which
featured higher sales of the higher-margin culinary and nutritional supplement
branded product lines.
Gross Profit:
Gross profit for the year ended December 31, 2001 was $11,374,300 versus
$10,466,400 for 2000, an increase of $907,900 or 8.7%. Gross profit as a
percentage of gross sales was 25.4% for 2001 versus 23.0% for 2000, primarily
due to the improved margins on the nutritional supplement products, packaged
dairy case products and the lower cost of goods associated with the disposed
tomato-based product lines as a result of the Morgan Hill shutdown. Also
contributing to the improvement in 2001 was the change in the sales mix which
featured higher sales of the higher-margin culinary and nutritional supplement
branded product lines.
Sales and Marketing Expenses:
The Company's sales and marketing expenses for the year ended December 31, 2001
were $6,156,100 or 13.7% of gross sales, versus $6,265,300 or 13.7% of gross
sales for 2000. The decrease in spending of $109,200 was primarily attributable
to reduced spending on trade shows and consulting fees, partially offset by
increased advertising and slotting fees.
General and Administrative Expenses:
The Company's general and administrative expenses for the year ended December
31, 2001 were $3,194,900 or 7.1% of gross sales, versus $3,542,700 or 7.8% of
gross sales for 2000. The decrease in spending of $347,800 was primarily
attributable to lower banking, accounting and legal fees, partially offset by
increased insurance and utility costs.
13
Amortization of Goodwill:
The Company recorded goodwill of $10,848,200 in connection with the Merger.
Amortization expense for the year ended December 31, 2001 was $520,700 versus
$909,600 of amortization expense for 2000. The decrease in 2001 was attributable
to the sale of the tomato-based product lines in June 2001. Since this comprised
all of the remaining assets of OFPI, the balance of unamortized goodwill
associated with the reverse acquisition of OFPI in October 1999 of $6,776,200
was written-off as part of the sale in June. The goodwill associated with the
acquisition of OI was amortized over a twelve-year life during both years.
Loss on Sale of Product Lines:
As described in Note 2 to the Financial Statements, the Company sold its
tomato-based product lines for $2,350,000 plus saleable inventories to Acirca,
Inc., an unrelated third party, in June 2001. Since the product lines sold
comprised all of the remaining assets of OFPI, the remaining net goodwill
associated with the reverse acquisition of OFPI in October 1999 of $6,776,200
was written-off as part of the entry to record the sale. Accordingly, after
accounting for transaction fees and eliminating escrowed funds from the
consideration received, the Company recorded a non-cash loss on the sale of the
product lines of $4,803,200 during 2001.
Loss on Asset Writedowns and Plant Closure:
As described in Note 3 to the Financial Statements, the Company has determined
that the net goodwill associated with the Organic Ingredients product lines was
impaired at December 31, 2001. Accordingly, the Company recorded a non-cash
writedown of $950,000 to reduce the goodwill carrying amount at December 31,
2001 to $1,470,200, the estimated net realizable value.
Also as described in Note 3 to the Financial Statements, the Company closed its
leased manufacturing facility in Morgan Hill, California during 2000 and
transferred the production of the tomato-based product lines (which were
subsequently sold to Acirca, Inc.) to a third party co-packer. A loss on the
sale of the production equipment and the abandonment of leasehold improvements
at the Morgan Hill facility of $436,500 was recorded in 2000.
Interest Expense:
The Company's interest expense for the year ended December 31, 2001 was $912,800
versus $1,381,500 for 2000. The reduction of $468,700 or 34% was primarily
attributable to significant reductions in the prime rate during 2001 and lower
non-cash interest expense associated with the private placement notes. Non-cash
interest expense of $72,300 was recorded during the year ended December 31, 2001
versus $118,700 for 2000 for the value of the common stock purchase warrants
issued to the private placement note holders.
Net Loss:
The Company reported a net loss of $5,205,800 and $2,002,300 for the years ended
December 31, 2001 and December 31, 2000, respectively. Excluding the non-cash
losses on the disposed product lines, asset writedowns and plant closure, the
Company reported net income of $547,400 versus a net loss of $1,565,800 for the
prior year. The improvement in 2001 was primarily due to improved gross margins,
reduced interest expense and lower operating expenses.
Deferred Tax Assets:
Since the Company could not determine that it was more likely than not that the
deferred tax benefits would be realized, a 100% valuation allowance has been
recorded against the deferred tax assets for all periods presented.
Liquidity and Capital Resources:
The Company maintains a credit facility (the "Credit Agreement") with its
primary lender, Wells Fargo Business Credit ("WFBC"), consisting of term debt
and a revolving line of credit, that is secured by substantially all assets of
14
the Company and bears interest at prime plus 1% to 1.25%. Advances under the
revolving line of credit are limited to a borrowing base consisting of certain
accounts receivable and inventory. Due to operating losses following the Merger,
the Company was in default of certain financial covenants that were based on
financial projections made at the time of the Merger. As a result of the
default, WFBC began assessing an additional 100 basis points to the interest
rates charged under the Credit Agreement as of July 17, 2000.
On October 18, 2001 the Company entered into an amendment (the "Amendment") to
the existing Credit Agreement with WFBC. The Amendment includes new financial
covenants based on the Company's current financial position and latest forecasts
of future results, a new term loan for additional production equipment purchased
by the Company, incentive targets for 2001 which have been achieved and will
enable the Company to reduce the interest rates charged by WFBC by 100 basis
points, and also entails a two year extension through October 2004. In
consideration for the Amendment, the Company paid WFBC an accommodation fee of
$20,000. As a result of executing the Amendment, the Company has returned to an
in-compliance status with WFBC. Accordingly, the Company has reclassified the
long-term portion of the WFBC term debt from current liabilities to long-term
debt for all periods presented.
The Company could not operate its business without the Credit Agreement with
WFBC or one similar to it. At December 31, 2001 the Company satisfied all
financial covenants under the Credit Agreement and was also in compliance with
all other requirements of the Credit Agreement. The Credit Agreement calls for
continued satisfaction of various financial covenants for 2002 and beyond.
Should the Company fail to meet future financial covenants (a "technical
default"), WFBC would have certain rights, including the right to call all
amounts due immediately. Management believes it is unlikely that the Company
will fail to meet future financial covenants under the Credit Agreement, and
that it would be even more unlikely for WFBC to exercise its right to terminate
the Credit Agreement and call all amounts due in the event of a technical
default by the Company.
At December 31, 2001 the Company had $955,800 in available borrowing under its
line of credit versus $311,900 at December 31, 2000. The Company's bank
overdraft as of December 31, 2001 was $546,400 compared to $539,000 at December
31, 2000. During 2001, the Company used $906,900 in cash from operating
activities, compared to generating $359,500 in cash in 2000. The additional cash
used was primarily due to reductions in trade payables financed by the sale of
the disposed product lines and increased trade accounts receivable primarily due
to increased November/December sales of the industrial ingredients product
lines. Cash provided by investing activities was $2,342,900 in 2001 compared to
$19,500 in 2000, which primarily reflected the proceeds from the sale of the
tomato-based product lines in 2001. Cash used in financing activities was
$1,435,700 in 2001 compared to $379,200 in 2000. The increase in funds used in
financing activities during 2001 primarily reflected reductions in outstanding
borrowing under the revolving line of credit and lower proceeds from notes
payable, partially offset by lower principal payments on long-term debt.
At December 31, 2001 the Company still had negative working capital of
$1,029,700, however, that reflected an improvement of $3,227,000 from the prior
year. The Company is highly leveraged and is currently investigating potential
additional sources of working capital from the sale of certain assets. However,
Management believes that future cash flows from operations should provide
adequate funds to meet the Company's estimated cash requirements for the
foreseeable future. The Company competes primarily in the organic and all
natural foods industry and in the nutritional supplements category. While an
economic downturn could decrease demand for the Company's products, which in
turn could impact the Company's ability to meet its obligations to its
creditors, Management believes that to be unlikely. Recent history has shown the
two primary categories the Company competes in to be recession-resistant. Both
categories feature double-digit growth year-on-year, and Management believes the
Company's product offerings compete favorably with regards to taste and overall
quality. Furthermore, the majority shareholder has indicated that he has the
intent and ability to support the operations of the Company with additional
funding for the next fiscal year, if needed.
The company is not presently pursuing additional debt or equity financing to
increase its capital resources. At the date of this report, Management was in
negotiations with an unaffiliated third party for the sale of certain assets. If
those negotiations prove successful, the Company's capital resources will
improve substantially. Any significant sale of assets requires the approval of
WFBC, which Management was in the process of securing at the date of this
report.
The Company does not utilize off-balance sheet financing arrangements. There
were no transactions with special purpose entities that give the Company access
to assets or additional financing or carry debt that is secured by the Company.
The only significant transactions with related parties are disclosed in Note 18
to the financial statements. Management believes those transactions were fair,
reasonable and consistent with terms the Company could have obtained from
unaffiliated third parties.
15
New Applicable Accounting Pronouncements:
In May 2000 the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement,
and income statement classification for sales incentives offered voluntarily by
a vendor without charge to customers that can be used in, or are exercisable by
a customer as a result of a single exchange transaction.
In April 2001 the EITF reached a consensus on Issue 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services." This issue addresses the recognition, measurement and
income statement classification of consideration, other than that directly
addressed by Issue 00-14, from a vendor to a retailer or wholesaler. Issue 00-25
will be effective for the Company's 2002 fiscal year. Both Issue 00-14 and 00-25
have been codified under issue 01-09, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products". The Company is
currently analyzing Issue 01-09. However, based on Management's current
understanding and interpretation, Issue 01-09 is not expected to have a material
impact on the Company's financial position or results of operations, except that
certain reclassifications may occur. The conclusions reached in Issue 00-25 and
Issue 00-14 (codified by Issue 01-09) are effective for fiscal quarters
beginning after December 15, 2001.
In June 2001 the Financial Accounting Standards Board finalized Statements No.
141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of certain intangible assets and goodwill based on the criteria in SFAS
141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combination (the merger of OFPI, OI, SNI and SCI
as discussed in Note 1 to the financial statements) was accounted for using the
purchase method. As of December 31, 2001 the net carrying amount of goodwill
remaining after the sale of the tomato-based product lines and the OI goodwill
writedown, as discussed in Notes 2, 3, 7 and 8 to the financial statements, was
$1,470,200 and other intangible assets was $54,000. Amortization expense of
goodwill and other intangible assets during the year ended December 31, 2001 was
$534,400. The Company believes the effect of the adoption of SFAS 144 will
eliminate future goodwill amortization expense, which was $520,700 in 2001.
In August 2001 Statement of Financial Accounting Standard No. 144, "Accounting
for the Impairment or Disposal of Long-lived Assets" ("SFAS 144") was issued.
SFAS 144 supersedes Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-lived Assets to be Disposed of" ("SFAS
121") and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 also amends Accounting Research Bulletin No.
51, "Consolidated Financial Statements", to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 retains the fundamental provisions of SFAS 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while resolving significant implementation issues
associated with SFAS 121. Among other things, SFAS 144 provides guidance on how
long-lived assets used as part of a group should be evaluated for impairment,
establishes criteria for when long-lived assets are held for sale, and
prescribes the accounting for long-lived assets that will be disposed of other
than by sale. SFAS 144 is effective for fiscal years beginning after December
15, 2001. The Company is currently evaluating the effect, if any, that adoption
of SFAS 144 will have on the Company's financial position and results of
operations.
16
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Summary of Results:
Management believes that Earnings Before Interest, Taxes, Depreciation,
Amortization and Losses on Asset Disposals ("EBITDA as adjusted") is an
important measure of the Company's operating performance. For the year ended
December 31, 2000 EBITDA as adjusted was $1,189,400 compared to $1,416,500 for
the prior year, a decrease of $227,100 or 16%. The reduced performance in 2000
was primarily attributable to increased operating expenses associated with the
Merger, partially offset by higher sales and gross profits.
Revenues:
SPOP's gross sales for the year ended December 31, 2000 ("2000") were
$45,582,400 compared to $31,417,800 for the year ended December 31, 1999
("1999"), an increase of $14,164,600, or 45.0% versus 1999. The increase in
sales in 2000 primarily reflected the revenues of the newly acquired product
lines of OFPI and OI. Excluding those revenues, SNI's comparable sales in 2000
increased 6% from 1999 reflecting growth in nutritional supplements, which grew
31% from the prior year, mayonnaise, salad dressing and Spectrum Spread. These
increases were partially offset by declines in institutional and ingredient oil
sales.
During the years ended 2000 and 1999, gross sales by product line were as
follows:
2000 1999
---- ----
Consumer Brands - Culinary Products $ 15,274,900 $ 14,660,800
Consumer Brands - Nutritional Supplements 8,144,000 6,472,900
Industrial Ingredients 14,848,300 7,784,100
Private Label Products/Other 2,411,200 679,900
Disposed/Discontinued Product Lines 4,904,000 1,820,100
------------ ------------
Total Gross Sales 45,582,400 31,417,800
Less Discounts and Allowances 3,092,300 1,798,200
------------ ------------
Net Sales $ 42,490,100 $ 29,619,600
============ ============
Foreign sales comprised 10% of the Company's sales during 2000. The largest
foreign markets were Canada and Japan, which comprised 8% and 1%, respectively,
of sales in 2000.
Discounts and allowances as a percent of gross sales increased to 6.8% for 2000
versus 5.7% for 1999. The increase was primarily the result of a full year of
the more heavily promoted tomato-based product lines acquired with OFPI versus
only three months in 1999.
Cost of Goods Sold:
SPOP's cost of goods sold for 2000 was $32,023,700 or 70.3% of gross sales,
versus $20,960,000 or 66.7% of gross sales for 1999. The increase in cost of
goods sold as a percentage of sales was due primarily to the increased
proportion of lower-margin ingredient sales and higher fixed manufacturing costs
at the Morgan Hill facility for the products acquired with OFPI.
Sales and Marketing Expenses:
SPOP's sales and marketing expenses for 2000 were $6,265,300 or 13.7% of gross
sales, versus $4,376,800 or 13.9% of gross sales for 1999. The decrease in sales
and marketing expenses as a percentage of sales reflected the increased
efficiencies and economies of scale associated with the larger organization and
increased sales base after the Merger.
General and Administrative Expenses:
SPOP's general and administrative expenses for 2000 were $3,542,700 or 7.8% of
gross sales, versus $3,299,100 or 10.5% of gross sales for 1999. The decrease in
2000 as a percentage of gross sales reflected increased efficiencies and
economies of scale associated with the larger organization and higher sales
base.
17
Loss on Asset Writedowns and Plant Closure:
Included in operating expenses for the year ended December 31, 2000 was $436,500
of expenses associated with the Morgan Hill plant closure (see Note 3). Of that
amount, $250,000 represented non-cash losses on the sale of the surplus bottling
line formerly used for the Company's tomato-based culinary products and $138,400
represented non-cash writedowns recorded as a result of the abandonment of
leasehold improvements at the leased Morgan Hill facility. The remaining $48,100
represented leasehold and other expenses associated with closing the facility.
Amortization of Goodwill:
The Company recorded goodwill of $10,848,200 in connection with the Merger.
Amortization expense for the twelve months ended December 31, 2000 was $909,600
based on a twelve-year amortization schedule, versus $221,500 of amortization
expense for the period October 6, 1999 to December 31, 1999.
Interest Expense:
SPOP's interest expense for 2000 was $1,381,500 versus $749,300 for 1999. The
increase in interest expense resulted primarily from higher utilization of the
revolving credit line. The additional borrowing was used to increase inventory
to meet minimum service levels, pay past due vendors at OFPI and fund certain
Merger costs.
Further contributing to the increased interest expense in 2000 was interest
associated with the default under the private placement notes (see Note 11).
Since the notes were not repaid by March 31, 2000, the accrued interest through
March 31 of $20,000 was added to the principal, the interest rate increased from
10% to 15%, and an additional 240,000 common stock warrants to purchase SPOP
stock at $.01 per share were granted. The resulting $118,700 value of the
warrants was included in interest expense for the year ended December 31, 2000.
Also included in interest expense for that period is $47,300 of interest paid to
the private placement note holders at the default interest rate of 15% for the
period April 1, through December 31, 2000.
Net Loss:
The Company reported a net loss of $2,002,300 and $113,300 for the years ended
December 31, 2000 and 1999, respectively. The lower performance in 2000 was
primarily the result of higher operating expenses, increased interest expense
and the loss on the plant closure, partially offset by increased sales and gross
profits as a result of the merged entities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Company does not hold market risk sensitive trading instruments, nor does it
use financial instruments for trading purposes. All sales, operating items and
balance sheet data are denominated in U.S. dollars, therefore, the Company has
no foreign currency exchange rate risk.
Throughout the course of its fiscal year, the Company utilizes a variable
interest rate line of credit at various borrowing levels. For the year ended
December 31, 2001, the average outstanding balance under the line of credit was
approximately $5,681,000 with a weighted average interest rate of 9.1%. The line
of credit agreement calls for the interest rate to float at the prime rate plus
200 basis points. Under the terms of the Amendment executed on October 18, 2001
the interest rates charged will drop to prime plus 100 basis points as a result
of the achievement by the Company of certain financial targets for the year
ended December 31, 2001.
Certain Company debt items are sensitive to changes in interest rates. The
following table summarizes principal cash flows and related weighted average
interest rates by expected maturity date for long-term debt excluding capital
leases ($ thousands):
18
Outstanding Expected Maturity Date
Dec. 31, 2001 (Years Ended December 31)
-------------
2002 2003 2004 2005 2006 2007+
---- ---- ---- ---- ---- -----
Long Term Debt:
Fixed Rate $1,665.9 $514.6 $586.6 $259.6 $40.7 -- $264.4
Avg. Int. Rate 10.8% 11.1% 11.3% 11.3% 10.0% -- 8.6%
Variable Rate $635.3 $206.4 $206.4 $185.7 $36.8 -- --
Avg. Int. Rate 7.0% 7.6% 7.6% 8.8% 9.3% -- --
In the ordinary course of its business, the Company enters into commitments to
purchase raw materials over a period of time, generally six months to one year,
at contracted prices. At December 31, 2001 these future commitments were not at
prices in excess of current market, or in quantities in excess of normal
requirements. The Company does not utilize derivative contracts either to hedge
existing risks or for speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Spectrum Organic Products, Inc.
Financial Statements
Years Ended December 31, 2001, 2000 and 1999
Statement of Management Responsibility
Report of Independent Certified Public Accountants
Financial Statements:
Balance Sheets
Statements of Operations
Statement of Stockholders' Equity
Statements of Cash Flows
Summary of Significant Accounting Policies
Notes to Financial Statements
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
================================================================================
19
Statement of Management Responsibility
Spectrum Organic Products' management is responsible for the preparation,
integrity and objectivity of the consolidated financial statements and other
financial information presented in this report. The accompanying consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America and reflect the effects of
certain estimates and judgments made by management.
Management maintains an effective system of internal control that is designed to
provide reasonable assurance that assets are safeguarded and transactions are
properly recorded and executed in accordance with management's authorization.
The system is continuously monitored by management. We select and train
qualified people who are provided with and expected to adhere to Spectrum
Organic Products' standards of business conduct. These standards, which set
forth strong principles of business ethics and conduct, are a key element of our
control system.
Our consolidated financial statements have been audited by BDO Seidman, LLP,
independent accountants. Their audits were conducted in accordance with auditing
standards generally accepted in the United States of America, and included a
review of financial controls and tests of accounting records and procedures as
they considered necessary in the circumstances. Their report follows this
statement by management.
The Audit Committee of the Board of Directors, which consists of outside
directors, meets regularly with management and the independent accountants to
review accounting, reporting, auditing and internal control matters. The
committee has direct and private access to both the Chief Financial Officer and
the independent accountants.
/s/ Jethren P. Phillips /s/ Robert B. Fowles
- ----------------------------- --------------------------
Jethren P. Phillips Robert B. Fowles
Chief Executive Officer and Chief Financial Officer
Chairman of the Board
20
Report of Independent Certified Public Accountants
To The Stockholders and Board of Directors of Spectrum Organic Products, Inc.
We have audited the accompanying balance sheets of Spectrum Organic Products,
Inc. as of December 31, 2001 and 2000 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. We have also audited the schedule listed in the
accompanying index. These financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and the schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and the schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and the
schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spectrum Organic Products, Inc.
as of December 31, 2001 and 2000 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
Also in our opinion, the schedule presents fairly in all material respects, the
information set forth therein.
/s/ BDO Seidman, LLP
- -------------------------
BDO Seidman, LLP
San Francisco, California
February 15, 2002
21
Spectrum Organic Products, Inc.
Balance Sheets
====================================================================================================
As of December 31, 2001 2000
- ----------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash $ 1,200 $ 900
Accounts receivable, net (Note 4) 3,427,900 2,971,700
Inventories, net (Note 5) 5,966,600 6,676,400
Prepaid expenses and other current assets 68,900 84,600
------------ ------------
Total Current Assets 9,464,600 9,733,600
Property and Equipment, net (Notes 3, 6, and 11) 3,239,000 3,254,900
------------ ------------
Other Assets:
Goodwill, net (Notes 2, 3 and 7) 1,470,200 9,717,100
Other intangible assets, net (Note 8) 54,000 67,700
Other assets 72,000 68,100
------------ ------------
Total Other Assets 1,596,200 9,852,900
------------ ------------
Total Assets $ 14,299,800 $ 22,841,400
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Bank overdrafts $ 546,400 $ 539,000
Line of credit (Note 9) 4,598,800 5,432,200
Accounts payable, trade (Note 5) 3,676,600 6,057,600
Accrued expenses (Note 17) 904,300 715,400
Current maturities of notes payable, former stockholder (Note 10) 281,300 375,000
Current maturities of notes payable & capital lease obligations
(Note 11) 375,200 760,300
Current maturities of notes payable, stockholders (Note 12) 111,700 110,800
------------ ------------
Total Current Liabilities 10,494,300 13,990,300
Notes payable, former stockholder, less current maturities (Note 10) 811,200 961,400
Notes payable & capital lease obligations, less current maturities
(Note 11) 671,300 702,500
Notes payable, stockholders, less current maturities (Note 12) 225,500 337,200
------------ ------------
Total Liabilities 12,202,300 15,991,400
------------ ------------
Commitments and Contingencies (Notes 9 and 17)
Stockholders' Equity (Notes 1, 15, 16, 17 and 18):
Preferred stock, 5,000,000 shares authorized, no shares issued or
outstanding -- --
Common stock, without par value, 60,000,000 shares authorized,
45,698,661 and 44,495,828 issued and outstanding at December 31,
2001 and 2000 9,373,700 8,920,400
Accumulated deficit (7,276,200) (2,070,400)
------------ ------------
Total Stockholders' Equity 2,097,500 6,850,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 14,299,800 $ 22,841,400
============ ============
See accompanying summary of significant accounting
policies and notes to financial statements.
22
Spectrum Organic Products, Inc.
Statements of Operations
===================================================================================================
For the years ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Net Sales (Note 4) $ 41,384,000 $ 42,490,100 $ 29,619,600
Cost of Goods Sold (Notes 3, 5 and 17) 30,009,700 32,023,700 20,960,000
------------ ------------ ------------
Gross Profit 11,374,300 10,466,400 8,659,600
------------ ------------ ------------
Operating Expenses:
Sales and Marketing 6,156,100 6,265,300 4,376,800
General and Administrative 3,194,900 3,542,700 3,299,100
Amortization of Goodwill (Notes 2 and 7) 520,700 909,600 221,500
Loss on Sale of Product Lines (Note 2) 4,803,200 -- --
Loss on Asset Writedowns and Plant Closure
(Notes 3, 6 and 7) 950,000 436,500 --
------------ ------------ ------------
Total Operating Expenses 15,624,900 11,154,100 7,897,400
------------ ------------ ------------
Income (Loss) From Operations (4,250,600) (687,700) 762,200
Other Income (Expense):
Interest Expense (Notes 9, 10, 11 and 12) (912,800) (1,381,500) (749,300)
Other, Net (42,400) 70,800 (29,900)
------------ ------------ ------------
Total Other Expense, Net (955,200) (1,310,700) (779,200)
------------ ------------ ------------
Loss Before Taxes (5,205,800) (1,998,400) (17,000)
Provision for Income Tax Expense (Note 13) -- (3,900) (96,300)
------------ ------------ ------------
Net Loss $ (5,205,800) $ (2,002,300) $ (113,300)
------------ ------------ ------------
Basic and Fully Diluted Loss Per Share
(Note 15) $ (0.12) $ (0.05) $ (0.00)
============ ============ ============
Weighted Average Shares Outstanding 45,278,517 44,234,378 35,095,155
============ ============ ============
See accompanying summary of significant accounting
policies and notes to financial statements.
23
Statement of Stockholders' Equity
For the years ended December 31, 1999, 2000 and 2001
=================================================================================================================
Retained Total
Earnings Stockholders'
Common Stock (Accumulated Equity
Shares Amount Deficit) (Deficit)
- -----------------------------------------------------------------------------------------------------------------
Balances, January 1, 1999 32,336,495 $ 95,500 $ 45,200 $ 140,700
Exchange of SPOP shares for all outstanding shares
of OFPI and OI in connection with the reverse
acquisition, including 351,926 shares issued to
investment bankers (Note 1) 11,577,691 8,200,500 -- 8,200,500
Exchange of SPOP options for OFPI options in
connection with the reverse acquisition (Note 15) -- 75,000 -- 75,000
Warrants issued in connection with the private
placement (Notes 11 and 16) -- 110,500 -- 110,500
Net Loss for the year -- -- (113,300) (113,300)
----------- ----------- ----------- -----------
Balances, December 31, 1999 43,914,186 $ 8,481,500 $ (68,100) $ 8,413,400
Restricted common shares issued in connection with
the settlement of litigation (Note 17) 400,000 318,800 -- 318,800
Exercise of warrants issued in connection with the
private placement notes (Notes 11 and 16) 181,642 1,400 -- 1,400
Warrants issued in connection with the private
placement notes (Notes 11 and 16) -- 118,700 -- 118,700
Net loss for the year -- -- (2,002,300) (2,002,300)
----------- ----------- ----------- -----------
Balances, December 31, 2000 44,495,828 $ 8,920,400 $(2,070,400) $ 6,850,000
Restricted common shares issued to a non-executive
Director of the Company, under a private sale (Note 18) 160,000 50,000 -- 50,000
Restricted common shares issued to non-executive
Directors of the Company, in lieu of cash
compensation for Board fees earned during CY 2000 64,000 20,000 -- 20,000
Restricted common shares issued to four note holders
under the private placement conversion offer to convert
the notes to equity (Note 11) 630,000 168,200 -- 168,200
Default warrants exercised by the note holders under
the private placement completed in October 1999
(Notes 11 and 16) 210,526 -- -- --
Warrants issued in connection with the renegotiated
private placement notes (Notes 11 and 16) -- 96,100 -- 96,100
New warrants exercised by the note holders under the
private placement notes (Notes 11 and 16) 20,357 -- -- --
Options issued to Global Natural Brands, Ltd. in
final settlement of litigation (Note 17) -- 25,300 -- 25,300
Shares issued to the Trustee for the Chapter 7
estate of Sunny Farms in final settlement of
litigation (Note 17) 117,950 93,700 -- 93,700
Net loss for the year -- -- (5,205,800) (5,205,800)
----------- ----------- ----------- -----------
Balances, December 31, 2001 45,698,661 $ 9,373,700 $(7,276,200) $ 2,097,500
=========== =========== =========== ===========
See accompanying summary of significant accounting
policies and notes to financial statements.
24
Spectrum Organic Products, Inc.
Statements of Cash Flows
=============================================================================================================
For the years ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Net Loss $ (5,205,800) $ (2,002,300) $ (113,300)
Adjustments to Reconcile Net Loss to Net Cash Provided by
(Used in) Operating Activities:
Provision for allowance against receivables 68,300 294,900 917,300
Provision for reserves for inventory obsolescence 300,500 614,500 86,300
Depreciation and amortization 418,800 531,000 436,700
Amortization of goodwill 520,700 909,600 221,500
Loss on asset writedowns and plant closure 950,000 436,500 --
Deferred income taxes -- -- (57,900)
Loss on sale of product lines 4,803,200 -- --
(Gain) Loss on sale of assets 84,100 (50,000) 102,900
Imputed interest on notes payable and warrants issued 107,600 169,300 47,400
Capitalized interest on construction in progress (49,200) (54,800) --
Increase in cash surrender value of life insurance (18,900) (21,200) (3,500)
Amortization of original issue discount on unsecured
subordinated notes -- 55,200 55,200
Directors fees paid in common stock 20,000 -- --
Professional fees paid via issuance of notes payable -- 75,000 --
Changes in Assets and Liabilities:
Accounts receivable (524,500) 284,800 (1,252,000)
Inventories (420,600) (704,000) (1,641,300)
Income tax refunds receivable -- 31,100 58,900
Prepaid expenses and other current assets 42,900 103,400 198,600
Other assets 11,000 112,100 (37,300)
Accounts payable (2,203,900) 24,000 816,500
Accrued expenses 188,900 (436,300) 11,100
Income taxes payable -- (13,300) (19,000)
------------ ------------ ------------
Net Cash Provided by (Used in) Operating Activities (906,900) 359,500 (171,900)
------------ ------------ ------------
Cash Flows From Investing Activities:
Purchase of property and equipment (473,500) (308,500) (1,026,400)
Proceeds from sale of assets 3,000 383,000 --
Proceeds from sale of product lines and related inventories 2,953,100 50,000 --
Transaction fees on sale of product lines (139,700) -- --
Cash acquired in reverse acquisition -- -- 90,900
Merger and related transaction costs -- (105,000) (594,200)
------------ ------------ ------------
Net Cash Provided by (Used in) Investing Activities 2,342,900 19,500 (1,529,700)
------------ ------------ ------------
Cash Flows From Financing Activities:
Increase in checks drawn against future deposits 7,400 309,700 42,300
Proceeds from lines of credit 43,677,700 44,317,300 21,879,700
Repayment of lines of credit (44,511,000) (43,823,100) (20,890,500)
Repayment of notes payable, former stockholder (265,600) (381,300) (246,700)
Repayment of notes payable to stockholders (160,800) (264,000) (126,400)
Proceeds of notes payable 132,700 276,100 1,400,000
Repayment of notes payable (287,500) (754,300) (304,500)
Repayment of capitalized lease obligations (78,600) (61,000) (51,700)
Restricted shares purchased by board member 50,000 -- --
Warrants exercised -- 1,400 --
------------ ------------ ------------
Net Cash Provided by (Used in) Financing Activities (1,435,700) (379,200) 1,702,200
------------ ------------ ------------
Net Increase (Decrease) in Cash 300 (200) 600
Cash, beginning of the year 900 1,100 500
------------ ------------ ------------
Cash, end of the year $ 1,200 $ 900 $ 1,100
------------ ------------ ------------
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 800 $ 15,700 $ 120,700
Cash paid for interest $ 805,200 $ 1,031,500 $ 786,700
Non-Cash Financing Activities:
Conversion of Notes Payable to common stock $ 168,200 $ -- $ --
============ ============ ============
See accompanying summary of significant accounting
policies and notes to financial statements.
25
Spectrum Organic Products, Inc.
Summary of Significant Accounting Policies
================================================================================
Business Combination and Basis of Presentation
- ----------------------------------------------
As a result of the reverse acquisition described in Note 1, the financial
statements include the historical results of Spectrum Naturals, Inc. ("SNI") and
its affiliate Spectrum Commodities, Inc. ("SCI"), the accounting acquirer, for
the 1999 period prior to the Merger date of October 6, 1999. Results of
operations after October 6, 1999 also include Organic Ingredients, Inc. ("OI")
and Organic Food Products, Inc. ("OFPI"). Following the closing of the Merger on
October 6, 1999 SNI, SCI and OI ceased to exist as separate legal entities, and
the Company changed its name to Spectrum Organic Products, Inc. Together, SNI
prior to the Merger and the combined companies after the Merger are referred to
as "the Company" or "SPOP".
Nature of Operations
- --------------------
The Company manufactures, packages, and sells nutritional supplements and
organic and natural food products, including cooking and nutritional oils,
condiments, dressings and spreads on a wholesale basis to distributors and
grocery and club store chains throughout the United States, Canada, Europe and
the Far East and to other manufacturers as industrial organic ingredients.
Company headquarters and principal manufacturing facilities are located in
Petaluma, California and warehousing operations for the Company's branded
product lines have been consolidated at a third-party facility in Tracy,
California. The Company's industrial ingredients sales force and the related
research and development center are located in Aptos, California.
Business Segments
- -----------------
The Company does not presently manage its operations by business segment, and
does not prepare internal financial statements by business segment for use by
Management. Accordingly, the Company's results of operations and financial
position have not been disaggregated and reported by business segment since the
information is presently unavailable to the Company's chief operating decision
maker.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant estimates
made by the Company are those concerning reserves against accounts receivable,
inventory and the impairment writedown of the remaining goodwill associated with
the organic ingredients product lines.
Stock-Based Compensation
- ------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), established a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from non-employees in exchange for equity instruments. As
permitted under SFAS 123, the Company has chosen to continue to account for
employee stock-based compensation using the intrinsic value method prescribed in
26
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Accordingly, compensation expense for employee stock
options is measured as the excess, if any, of the fair market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. Options granted to non-employees are recorded over the
service period at the estimated fair value of the option granted. Pro forma
disclosure of net income and earnings per share is provided as if the Company
had elected the fair value method of accounting for all stock-based compensation
awards.
Accounts Receivable and Allowances
- ----------------------------------
The Company provides allowances for estimated credit losses, product returns,
spoilage and other customer adjustments (for advertising allowances, etc.) at a
level deemed appropriate to adequately provide for known and inherent risks
related to such amounts.
The allowances are based on reviews of loss, return, spoilage, adjustment
history, contractual relationships with customers, current economic conditions
and other factors that deserve recognition in estimating potential losses. While
Management uses the best information available in making its determination, the
ultimate recovery of accounts receivable is also dependent on future economic
and other conditions that are beyond Management's control.
Inventory
- ---------
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Provisions are maintained for obsolete or unsaleable inventories to reduce the
carrying cost of such inventories to market value.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, ranging from
three to 25 years. Maintenance and repairs that neither significantly add to the
value of the property nor appreciably prolong its life are charged to expense as
incurred. Betterment or renewals are capitalized when incurred.
Goodwill and Intangible Assets
- ------------------------------
The excess of purchase consideration including transaction costs over the
identifiable net assets of businesses acquired is recorded as goodwill. Through
December 31, 2001 goodwill has been amortized under the straight-line method
over the estimated useful life of twelve years. In accordance with SFAS 142, the
Company has ceased the amortization of goodwill as of January 1, 2002 and will
test goodwill for impairment at least annually.
Trademark, label development and other intangible assets without an indefinite
life are amortized on the straight-line method over the estimated useful life,
generally five years.
Long-Lived Assets
- -----------------
Long-lived assets, including property and equipment, goodwill and other
intangible assets, are assessed for possible impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable, or whenever Management has committed to a plan to dispose of the
assets. Such assets are carried at the lower of book value or fair value as
estimated by Management based on appraisals, current market value, and
comparable sales value, as appropriate. Long-lived assets to be retained that
are affected by such impairment loss are depreciated or amortized at their new
carrying amount over the remaining estimated life; assets to be sold or
otherwise disposed of are not subject to further depreciation or amortization.
27
Income Taxes
- ------------
The Company accounts for corporate income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires an asset and liability approach.
This approach results in the recognition of deferred tax assets (future tax
benefits) and liabilities for the expected future tax consequences of temporary
timing differences between the financial statement amounts and the tax basis of
assets and liabilities. Deferred tax assets are subject to a valuation allowance
in the event Management believes there is risk that the future tax benefits may
not be realized.
Revenue Recognition
- -------------------
In accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), the Company recognizes revenue once it is
realizable and earned. Sales and cost of goods sold are recognized when goods
are shipped for most customers and upon delivery to retail locations for certain
customers. Potential returns, adjustments and spoilage are provided for in the
accounts receivable allowances.
Advertising Costs
- -----------------
Magazine advertising is expensed at the on-stand date when the consumer or trade
is first exposed to the ad. Costs associated with the production of pamphlets
and similar advertising literature are expensed in the initial period of
distribution. Other advertising costs are expensed as incurred. Advertising
expenses for the years ended December 31, 2001, 2000 and 1999 were $810,300,
$660,000 and $687,000, respectively.
Fair Value of Financial Instruments
- -----------------------------------
The Company's notes payable approximate fair value based on rates currently
available for debt with similar terms and maturities. The fair value of the line
of credit approximates book value because the interest rate fluctuates with
changes in the prime rate. The Company's commitments to purchase inventory
approximate fair value because they do not exceed current market prices
available to the Company.
Net Loss per Share
- ------------------
Basic loss per share is computed by dividing net loss attributable to common
shares by the weighted average number of common shares outstanding during each
period. Diluted loss per share is similar to basic loss per share except that
the weighted average number of common shares outstanding is increased to reflect
the dilutive effect of potential common shares, such as those issuable upon the
exercise of stock options or warrants, as if they had been issued.
For the fiscal years 2001, 2000 and 1999 there is no difference between basic
and diluted loss per common share, as the effects of the exercise of common
stock options and warrants are anti-dilutive, given the net loss incurred in
each year presented. For each year, the following potential common shares were
excluded from the computation of diluted earnings per share since their effect
would be anti-dilutive:
Number of Potential Convertible Shares
--------------------------------------
2001 2000 1999
----- ----- -----
Stock Options 3,225,315 2,010,115 1,380,515
Stock Warrants 843,156 608,156 550,656
---------- --------- ---------
Total Potential Convertible Shares 4,068,471 2,618,271 1,931,171
========== ========= =========
28
New Applicable Accounting Pronouncements
- ----------------------------------------
In May 2000 the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement,
and income statement classification for sales incentives offered voluntarily by
a vendor without charge to customers that can be used in, or are exercisable by
a customer as a result of a single exchange transaction.
In April 2001 the EITF reached a consensus on Issue 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services." This issue addresses the recognition, measurement and
income statement classification of consideration, other than that directly
addressed by Issue 00-14, from a vendor to a retailer or wholesaler. Issue 00-25
will be effective for the Company's 2002 fiscal year. Both Issue 00-14 and 00-25
have been codified under issue 01-09, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products". The Company is
currently analyzing Issue 01-09. However, based on Management's current
understanding and interpretation, Issue 01-09 is not expected to have a material
impact on the Company's financial position or results of operations, except that
certain reclassifications may occur. The conclusions reached in Issue 00-25 and
Issue 00-14 (codified by Issue 01-09) are effective for fiscal quarters
beginning after December 15, 2001.
In June 2001 the Financial Accounting Standards Board finalized FASB Statements
No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of certain intangible assets and goodwill based on the criteria in SFAS
141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combination (the merger of OFPI, OI, SNI and SCI
as discussed in Note 1 to the financial statements) was accounted for using the
purchase method. As of December 31, 2001 the net carrying amount of goodwill
remaining after the sale of the tomato-based product lines and the writedown of
the remaining OI goodwill to its estimated net realizable value, as discussed in
Notes 2, 3, 7 and 8 to the financial statements, was $1,470,200 and other
intangible assets was $54,000. Amortization expense of goodwill and other
intangible assets during the year ended December 31, 2001 was $534,400. The
Company believes the effect of the adoption of SFAS 144 will eliminate future
goodwill amortization expense, which was $520,700 in 2001.
In August 2001 Statement of Financial Accounting Standard No. 144, "Accounting
for the Impairment or Disposal of Long-lived Assets" ("SFAS 144") was issued.
SFAS 144 supersedes Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-lived Assets to be Disposed of" ("SFAS
121") and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
29
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 also amends Accounting Research Bulletin No.
51, "Consolidated Financial Statements", to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 retains the fundamental provisions of SFAS 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while resolving significant implementation issues
associated with SFAS 121. Among other things, SFAS 144 provides guidance on how
long-lived assets used as part of a group should be evaluated for impairment,
establishes criteria for when long-lived assets are held for sale, and
prescribes the accounting for long-lived assets that will be disposed of other
than by sale. SFAS 144 is effective for fiscal years beginning after December
15, 2001. The Company is currently evaluating the effect, if any, that adoption
of SFAS 144 will have on the Company's financial position and results of
operations.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year financial statements
to be consistent with the current year presentation. These reclassifications had
no impact on prior years net income or retained earnings.
30
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
1. Business Combination
- -----------------------
On October 6, 1999 Spectrum Naturals, Inc. and its affiliate Spectrum
Commodities, Inc. ("SNI") and Organic Ingredients, Inc. ("OI"), all California
corporations, were merged with and into Organic Food Products, Inc. (OFPI), also
a California corporation. Effective with the Merger the newly combined entity
changed its name to Spectrum Organic Products, Inc. SNI and SCI prior to the
Merger and the combined companies after the Merger are referred to as "the
Company" or "SPOP".
As a result of the Merger SNI stockholders received 4,669.53 shares of OFPI
stock in exchange for each share of SNI stock previously held, for a total of
32,336,495 shares representing approximately 73.8% of the outstanding common
stock after the Merger. OI stockholders received 39.5 shares of OFPI stock in
exchange for each share of OI stock previously held, for a total of 3,950,000
shares representing approximately 9.0% of the outstanding common stock after the
Merger. Existing OFPI stockholders held 7,275,665 of the outstanding shares, or
approximately 17.2% of the common stock outstanding after the Merger. Since a
controlling interest in the combined Company is held by former SNI stockholders,
the transaction was accounted for as a reverse acquisition, with SNI as
accounting acquirer and OFPI and OI as accounting acquirees.
Accordingly, the financial statements present the historical results of SNI, the
accounting acquirer, for the period January 1, 1999 through October 5, 1999.
Results of operations for OFPI and OI are included with SNI from the October 6,
1999 Merger date forward. The number of shares outstanding and per-share amounts
have been retroactively restated where applicable for all periods presented.
The assumed purchase prices of OI and OFPI were determined by multiplying the
number of combined Company shares issued to OI stockholders or retained by OFPI
stockholders by $0.7083 per share, the average of the closing market prices for
OFPI stock for the three days immediately prior to the announcement of the
Merger in February 1999. The total assumed purchase price, plus transaction
costs of $918,700 (including $75,000 related to outstanding OFPI options), was
recorded as follows:
Total OFPI OI
------------ ------------ ------------
Receivables $ 1,636,800 $ 541,700 $ 1,095,100
Inventories 2,310,000 977,200 1,332,800
Prepaid and other assets 273,000 190,800 82,200
Fixed assets and intangibles 1,118,900 1,074,500 44,400
Line of credit (1,894,100) (942,100) (952,000)
A/P and accrued liabilities (4,270,600) (3,012,500) (1,258,100)
Related party notes (838,400) (497,200) (341,200)
Goodwill 10,848,200 7,866,000 2,982,200
------------ ----------- -----------
Total purchase, excluding
$90,900 cash acquired $ 9,183,800 $ 6,198,400 $ 2,985,400
============ ============ ============
2. Sale of Product Lines
- ------------------------
On June 11, 2001 the Company sold its tomato-based product lines to Acirca,
Inc., an unrelated third party, in a transaction approved by unanimous vote of
the Company's Board of Directors. Acirca has been, and may continue to be, a
31
customer of the Company, purchasing organic ingredients for use in its branded
product lines. The assets sold included inventories, trademarks and goodwill
associated with the Millina's Finest, Garden Valley Natural, Parrot and Frutti
di Bosco brands of pasta sauces and salsas, as well as children's meals sold
under the Grandma Millina's Kitchen Kids' Meals brand and certain private label
pasta sauce and salsa products.
The total consideration was $3,128,100 which included $2,350,000 for intangibles
and $778,100 for saleable inventory sold to Acirca. Also included in the total
amount of consideration was $350,000 deposited in an escrow account to be
applied towards indemnity claims of Acirca and, to the extent not utilized for
any indemnity claims of Acirca, released to the Company in two equal
installments at the six month and one year anniversaries of the sale. The first
installment from the escrowed funds of $175,000 was received in full in December
2001. Because of the contingency for indemnity claims of Acirca, the remaining
$175,000 was not recorded as part of the consideration received on the sale.
Since the product lines sold comprised all of the remaining assets of OFPI, the
remaining net goodwill associated with the reverse acquisition of OFPI in
October 1999 of $6,776,200 was written-off. Accordingly, the Company recorded a
non-cash loss on the sale of the product lines of $4,803,200 which was computed
as follows:
Total consideration $3,128,100
Less escrowed funds included above 175,000
----------
Net cash proceeds from sale 2,953,100
----------
Assets sold:
Inventories 778,100
Label plates, net of accumulated depreciation 10,500
Goodwill, net of accumulated amortization 6,776,200
Transaction fees 139,700
Write-off of remaining inventories not purchased 51,800
----------
Total assets sold and deal costs 7,756,300
----------
Net Loss on Sale of Product Lines $4,803,200
==========
The transaction fees represented investment banking, legal and accounting fees
associated with the sale. The write-off of remaining inventories represented
losses on close-out sales of dry cut pasta and canned tomatoes, which were
products previously sold by the Company under the disposed brand names that were
not purchased by the buyer.
3. Asset Writedowns and Plant Closure
- -------------------------------------
As a result of ongoing negotiations for the potential sale of the Organic
Ingredients product lines, the Company determined that the net goodwill
associated with the Organic Ingredients product lines was impaired. Accordingly,
the Company recorded a non-cash writedown of $950,000 to reduce the goodwill
carrying amount at December 31, 2001 to $1,470,200, its estimated net realizable
value. As of the date of this report, negotiations were still ongoing.
In May 2000 the Company committed to a plan to close its leased facility in
Morgan Hill, California and transfer the production of the OFPI brands to a
third-party co-packer. Production at the Morgan Hill facility and depreciation
of the Morgan Hill assets ceased as of July 31, 2000. Included in cost of sales
for the year ended December 31, 2000 was $53,100 of severance and shutdown
expenses associated with the closing of the facility. In addition, a loss on the
disposal of property and equipment of $436,500 was recorded in 2000 on the sale
of surplus bottling equipment and the abandonment of leasehold improvements at
the Morgan Hill facility.
32
The Company executed a lease termination agreement on November 6, 2001 in
exchange for $42,600 in additional rent and repair costs to return the facility
to its condition on the date it was leased. The Company has no further
obligations remaining under the Morgan Hill lease as of December 31, 2001.
4. Sales and Accounts Receivable
- --------------------------------
During the years ended December 31, 2001 and 2000, gross sales by product line
were as follows:
2001 2000 % Change
---- ---- --------
Consumer Brands - Culinary $17,222,200 $15,274,900 +12.7%
Consumer Brands - Nutritional 9,262,700 8,144,000 +13.7%
Industrial Ingredients 14,189,600 14,848,300 -4.4%
Private Label/Other 2,285,200 2,411,200 -5.2%
Disposed/Discontinued Products 1,862,700 4,904,000 -62.0%
----------- ----------- --------
Total Gross Sales 44,822,400 45,582,400 -1.7%
Less Discounts and Allowances 3,438,400 3,092,300 +11.2%
----------- ----------- --------
Net Sales $41,384,000 $42,490,100 -2.6%
=========== =========== ========
Accounts receivable consisted of the following:
December 31, 2001 2000
---------- ----------
Trade $3,821,800 $3,501,500
Stockholder 20,000 20,000
Other 61,100 19,200
---------- ----------
Total accounts receivable 3,902,900 3,540,700
Less allowance for doubtful accounts and
customer adjustments 475,000 569,000
---------- ----------
Net Accounts Receivable $3,427,900 $2,971,700
========== ==========
During 2001 the Company had one customer that accounted for approximately 36%
of gross sales and approximately 11% of trade accounts receivable at December
31, 2001. During 2000 the same customer accounted for approximately 27% of
gross sales and approximately 22% of trade accounts receivable at December 31,
2000. The loss of this customer would have a material adverse effect on the
Company's operations and cash flows.
During 2001 and 2000 foreign sales comprised 6% and 10%, respectively, of total
gross sales and approximately 7% and 2% of accounts receivable at December 31,
2001 and 2000, respectively.
5. Inventories
- --------------
Inventories consisted of the following:
December 31, 2001 2000
----------- -----------
Finished goods $ 5,633,000 $ 6,111,600
Raw materials 683,600 1,130,300
----------- -----------
Total inventories 6,316,600 7,241,900
Less provision for obsolete inventory 350,000 565,500
----------- -----------
Net Inventories $ 5,966,600 $ 6,676,400
=========== ===========
33
For 2001 and 2000 the Company had one supplier of raw materials that accounted
for approximately 6% and 9%, respectively, of total purchases of raw materials
and one supplier of processing (co-packer) that accounted for approximately 6%
and 9%, respectively, of total cost of sales. At December 31, 2001 and 2000
approximately $244,300 and $542,000 was owed to these suppliers and included in
accounts payable.
6. Property and Equipment
- -------------------------
Property and equipment consisted of the following:
December 31, 2001 2000
---------- ----------
Machinery and equipment $3,775,600 $3,290,900
Construction in progress 463,100 704,700
Furniture and fixtures 821,200 760,600
Leasehold improvements 239,000 215,000
Vehicles 84,000 146,200
--------- ---------
Total property and equipment 5,382,900 5,117,400
Less accumulated depreciation 2,143,900 1,862,500
---------- ----------
Net Property and Equipment $3,239,000 $3,254,900
========== ==========
During the years ended 2001 and 2000, the Company capitalized interest of
$49,200 and $54,800, respectively, on construction in progress. Management
estimates that an additional $400,000 of expenditures are necessary to complete
construction in progress.
Depreciation expense was $405,100 and $504,200 for 2001 and 2000, respectively.
As described in Note 3, the Company sold the surplus bottling equipment at the
closed Morgan Hill facility in November 2000 for $380,000 in cash. At the time
of the sale, the bottling equipment was included in machinery and equipment at a
cost of $925,000 with accumulated depreciation of $286,500. In addition,
leasehold improvements with a cost of $176,100 and accumulated depreciation of
$97,500 at December 31, 2000 were abandoned and written-off.
34
7. Goodwill
- -----------
As described in Note 1, the Company recorded Goodwill for the excess of the
purchase consideration and transaction costs versus the identifiable net assets
of the businesses acquired in the Merger. The following table sets forth the
transactions affecting goodwill since the Merger:
OFPI OI TOTAL
------------ ------------ ------------
Goodwill recorded with the Merger
on October 6, 1999 $ 7,461,000 $ 2,982,200 $ 10,443,200
Amortization expense for CY 1999 (159,400) (62,100) (221,500)
------------ ------------ ------------
Balances, December 31, 1999 $ 7,301,600 $ 2,920,100 $ 10,221,700
Amortization expense for CY 2000 (661,100) (248,500) (909,600)
Additional goodwill recorded in CY
2000 for litigation settlement
and escaped property taxes 405,000 -- 405,000
------------ ------------ ------------
Balances, December 31, 2000 $ 7,045,500 $ 2,671,600 $ 9,717,100
Amortization expense for CY 2001 (269,300) (251,400) (520,700)
Sale of OFPI product lines (Note 2) (6,776,200) -- (6,776,200)
Writedown of OI goodwill to net
realizable value (Note 3) -- (950,000) (950,000)
------------ ------------ ------------
Balances, December 31, 2001 $ -- $ 1,470,200 $ 1,470,200
============ ============ ============
In accordance with Financial Accounting Standards Board Statement No. 142, the
Company will cease the amortization of the remaining goodwill as of December 31,
2001. Instead, the Company will test goodwill for any potential impairment at
least annually beginning January 1, 2002.
8. Other Intangible Assets
- --------------------------
Other intangible assets consisted of the following:
December 31, 2001 2000
-------- --------
Trademarks $ 74,100 $ 74,100
Label development 80,800 80,800
Covenant not-to-compete 76,500 76,500
-------- --------
Total other intangiable assets 231,400 231,400
Less accumulated amortization 177,400 163,700
-------- --------
Net Other Intangible Assets $ 54,000 $ 67,700
======== ========
Amortization expense was $13,700 and $26,800 for the years ending December 31,
2001 and 2000, respectively.
35
9. Line of Credit
- -----------------
The Company has available a $9,000,000 revolving line of credit, subject to a
borrowing base limitation based upon a percentage of eligible accounts
receivable and inventory, bearing interest at prime plus 2% per annum (6.75% at
December 31, 2001), expiring October 5, 2004. Borrowings under the revolving
line of credit, totaled $4,598,800 at December 31, 2001 versus $5,432,200 at
December 31, 2000. The credit line is secured by substantially all assets of the
Company and life insurance policies on key officers. As of December 31, 2001
the Company had $955,800 in additional borrowing available under the line of
credit versus $311,900 at December 31, 2000.
10. Notes Payable, Former Stockholder
- -------------------------------------
Notes payable, former stockholder consisted of the following:
December 31, 2001 2000
- --------------------------------------------------------------------------------
Note payable with interest due monthly at 12% per
annum. Principal is due in monthly installments of
$15,625 through June 2002, and $31,250 thereafter
until paid in full. The note is secured by a
collateral assignment of a life insurance policy
on the majority stockholder and unissued shares of
common stock in an amount equivalent to the unpaid
principal and interest due under the note. The
note is subordinated to the line of credit and all
notes payable to the bank. $ 828,100 $1,093,700
Non-interest bearing, unsubordinated and unsecured
note due in one installment of $513,300 five years
after the last principal payment on the above
note, expected to be December 2009. Interest has
been imputed at an effective interest rate of 8.6%
per annum. 264,400 242,700
---------- ----------
Total Notes Payable - Former Stockholder 1,092,500 1,336,400
Less current maturities 281,300 375,000
---------- ---------
Long-term Portion of Notes Payable - Former
Stockholder $ 811,200 $ 961,400
========== ==========
Aggregate maturities or principal payments required on notes payable-former
stockholder for each of the succeeding years are as follows:
Year ending December 31,
- --------------------------------------------------------------------------------
2002 $ 281,300
2003 375,000
2004 171,800
December 2009 513,300
-----------
Total Principal Payments - Former Stockholder 1,341,400
Less amounts representing interest at an imputed rate of 8.6%
per annum 248,900
-----------
Total Notes Payable - Former Stockholder $ 1,092,500
===========
36
11. Notes Payable and Capital Lease Obligations
- -----------------------------------------------
Notes payable and capital lease obligations consisted of the following:
December 31, 2001 2000
- --------------------------------------------------------------------------------
Senior Debt:
Notes payable to bank, due in monthly principal
installments of $17,200 plus interest at prime
plus 2.25% per annum (7.0% at December 31, 2001).
These notes are secured by substantially all
assets of the Company (a) $ 635,300 $ 798,800
Capital lease obligations secured by the related
property and equipment (b) 174,900 244,000
Subordinated Debt:
Private placement notes, unsecured, principal due
in quarterly installments of $28,100 through
December 31, 2003, plus interest at 10% per annum
and quarterly common stock purchase warrants equal
to 10% of the outstanding principal balance, at
the closing bid price of SPOP shares (c) 236,300 420,000
---------- ---------
Total Notes Payable and Capital Lease obligations 1,046,500 1,462,800
Less current maturities 375,200 760,300
---------- ---------
Long-term Portion of Notes Payable and Capital
Lease Obligations $ 671,300 $ 702,500
========== ==========
(a) On October 6, 1999 the Company entered into a credit facility with WFBC
which included two term loans for $150,000 and $1,067,000 with payment
terms of 18 months and 60 months, respectively, and a capital expenditure
credit line of up to $1,500,000. Only $276,100 of the capital expenditure
line was utilized and was being paid via monthly principal payments of
$4,600 over 60 months, beginning August 2000. A portion of the proceeds
from the term loans was used to pay previously existing notes with the
Company's former lender.
In November 2000 the Company completed the sale of surplus bottling
equipment from its former leased manufacturing facility in Morgan Hill,
California for cash consideration of $380,000. Since a portion of the
original term loans from WFBC of $1,217,000 were secured by the bottling
equipment, the Company paid down the term loans by $318,600.
In December 2001 the Company entered into a third term loan with WFBC for
$82,700 with payment terms of 36 months and interest at prime plus 2.25%
per annum. Monthly principal payments of $2,300 began on January 1, 2002.
The Company utilized the proceeds from the third term loan to fund two new
pieces of bottling equipment at its Copeland Street manufacturing facility.
(b) The cost of assets securing the capital lease obligations was $438,900 and
$386,500 at December 31, 2001 and 2000, respectively, with accumulated
amortization of $183,500 and $127,500 at December 31, 2001 and 2000,
respectively.
(c) The private placement notes were issued in October 1999 to twelve
individual investors for a total face amount of $400,000. The notes are
unsecured and subordinated to all other indebtedness of the Company. Each
of the 16 Units sold in the private placement included a $25,000 note
bearing interest at 10% per annum plus warrants to purchase 10,000 shares
37
of SPOP common stock at $0.01 per share from January 1 to September 30,
2000. The resulting $110,500 value of the warrants was allocated as
original issue discount to the face amount of the notes, and was amortized
to interest expense over the six month base term of the notes (October 1,
1999 - March 31, 2000).
The notes were originally due the earlier of (1) March 31, 2000, (2) the
Company raising additional capital of $1,000,000 or more, (3) sale or
merger of the Company, or (4) refinancing of any Company debt in the net
amount of $1,000,000 or more. As provided for in the private placement,
since the notes were not repaid by March 31, 2000 the accrued interest at
that date of $20,000 was added to the principal, the interest rate was
increased to 15% per annum, and an additional 240,000 common stock warrants
to purchase SPOP stock at $0.01 per share from October 1, 2000 to March 31,
2001 were granted. The resulting $118,700 value of the warrants was
included in interest expense for the twelve months ended December 31, 2000.
Also included in interest expense for that period is $47,300 of interest
paid to the private placement note holders at the default interest rate of
15% per annum for the period April 1, 2000 through December 31, 2000.
In June 2001 the Company completed the process of clearing the default by
offering the private placement note holders the option of converting their
notes to restricted common stock at $0.25 per share, or a three year term
note bearing interest at 10% per annum, calling for interest payments only
during 2001 with principal and interest thereafter, plus common stock
purchase warrants, retroactive to October 1, 2000, equal to 10% of the
outstanding principal at the closing bid price of SPOP stock at each
quarter-end until the note is retired. Four note holders representing
$157,500 of the outstanding principal elected the conversion to equity,
seven note holders representing $236,300 of the outstanding principal
elected the replacement note with common stock purchase warrants, and one
note holder representing $26,200 of the outstanding principal was paid off.
For those note holders who elected the conversion to common stock, non-cash
interest expense of $10,700 was recorded for the beneficial pricing effect
upon conversion. For those note holders who elected the payment schedule
with common stock purchase warrants, non-cash interest expense was recorded
for the value of the warrants during the year ended December 31, 2001 of
$96,100.
Aggregate maturities or principal payments required on bank notes payable and
the private placement notes for each of the succeeding years are as follows:
Year ending December 31,
- --------------------------------------------------------------------------------
2002 $ 318,600
2003 330,400
2004 185,800
2005 36,800
---------
Total Notes Payable $ 871,600
=========
38
Future minimum lease payments for equipment under capital lease agreements are
as follows:
Year ending December 31,
- --------------------------------------------------------------------------------
2002 $ 76,100
2003 62,700
2004 51,900
2005 20,100
--------
Total future minimum lease payments 210,800
Less amounts representing interest at rates from 7% to 13.5% per annum 35,900
--------
Present value of minimum lease payments 174,900
Less current maturities 56,600
--------
Long-term portion of present value of minimum lease payments $118,300
========
12. Notes Payable to Stockholders
- ---------------------------------
Notes payable to stockholders consisted of the following:
December 31, 2001 2000
- --------------------------------------------------------------------------------
Unsecured subordinated notes due in monthly
installments of $8,600, including principal and
interest at 10% per annum (a) $ 204,000 $ 276,100
Unsecured subordinated notes due in monthly
installments of $8,500, including principal and
interest at 10% per annum 133,200 171,900
--------- ---------
Total Notes Payable to Stockholders 337,200 448,000
Less Current Maturities 111,700 110,800
--------- ---------
Long-term Portion of Notes Payable-Stockholders $ 225,500 $ 337,200
========= =========
(a) In January 2001 these stockholders agreed to revised payment schedules in
connection with their notes, in an effort to assist the Company with its
working capital and liquidity issues. The stockholders agreed to reduce the
monthly payments of principal and interest due under the notes by
approximately one-half. Accordingly, monthly principal and interest
payments were reduced from $17,400 to $8,600 effective January 2001.
Aggregate maturities or principal payments required on notes payable to
stockholders, including the revisions referred to above, are as follows:
Year Ending December 31,
- --------------------------------------------------------------------------------
2002 $ 111,700
2003 86,600
2004 86,600
2005 48,100
2006 and thereafter 4,200
---------
Total Notes Payable to Stockholders $ 337,200
=========
39
13. Income Taxes and Deferred Income Taxes
- ------------------------------------------
Income tax expense consisted of the following:
Years ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------------------
Current:
Federal $ -- $ (1,400) $ 130,600
State -- 5,300 23,600
---------- ----------- -----------
Subtotal Current -- 3,900 154,200
---------- ----------- -----------
Deferred:
Federal -- -- (45,100)
State -- -- (12,800)
---------- ----------- -----------
Subtotal Deferred -- -- (57,900)
---------- ----------- -----------
Total Income Tax Expense $ -- $ 3,900 $ 96,300
========== =========== ===========
A reconciliation of the federal statutory rate to the tax provision of the
corresponding years follows:
Years Ending December 31, 2001 2000 1999
- --------------------------------------------------------------------------------------------
Tax benefit at effective federal statutory
rate $(1,772,900) $ (679,500) $ (5,800)
Disposal of non-deductible goodwill 2,303,900 -- --
Impairment loss on non-deductible goodwill 323,000 -- --
Goodwill amortization 177,100 309,300 77,300
Other non-deductible expense 57,700 21,200 18,600
State income tax expense, net of federal effect 94,000 22,200 7,100
Valuation allowance (1,104,200) 324,100 --
Other (78,600) 6,600 (900)
----------- ----------- -----------
Total Income Tax Expense $ -- $ 3,900 $ 96,300
=========== =========== ===========
Deferred tax assets and liabilities consisted of the following:
December 31, 2001 2000
- -------------------------------------------------------------------------------------------
Deferred Tax Assets:
Federal net operating loss carryovers $ 2,384,100 $ 2,372,600
Goodwill amortization and write-down -- 809,700
Inventory allowances 154,800 231,300
Accounts receivable allowances 161,500 193,500
Accrued compensation 59,300 57,600
State income taxes 196,500 363,800
Other 236,500 112,600
----------- -----------
Gross Deferred Tax Assets 3,192,700 4,141,100
Deferred Tax Liabilities:
Depreciation and fixed asset write-down (320,600) (171,800)
Other (7,000) --
----------- -----------
Net Deferred Tax Assets, Before Allowance 2,865,100 3,969,300
Valuation allowance (2,865,100) (3,969,300)
----------- -----------
Net Deferred Tax Assets $ -- $ --
=========== ===========
40
As a result of the reverse acquisition, OI, SNI and SCI were merged into OFPI as
of October 6, 1999 with OFPI as the surviving taxable entity for the Company.
Subsequently, the tax year of the combined entity was changed from June 30 to
December 31. OI, SNI and SCI all filed final federal and state income tax
returns for the period ended October 5, 1999.
As of December 31, 2001 the Company has federal net operating loss
carryforwards (NOLS) totaling approximately $7,300,000 that expire at various
times through 2020. For state purposes, the Company has net operating loss
carryforwards totaling approximately $2,800,000 which expire at various times
through 2010. In addition, the Company has approximately $77,000 of state
manufacturing investment tax credit carryforwards that expire in varying amounts
through 2015.
Approximately $5,600,000 of the NOLS originated primarily from pre-merger
operations of OFPI. As a result of OFPI's acquisition by SNI (Note 1), OFPI
experienced a more than 50% change in ownership for federal and state income tax
purposes. As a result, an annual limitation is placed upon the Company's ability
to realize the benefit of the pre-merger NOLS. Management is unable to determine
whether it is more likely than not that the net deferred tax assets will be
realized. Accordingly, there is a 100% valuation allowance against the net
deferred tax assets for all periods presented. The amount of the valuation
allowance has decreased from 2000 to 2001 by $1,104,200 and increased by
$273,500 from 1999 to 2000.
14. 401(k) Plan
- ---------------
The Company provides a defined contribution plan covering substantially all
employees meeting certain age and service requirements. Plan contributions are
made at the discretion of Management and totaled $47,300, $40,400 and $13,900
for the years ended December 31, 2001, 2000 and 1999, respectively.
15. Stock Options
- -----------------
Prior to the Merger discussed in Note 1, SNI had an Equity Incentive Plan under
which options were granted to one officer in 1998. Those options vest monthly
over a three-year period, are exercisable for ten years from the date of grant,
and were granted at the estimated market value of SNI stock at the grant date.
As a result of the Merger, the Company assumed the options outstanding under
OFPI's 1995 Stock Option Plan (the "1995 Plan"). Because OFPI is the surviving
legal entity, SNI's existing options were absorbed into the 1995 Plan and
restated at their equivalent number of shares and strike price using the Merger
conversion ratio (see Note 1), and the SNI Equity Incentive Plan was
discontinued.
In August 2000 the Company amended the 1995 Plan by filing an S-8 Registration
Statement with the SEC which amended the 1995 Plan name to Spectrum Organic
Products, Inc. and increased the aggregate number of shares of common stock
which could be issued under the 1995 Plan from 625,000 shares to 4,500,000
shares. Under the amended 1995 Plan, the option price shall not be less than the
fair market value on the date of grant and options generally will expire ten
years after grant. Options generally vest ratably over four years for employees
and directors (the existing SNI options retained their three-year vesting
period). The following table summarizes the activity under the 1995 Plan for the
years ended December 31, 2001 and 2000:
41
2001 2000
---------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------- --------- --------
Outstanding, beginning of year 2,010,115 $ 0.41 1,380,515 $ 0.59
Options granted 1,256,400 0.59 1,157,200 0.44
Cancelled or expired (41,200) 0.44 (527,600) 0.93
---------- -------- --------- --------
Outstanding, end of year 3,225,315 $ 0.48 2,010,115 $ 0.41
========== ======== ========= ========
Options exercisable at year end 1,457,448 $ 0.67 627,289 $ 0.39
========== ======== ========= ========
Weighted average fair value of options granted
during the year $ 0.59 $ 0.43
======== ========
The following table discloses exercise prices and remaining lives of options
outstanding or exercisable as of December 31, 2001:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Average Average
Remaining Weighted Remaining Weighted
Range of Number Contractual Average Number Contractual Average
Exercise Outstanding Life Exercise Exercisable Life Exercise
Price at 12/31/01 (Years) Price at 12/31/01 (Years) Price
- ----------- ----------- ------------ ----------- ----------- ----------- -----------
$ 0-$0.25 781,400 9.7 $0.22 93,333 9.3 $0.25
$0.26-$0.50 2,196,915 8.2 0.37 1,117,115 7.4 0.35
$0.51-$2.50 247,000 1.2 2.27 247,000 1.2 2.27
- ----------- ----------- ------------ ----------- ----------- ----------- -----------
$0-$2.50 3,225,315 8.0 $0.48 1,457,448 6.4 $0.67
=========== =========== ============ =========== =========== =========== ===========
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant. In
accordance with the accounting for such options utilizing the intrinsic value
method, there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value of the options at the grant dates consistent
with SFAS 123, the Company's net loss and loss per share for the years ended
December 31, 2001, 2000 and 1999 would have been adjusted to the pro-forma
amounts presented below:
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Net loss:
As reported $ 5,205,800 $ 2,002,300 $ 113,300
Pro-forma $ 5,572,300 $ 2,082,100 $ 182,300
Basic and diluted loss per share:
As reported $ 0.12 $ 0.05 $ 0.00
Pro-forma $ 0.12 $ 0.05 $ 0.00
=========== =========== ===========
42
The fair value of option grants for 2001 was estimated on the date of grant
utilizing the Black-Scholes option-pricing model, with the following
assumptions: expected life of five years, risk-free interest rates of 2.5% to
4.25%, no dividend yield and volatility of 188% to 201%.
The fair value of option grants for 2000 was estimated on the date of grant
utilizing the Black-Scholes option-pricing model, with the following
assumptions: expected life of five years, risk-free interest rate of 5.0%, no
dividend yield and volatility of 214%. There were no options granted in 1999.
The incremental value of outstanding OFPI options assumed as a result of the
Merger was included in the purchase consideration (see Note 1).
16. Stock Warrants
- ------------------
Each common stock purchase warrant represents the right to purchase one share of
the Company's common stock at a fixed price per share at some point in the
future. At the date of the Merger the Company assumed outstanding common stock
purchase warrants of OFPI totaling 590,656. At December 31, 2001 there were
390,656 of those warrants still outstanding. In addition, in connection with a
private placement of unsecured subordinated notes (see Note 11), the Company
issued 160,000 common stock purchase warrants with an exercise price of $0.01
per share plus an additional 240,000 warrants at the same exercise price as a
result of the default under the notes. All of these penny warrants were
exercised by the holders during 2001 and 2000. As described in Note 11, the
Company cleared the default under the private placement notes in June 2001 by
offering the note holders their choice of conversion to equity or new term notes
which entail a three year payment schedule plus common stock purchase warrants
retroactive to October 1, 2000 equal to 10% of the outstanding principal at the
closing bid price of SPOP stock at each quarter-end until the notes are retired.
Seven note holders elected to convert to new notes.
The following table discloses the activity related to common stock purchase
warrants for the years ended December 31, 2001 and 2000:
2001 2000
------------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Warrants Price Warrants Price
-------- -------- -------- --------
Outstanding, beginning of year 608,156 $ 1.78 550,656 $ 1.96
Original private placement warrants exercised -- -- (160,000) 0.01
Default private placement warrants issued -- -- 240,000 0.01
Default private placement warrants exercised (217,500) 0.01 (22,500) 0.01
Warrants issued in connection with restricted stock
purchase (a) 160,000 0.31 -- --
New private placement warrants issued 337,500 0.26 -- --
New private placement warrants exercised (45,000) 0.23 -- --
-------- -------- -------- --------
Outstanding, end of year 843,156 $ 1.43 608,156 $ 1.78
======== ======== ======== ========
(a) These warrants were issued in February 2001 in connection with the purchase
of 160,000 shares of SPOP restricted common stock. Since the shares were
purchased at the closing market price for the Company's unrestricted common
stock, the Company also issued 160,000 common stock purchase warrants at
the same price, which expire five years from the date issued. See Note 18.
43
The following table discloses exercise prices and remaining lives of the
outstanding common stock purchase warrants at December 31, 2001:
Weighted
Average
Number Exercise Expiration
Outstanding Price Date
----------- ----------- -----------
Warrants assumed at the Merger 130,000 $ 4.00 8/11/2002
Warrants assumed at the Merger 200,000 2.00 12/31/2002
Warrants assumed at the Merger 60,656 2.63 2/11/2003
----------- -----------
Subtotal assumed at the Merger 390,656 $ 2.76
Warrants issued under the new private
placement notes 292,500 0.26 12/31/2003
Warrants issued to non-excutive
Director 160,000 0.31 2/15/2006
----------- -----------
Total Warrants Outstanding 843,156 $ 1.43
=========== ===========
17. Commitments and Contingencies
- ---------------------------------
The Company rents office, production, warehouse and research and development
facilities under various non-cancelable operating leases, which expire at
various times through 2002 and generally contain renewal provisions and base
rent increases tied to changes in the consumer price index. Total monthly rental
payments for these leases approximated $32,700 at December 31, 2001. The Company
also rents office equipment under operating leases that expire at various times
through 2005 with monthly lease payments approximating $3,300.
Rental expense for 2001, 2000 and 1999 totaled $686,000, $578,800 and $303,500,
respectively.
Future minimum lease payments under non-cancelable operating leases with terms
greater than one year are $117,200, all due in 2002.
Bonus Arrangements
- ------------------
The Company has entered into a bonus agreement with the family of a deceased
employee, whereby the family will be paid $75,000 in the event the Company is
sold.
Royalty Agreements
- ------------------
The Company has entered into royalty agreements with various unrelated
companies which provide for a percentage royalty to be paid on sales of certain
products. Included in accrued expenses were royalties of $61,900 and $66,800 as
of December 31, 2001 and 2000, respectively related to these agreements. Royalty
expense included in cost of sales under these agreements for the years ended
December 31, 2001, 2000 and 1999 was $216,600, $176,200 and $199,800,
respectively.
Litigation and Settlements
- --------------------------
In February 1998 OFPI acquired the natural fruit juice and water bottling
operations of Sunny Farms Corporation for cash and 566,667 shares of common
stock. Half of the common stock consideration was held in escrow, contingent
upon earn-out factors for the year following the acquisition. Sunny Farms sought
voluntary relief pursuant to Chapter 7 of the U.S. Bankruptcy Code in November
1998. A Trustee was duly appointed shortly thereafter to protect the Chapter 7
estate of Sunny Farms. The Company reported its calculations under the earn-out
provisions in early 1999, which Sunny Farms disputed. In October 2000 attorneys
44
for the Trustee filed a complaint against the Company in the U.S. Bankruptcy
Court for the Northern District of California, challenging the Company's
earn-out calculations and requesting that a portion of the common stock held in
escrow be released.
The Company and the Sunny Farms bankruptcy Trustee reached an agreement on
October 9, 2001 regarding the earn-out calculations and subsequent shares to be
released from escrow, which was approved by the Bankruptcy Court on December 6,
2001. Accordingly, the Company has retired the escrowed shares and issued
118,000 shares of restricted common stock to the Trustee in final settlement of
this matter.
In November 1998 Global Natural Brands, Ltd. ("Global") and its four principals
filed a lawsuit against OFPI and its four principals, alleging unpaid wages and
seeking money damages and injunctive relief. Global had provided managerial
services to OFPI from April 1998 to October 1998, when OFPI terminated its
services.
SPOP assumed the litigation in connection with the Merger and reached a
settlement and release with Global in April 2000, and the case has been
dismissed. Under the terms of the settlement and release, SPOP paid Global cash
consideration of $145,000, and issued 400,000 shares of SPOP stock, which were
valued at the closing market price on the date of settlement. In addition, SPOP
issued to Global options to purchase 225,000 common shares at $2.25 per share
over an option term that expires on October 31, 2002.
In October 2000, the Company was notified by counsel for GFA Brands, Inc. that
nutritional claims pertaining to Spectrum Naturals Organic Margarine were
infringing upon two patents issued in the United States that pertain to
particular fat compositions suitable for human ingestion. The patent holder
exclusively licensed each of these patents to GFA Brands. Management believes
that the margarine does not infringe upon either patent, and further, that the
patents are unenforceable. Management engaged legal counsel that specialize in
this area and received an opinion letter in February 2001 confirming that, in
the opinion of counsel, the manufacture or sale of Spectrum Naturals Organic
Margarine does not infringe upon the GFA patents, either literally or under the
doctrine of equivalents.
The Company filed a complaint against GFA Brands for declaratory judgment of
non-infringement and invalidity of the two patents on August 28, 2001 in the
U.S. District Court for Northern California. The Complaint requests a
declaratory judgment that the margarine does not infringe either patent, a
declaratory judgment that both patents are invalid, that GFA Brands be enjoined
from threatening or asserting any action for infringement of either patent, and
attorney's fees.
Management believes the Company has meritorious defenses and that a loss is not
probable on the patent infringement claim at this time. Accordingly, no
provision for loss has been recorded at December 31, 2001.
Inventory Purchase Commitments
- ------------------------------
In the ordinary course of business, the Company enters into commitments to
purchase raw materials over a period of time, generally six months to a year, at
contracted prices. At December 31, 2001 and 2000 these future commitments, which
are at prices not in excess of those currently obtainable nor in quantities in
excess of normal requirements, aggregated approximately $5,958,000 and
$5,100,000, respectively.
In addition to the commitments above in the ordinary course of its business, the
Company had one contract for quantities of sunflower oil which exceeded the
Company's needs. During 2000 the supplier liquidated the Company's unfulfilled
purchase commitment at market prices for sunflower oil, which were lower than
the contract purchase price. The Company established a provision at December 31,
2000 for anticipated losses under the contract of $70,000. A settlement with the
supplier was reached on December 31, 2001 under which the Company paid $35,100
in full settlement of this issue.
45
Liquidity
- ---------
In connection with the Merger, the Company entered into a credit facility (the
"Credit Agreement") with its primary lender, Wells Fargo Business Credit
("WFBC"), consisting of term debt and a revolving line of credit, that is
secured by substantially all assets of the Company and bears interest at prime
plus 1% to 1.25% per annum. Advances under the revolving line of credit are
limited to a borrowing base consisting of certain accounts receivable and
inventory. Due to operating losses following the Merger, the Company was in
default of certain financial covenants that were based on financial projections
made at the time of the Merger. As a result of the default, WFBC began assessing
an additional 100 basis points to the interest rates charged under the Credit
Agreement as of July 17, 2000.
On October 18, 2001 the Company entered into an amendment (the "Amendment") to
the existing Credit Agreement with WFBC. The Amendment includes new financial
covenants based on the Company's current financial position and latest forecasts
of future results, a new term loan for additional production equipment purchased
by the Company, incentive targets for 2001 which have been achieved and will
enable the Company to reduce the interest rates charged by WFBC by 100 basis
points, and also entails a two year extension through October 2004. In
consideration for the Amendment, the Company paid WFBC an accommodation fee of
$20,000. As a result of executing the Amendment, the Company has returned to an
in-compliance status with WFBC. Accordingly, the Company has reclassified the
long-term portion of the WFBC term debt from current liabilities to long-term
debt for all periods presented.
At December 31, 2001 the Company had $955,800 in additional borrowing available
under its line of credit versus $311,900 at December 31, 2000. While the Company
still had negative working capital at December 31, 2001 of $1,029,700, this
reflected an improvement of $3,227,000 from the prior year.
The Company is highly leveraged and is currently investigating potential sources
of working capital from the sale of certain assets. However, Management believes
that future cash flows from operations should provide adequate funds to meet the
Company's estimated cash requirements for the foreseeable future. Furthermore,
the majority shareholder, who holds approximately 69% of the outstanding common
stock of the Company, has represented that he has the intent and ability to
support the operations of the Company with additional funding for the next
fiscal year, if necessary.
18. Related Party Transactions
- ------------------------------
In January 2001 the Company executed an unsecured, subordinated promissory note
with Mr. Jethren P. Phillips, CEO and Chairman of the Board for $50,000 bearing
interest at 15% per annum. The Company applied the proceeds towards its working
capital requirements. The Company retired the note on June 14, 2001 from
proceeds received from the sale of the tomato-based product lines. The Company
paid $3,700 of interest to Mr. Phillips during 2001 under the note.
In February 2001 the Company sold 160,000 restricted shares under Regulation D
of the Securities Act of 1933 to Mr. Thomas B. Simone, a non-executive director
of the Company, for $0.3125 per share, the closing price of the Company's common
stock as quoted on the NASDAQ OTC Bulletin Board system on the day the
transaction was approved by the Company's disinterested members of the Board of
Directors. The Company applied the proceeds of $50,000 toward the expansion of
its proprietary SpectraVac technology. In addition, the Company issued common
stock purchase warrants to Mr. Simone for an additional 160,000 shares at the
same price, which expire five years from the date issued.
The Company paid consulting fees of $70,000, $45,000 and $30,000 during the
years ended December 31, 2001, 2000 and 1999, respectively, for management
advisory services rendered by Moore Consulting, a firm owned and operated by
Phillip Moore, a non-executive director of the Company. In addition, the Company
paid Moore Consulting an investment banking fee of $78,200 in June 2001 in
connection with the sale of the tomato-based product lines as described in Note
2.
46
The Company paid interest at 10% per annum under notes payable to two
stockholders of $22,900, $33,500 and $7,500 during the years ended December 31,
2001, 2000 and 1999, respectively.
The Company also paid interest at 10% per annum under notes payable to two
stockholders that are also executives of the Company of $15,400, $23,600 and
$8,100 during the years ended December 31, 2001, 2000 and 1999, respectively.
19. Quarterly Information (Unaudited)
- ------------------------------------
The summarized quarterly financial data presented below reflects all adjustments
which in the opinion of management, are of a normal and recurring nature and
necessary to present fairly the results of operations for the periods presented.
In thousands, First Second Third Fourth Full
except per share data Quarter Quarter Quarter Quarter Year
- ----------------------------- -------- -------- -------- -------- --------
Year ended December 31, 2001:
Net Sales $ 10,212 $ 10,631 $ 10,595 $ 9,946 $ 41,384
Gross Profit 2,748 3,136 2,856 2,634 11,374
Operating Income (Loss) 95 (4,477) 374 (243) (4,251)
Net Income (Loss) (168) (4,726) 196 (508) (5,206)
Basic and Fully Diluted
Income (Loss) per Share $ 0.00 $ (0.10) $ 0.00 $ (0.02) $ (0.12)
Year Ended December 31, 2000:
Net Sales $ 10,776 $ 11,381 $ 10,615 $ 9,718 $ 42,490
Gross Profit 2,803 3,018 2,673 1,972 10,466
Operating Income (Loss) (113) 178 (270) (483) (688)
Net Income (Loss) (373) (201) (636) (792) (2,002)
Basic and Fully Diluted
Income (Loss) per Share $ (0.01) $ (0.01) $ (0.01) $ (0.02) $ (0.05)
47
Schedule II
Spectrum Organic Products, Inc.
Valuation and Qualifying Accounts
For the Years ended December 31, 1999, 2000, and 2001
Reserves for Allowances
Obsolete Against
Inventories Receivables
----------- -----------
Balances, January 1, 1999 $ 373,700 $ 903,200
Additions charged to profit and loss 86,300 917,300
Deductions for amounts written-off against
reserves -- (1,394,600)
----------- -----------
Balances, December 31, 1999 460,000 425,900
Additions charged to profit and loss 614,500 294,900
Deductions for amounts written-off against
reserves (509,000) (151,800)
----------- -----------
Balances, December 31, 2000 565,500 569,000
Additions charged to profit and loss 300,500 68,300
Deductions for amounts written-off against
reserves (516,000) (162,300)
----------- -----------
Balances, December 31, 2001 $ 350,000 $ 475,000
=========== ===========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
- ----------------------------------------------------------------------------
None.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Directors and Executive Officers
The name, age, position, and term of office of each of the Company's executive
officers and directors are set forth below:
Held
Name Age Position Since
---- --- -------- -----
Jethren P. Phillips 51 Chief Executive Officer & Chairman 10/06/99
of the Board
Neil G. Blomquist 50 President - Consumer Brands 10/06/99
Joseph J. Stern 49 President - Industrial Ingredients 10/06/99
John R. Battendieri 55 Vice President - Business 10/06/99
Development, Director
Hubert H. Holcombe 58 Vice President - Operations 11/29/99
Robert B. Fowles 46 Chief Financial Officer 06/26/00
Phillip L. Moore 52 Director (1)(2) 10/06/99
Charles A. Lynch 74 Director (1)(2) 04/01/00
Thomas B. Simone 59 Director (1)(2) 12/15/00
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Directors hold office for a period of one year from their election at the annual
meeting of shareholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors.
Background
The following is a brief summary of the business experience of each executive
officer and director of the Company for at least the last five years:
Jethren Phillips founded SNI in 1981 and has served as its Chief Executive
Officer and Chairman of the Board of Directors since its inception. Prior to
founding SNI, he was principal of Spectrum Brokerage, a natural foods brokerage
and product development company from 1978 to 1981. In 1995, he founded SCI, an
organic and natural food ingredients affiliate. Mr. Phillips has been involved
in the natural product industry since 1972. He attended California State
University at Los Angeles and Humbolt.
Neil Blomquist has served as SNI's President and Chief Operating Officer since
January 1994, and served as its Director of Sales and Marketing from 1989 to
1994. Mr. Blomquist has served on the Board of Directors of the California Olive
Oil Council since 1996. Mr. Blomquist holds a Bachelor's degree in Business
Management and Economics from the University of South Dakota. He has worked in
the natural products industry since 1976.
Joseph Stern, co-founder of OI, has served as OI's President since 1996.
Previously he founded Creative Team Consulting, which he operated from 1992 to
1996. From 1985 to 1991, Mr. Stern was President of United News, the fourth
largest publication distributor in the U.S. Mr. Stern founded Earthly Organics,
49
a natural and organic food distributor, and served as its President from 1975 to
1985, when it was sold to Cornucopia (now United Natural Foods). Mr. Stern
received a Bachelor of Science degree from the College of Business
Administration at Penn State University.
John Battendieri founded OFPI in 1988 and has served as its President and as a
director since 1988 and as its Chief Executive Officer since October 1998. In
1987, he founded Santa Cruz Naturals, an organic fruit juice company, which he
sold to Smuckers Corporation in 1992. Mr. Battendieri has grown, developed and
marketed a wide variety of natural food products for more than 25 years. He
attended Southern Illinois University.
Hubert Holcombe is Vice President/Operations for Spectrum Organic Products, Inc.
Mr. Holcombe joined Spectrum in November 1999, bringing over thirty years of
experience in food manufacturing. Prior to joining Spectrum, Mr. Holcombe was
Chief Operations Officer for Amy's Kitchen from April 1999 to November 1999.
From September 1998 to March 1999, Mr. Holcombe served as Executive Vice
President and General Manager of Arrowhead Mills, Inc. and as Vice President,
Manufacturing and Distribution for twelve years prior to that. He received his
Bachelor of Science degree in Industrial Engineering from the University of
Arkansas.
Robert Fowles joined Spectrum as Chief Financial Officer in June 2000 and brings
over twenty years of financial expertise in packaged consumer products. From
June 1999 until June 2000, Mr. Fowles was CFO of Cedco Publishing Company, a
privately held publisher of books, calendars and CD ROMS. Prior to that, Mr.
Fowles served for 19 years in various capacities within the food and beverage
businesses of Diageo, PLC, the last seven of which as CFO of Heublein Wines
Group. Mr. Fowles is a Certified Public Accountant and received a Bachelor of
Science degree in Business Administration from the University of Connecticut.
Phillip Moore has been a Director of the Company since October 6, 1999 and is
owner of Moore Consulting, a management consulting business established in 1996
to provide advisory services to the food industry. Mr. Moore has 25 years of
experience in the food industry and was President of Perimeter Sales and
Merchandising prior to founding Moore Consulting. He has a Bachelor of Science
degree in Accounting and Business from Guilford College of North Carolina.
Charles Lynch became a Director on April 1, 2000 and is Chairman of Marketing
Partners Company, a management and advisory source for existing and emerging
businesses. Mr. Lynch also serves as Chairman of the Board of Fresh Choice, Inc.
and serves on the Boards of Shari's Management Corporation and SRI
International, Inc. Additionally, Mr. Lynch serves on the Board of Directors of
three start-up companies which are not publicly traded. He has had executive
management responsibility for 70-plus companies, primarily in consumer related
businesses, and has been a director of over 20 major corporations. Mr. Lynch
received his Bachelor of Science Degree from Yale University and an Honorary
Degree of Doctors of Law from Golden Gate University.
Thomas Simone has been a Director of the Company since December 2000, and is the
principal of Simone & Associates, a management and advisory firm that invests in
and consults with healthcare and natural products companies. Mr. Simone also
serves as Chairman of the Board of United Natural Foods, Inc., the largest
distributor of natural products in the industry and also serves on the Board of
EcoDenT International. Prior to forming Simone & Associates, Mr. Simone was
President of McKesson Drug Company, America's largest pharmaceutical wholesaler.
During his twenty-year career with McKesson, Mr. Simone also served as Vice
President of Finance for McKesson Corporation, Executive Vice President of PCS
Health Systems, and Vice President & Controller. Mr. Simone holds Bachelor of
Science and Master of Business Administration degrees from DePaul University.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of the Company. Officers, directors and greater than
50
10% beneficial owners are required by SEC regulations to furnish the Company
with copies of all reports they file under Section 16(a). To the Company's
knowledge, based solely on its review of the copies of such reports furnished to
the Company and written representations that no other reports were required, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with during the fiscal year
ended December 31, 2001 with no exceptions.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The following table summarizes the annual compensation awarded or paid during
the last three fiscal years for the Company's Chief Executive Officer and the
next five most highly compensated officers (hereinafter, the "Named Executive
Officers").
Summary Compensation Table
Long-term
Annual Compensation Compensation
--------------------------- ------------
Other Securities
Fiscal Compen- Underlying
Name and Position Year Salary Bonus sation Options
------------------ ------ ------- ------- ------- ----------
Jethren Phillips (1) 2001 $205,000 $ -- $ 5,600 --
Chief Executive Officer & 2000 $240,000 $ -- $11,500 --
Chairman of the Board 1999 $237,500 $ 57,800 $11,000 --
Neil Blomquist (2) 2001 $148,600 $ 28,100 $ 4,600 --
President, 2000 $150,000 $ -- $ 5,000 50,000
Consumer Brands 1999 $149,100 $ 27,300 $ 5,100 --
Joseph Stern (3) 2001 $148,600 $ 32,500 $20,300(4) --
President, 2000 $150,000 $ -- $11,400(4) 50,000
Industrial Ingredients 1999 $107,500 $ 67,300 $46,500(4) --
John Battendieri (5) 2001 $145,400 $ 30,200 $ 7,400(4) --
Vice President, 2000 $127,000 $ -- $19,700(4) 50,000
Business Development 1999 $109,300 $ -- $45,600(4) --
Pete Holcombe (6) 2001 $120,500 $ 21,500 $ -- --
Vice President, 2000 $120,000 $ -- $ -- 250,000
Operations 1999 $ 5,900 $ -- $ -- --
Robert Fowles (7) 2001 $120,500 $ 23,800 $ -- 250,000
Chief Financial Officer 2000 $ 57,300 $ -- $ -- 250,000
1999 $ -- $ -- $ -- --
(1) Mr. Phillips was Chief Executive Officer of SNI and President of SCI during
1999 until October 6, 1999 when he became Chief Executive Officer of SPOP.
(2) Mr. Blomquist was President and Chief Operating Officer of SNI during 1999
until October 6, 1999 when he became President of Consumer Brands.
(3) Mr. Stern was President of OI during fiscal 1999 until October 6, 1999 when
he became President of Industrial Ingredients.
(4) Includes interest income from shareholder's note.
(5) Mr. Battendieri was President of OFPI during fiscal 1999 until October 6,
1999 when he became Vice President, Business Development for SPOP.
(6) Mr. Holcombe was appointed Vice President - Operations on November 29,
1999.
(7) Mr. Fowles was appointed Chief Financial Officer on June 26, 2000.
51
Under new arrangements which began January 1, 2001 the Company's non-executive
directors have the choice of annual cash compensation of $10,000 and 25,000
stock options at the market price on the date of grant with a four year vesting
schedule, or 80,000 stock options for serving on the Board and 20,000 additional
stock options for Chairmanship of a Committee, at the market price on the date
of grant, with one-third vested immediately and the remainder vesting ratably
over two years. Under either choice, non-executive directors will be reimbursed
for out-of-pocket expenses incurred in attending Board meetings.
In February 2001 Mr. Lynch and Mr. Moore elected to receive the Board fees for
2000 due to them of $10,000 each in restricted shares, under Regulation D of the
Securities Act of 1933, in a transaction approved by the Company's disinterested
Board members. The shares were issued at $0.3125 per share, the closing price of
the Company's common stock as quoted on the NASDAQ OTC Bulletin Board system on
the date the Board approved the transaction.
1995 Stock Option Plan
In November 1995 OFPI adopted a stock option plan (the "1995 Plan") which
provides for the grant of stock options intended to qualify as "incentive stock
options" or "nonqualified stock options" within the meaning of Section 422 of
the United States Internal Revenue Code of 1986. Incentive stock options are
issuable only to eligible officers and key employees of the Company.
The 1995 Plan is administered by the Board of Directors. As a result of the
Merger, the 1995 Plan was amended and restated to increase the aggregate number
of shares of common stock for issuance under the plan from 625,000 to 4,500,000
shares. The Board of Directors determines which individuals shall receive stock
options, the time period during which the options may be partially or fully
exercised, the number of shares of common stock that may be purchased under each
option and the option price. In connection with the Merger, the 1995 Plan
assumed the outstanding options under SNI's 1998 Equity Incentive Plan.
For incentive stock options the per share exercise price of the common stock may
not be less than the fair market value of the common stock on the date the
option is granted, and no person who owns, directly or indirectly at the time of
the granting of an incentive stock option, more than 10% of the total combined
voting power of all classes of stock of the Company is eligible to receive stock
options unless the option price is at least 110% of the fair market value of the
common stock subject to the option on the date of grant. No stock options may be
transferred by an optionee other than by will or the laws of descent and
distribution and, during the lifetime of an optionee, the option may only be
exercised by the optionee. Stock options may be exercised only if the option
holder remains continuously associated with the Company from the date of grant
to the date of exercise or 90 days after employment termination, whichever is
longer. Stock options under the Plan must be granted within ten years from the
effective date of the Plan. The exercise date of a stock option granted under
the Plan cannot be later than ten years from the date of grant. Any options that
expire unexercised or that terminate 90 days after an optionee ceases to be
employed by the Company become available once again for issuance. Shares issued
upon exercise of an option will rank equally with other shares then outstanding.
As of December 31, 2001 3,225,315 stock options were outstanding under the 1995
Plan for officers, directors and employees (2,070,515 for current executive
officers and directors) at exercise prices of $0.20 to $2.50 per share.
Option Grants in Last Fiscal Year:
The following table sets forth the options granted to the Named Executive
Officers for the year ended December 31, 2001. During the year there were no
exercises of stock options by the Named Executive Officers.
52
INDIVIDUAL GRANTS
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in or Base Expiration
Granted 2001 Price Date
----------- ------------ --------- -----------
Robert Fowles 250,000 34.4% $ 0.27 July 27, 2011
The above options vest ratably over a four-year period beginning July 27, 2001.
The following table sets forth the number of shares underlying outstanding
options at December 31, 2001 and their related value for the Named Executive
Officers:
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-money
at December 31, 2001 Options at December 31, 2001(1)
---------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Neil Blomquist 853,015 37,500 $ 41,200 $ --
John Battendieri 12,500 37,500 -- --
Joseph Stern 12,500 37,500 -- --
Pete Holcombe 62,500 187,500 -- --
Robert Fowles 62,500 437,500 -- 25,000
---------- ---------- ---------- ----------
Totals 1,003,015 737,500 $ 41,200 $ 25,000
========== ========== ========== ==========
(1) At closing stock price of $0.37 at December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The following table sets forth information concerning the holdings of common
stock by each Named Executive Officer, by each director and by all directors
and executive officers as a group. All shares are owned beneficially and of
record. The address of all persons is in care of the Company at 133 Copeland
Street, Petaluma, California.
Name Amount of Ownership Percent of Class
---- ------------------- ----------------
Jethren P. Phillips (1) 31,519,328 69.0%
John R. Battendieri (2) 3,977,499 8.7
Joseph J. Stern (2) 2,075,000 4.5
Neil G. Blomquist (1) 817,168 1.8
Phillip L. Moore (3) 256,013 *
Thomas B. Simone 160,000 *
Charles A. Lynch 28,000 *
------------ -------
All officers and directors as a
group (7 persons) 38,833,008 85.0%
============ =======
* Less than 1%
(1) All shares issued in connection with the Merger.
(2) Includes 1,975,000 shares issued in connection with the Merger.
(3) Includes 176,013 shares paid to Moore Consulting upon completion of the
Merger.
53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
In connection with the Merger, the Company assumed a promissory note held by Mr.
Battendieri for a capital loan made to Organic Ingredients, which had a balance
due as of October 6, 1999 of $102,000. The note is being amortized over 60
months with interest at 10% per annum. During 2001 the Company made payments
of $26,000 to Mr. Battendieri representing principal and interest payments under
the note.
Also in connection with the Merger, the Company assumed a promissory note held
by Mr. Stern for the advance of funds to Organic Ingredients. At October 6, 1999
the outstanding balance due including principal and interest was $110,400. The
note is being amortized over 60 months with interest at 10% per annum. During
2001 the Company made payments of $28,100 to Mr. Stern representing principal
and interest payments under the note.
In January 2001 the Company executed an unsecured, subordinated promissory note
with Mr. Phillips for $50,000 bearing interest at 15% per annum. The Company
applied the proceeds towards its working capital requirements. The Company
retired the note on June 14, 2001 with proceeds received from the sale of the
tomato-based product lines. The Company paid interest of $3,700 to Mr. Phillips
during 2001 under the note.
In February 2001 Thomas Simone, a non-executive Director of the Company,
purchased 160,000 restricted shares under Regulation D of the Securities Act of
1933, in a transaction approved by the Company's disinterested members of the
Board of Directors. The shares were purchased at $0.3125 per share, the closing
price of the Company's common stock as quoted on the NASDAQ Over the Counter
Bulletin Board system on the date the Board approved the transaction. In
addition to the shares purchased, the Company issued common stock purchase
warrants to Mr. Simone for an additional 160,000 shares at the same price, which
expire five years from the date issued.
The Company has retained Moore Consulting Company for consulting and management
advisory services. Moore Consulting is operated as a sole proprietorship by
Phillip Moore, a non-executive Director of the Company. During 2001 the Company
made payments of $70,000 to Moore Consulting Company for management advisory
services. In addition, the Company paid Moore Consulting an investment banking
fee of $78,200 in June 2001 in connection with the sale of the Company's
tomato-based product lines.
The Company believes that the terms and conditions of the above transactions
were fair, reasonable and consistent with terms the Company could have obtained
from unaffiliated third parties. Any future transactions with the Company's
executive officers or directors will be entered into on terms that are no less
favorable to the Company than those that are available from unaffiliated third
parties, and all such transactions will be approved by a majority of the
Company's disinterested directors.
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) Documents filed as part of this Report:
(1) Index to Financial Statements:
Page
----
Statement of Management Responsibility 20
Report of Independent Certified Public Accountants 21
Balance Sheets as of December 31, 2001 and 2000 22
Statements of Operations for the years ended December
31, 2001, 2000 and 1999 23
Statement of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999 24
Statements of Cash Flows for the years ended December
31, 2001, 2000 and 1999 25
Summary of Significant Accounting Policies 26
Notes to Financial Statements 31
(2) Index to Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 48
(3) Exhibits:
Exhibit
No. Description
------- -----------
1.01 Form of Representatives' Warrant (1)
1.02 Form of Amended Representatives' Warrant (1)
2.01 January 21, 1998 Agreement of Purchase and Sale of
Assets between the Registrant and Sunny Farms
Corporation (2)
2.02 February 10, 1998 Amendment to Agreement of Purchase
and Sale of Assets between the Registrant and Sunny
Farms Corporation (2)
2.03 Asset Purchase Agreement dated June 11, 2001 by and
between Spectrum Organic Products, Inc. and Acirca,
Inc. (7)
2.04 Escrow and Security Agreement dated June 11, 2001 by
and among Spectrum Organic Products, Inc., Acirca,
Inc. and Webster Trust Company, NA. (7)
2.05 Transition Services Agreement dated June 11, 2001 by
and between Spectrum Organic Products, Inc. and
Acirca, Inc. (7)
2.06 License Agreement dated June 11, 2001 by and between
Spectrum Organic Products, Inc. and Acirca, Inc. (7)
2.07 Noncompetition Agreement dated June 11, 2001 by and
among Spectrum Organic Products, Inc., Acirca, Inc.,
Jethren Phillips, and John Battendieri. (7)
2.08 Assignment and Assumption Agreement dated June 11,
2001 by and between Spectrum Organic Products, Inc.
and Acirca, Inc. (7)
2.09 Settlement Agreement dated October 9, 2001 by and
between Tevis T. Thompson, Jr., Trustee of the
Chapter 7 Estate of Sunny Farms Corporation and
Spectrum Organic Products, Inc. (8)
3.01 Form of Amended and Restated Articles of
Incorporation of Spectrum Organic Products, Inc. (4)
3.02 Bylaws of the Registrant (1)
3.03 Audit Committee Charter of the Registrant
10.01 Office and Warehouse Lease (Morgan Hill, California)
(1)
10.02 Employment Agreement with Mr. Battendieri (1)
10.03 Merger Agreement between the Registrant (Garden
Valley Naturals, Inc.) and Organic Food Products,
Inc. (1)
10.04 Loan Agreement with Mr. Steel (1)
55
10.05 Stock Redemption Agreement with Messrs. Nicholson
and Reedy (1)
10.06 Settlement Agreement with Mr. Nicholson (1)
10.07 First Amendment to Stock Redemption Agreement (1)
10.08 Amendment to Promissory Notes issued to Messrs.
Nicholson and Reedy (1)
10.09 Form of Subscription Agreement, Promissory Note and
Warrant for Bridge Loan (1)
10.10 1995 Stock Option Plan (3)
10.11 Incentive Stock Option Agreement (3)
10.12 Non-qualified Stock Option Agreement (3)
10.13 Agreement and Plan of Merger and Reorganization
dated May 14, 1999 by and between Organic Food
Products, Inc and Organic Ingredients, Inc. (4)
10.14 Agreement and Plan of Merger and Reorganization
dated May 14, 1999 by and between Organic Food
Products, Inc. and Spectrum Naturals, Inc. (4)
10.15 Form of Organic Food Products, Inc. Employment
Agreement (4)
10.16 Form of Organic Food Products, Inc. Shareholder
Lock-up Agreement (4)
10.17 Form of Voting Agreement dated May 14, 1999 between
Spectrum Naturals, Inc. and certain shareholders of
Organic Food Products, Inc. (4)
10.18 October 6, 1999 Credit and Security Agreement by and
between Organic Food Products, Inc., Organic
Ingredients, Inc., Spectrum Naturals, Inc. and
Spectrum Commodities, Inc. and Wells Fargo Business
Credit, Inc. (5)
10.19 September 23, 1999 Private Placement Memorandum by
Organic Food Products, Inc. (5)
10.20 Settlement Agreement and Mutual Release dated
November 12, 1999 by and between Spectrum Organic
Products, Inc. and Global Natural Brands, Ltd. (6)
10.21 Subordination Agreement dated October 6, 1999 by
and between Debora Bainbridge Phillips and Wells
Fargo Business Credit, Inc. (6)
10.22 Fifth Amendment to Redemption Agreement dated
October 6, 1999 by and between Spectrum Naturals,
Inc., Organic Food Products, Inc., Jethren Phillips
and Debora Bainbridge Phillips. (6)
10.23 Fourth Amendment to Redemption Agreement dated July
12, 1999 by and between Spectrum Naturals, Inc.,
Jethren Phillips and Debora Bainbridge Phillips. (6)
10.24 Third Amendment to Redemption Agreement dated July
9, 1999 by and between Spectrum Naturals, Inc.,
Jethren Phillips and Debora Bainbridge Phillips. (6)
10.25 Second Amendment to Redemption Agreement dated July
2, 1999 by and between Spectrum Naturals, Inc.,
Jethren Phillips and Debora Bainbridge Phillips. (6)
10.26 First Amendment to Redemption Agreement dated
September 11, 1998 by and between Spectrum Naturals,
Inc., and Debora Bainbridge Phillips. (6)
10.27 Redemption Agreement dated November 1, 1996 by and
between Spectrum Naturals, Inc. and Debora
Bainbridge Phillips. (6)
10.28 Guaranty Agreement dated June 6, 1997 by and between
Spectrum Naturals, Inc., Debora Bainbridge Phillips
and Jethren Phillips. (6)
56
10.29 Pledge Agreement dated June 6, 1997 by and between
Spectrum Naturals, Inc., Debora Bainbridge Phillips
and Richard W. Abbey, Attorney at Law. (6)
10.30 Promissory Note dated June 6, 1997 by and between
Spectrum Naturals, Inc. and Debora Bainbridge
Phillips. (6)
10.31 Settlement Agreement and Release dated March 28,
1999 by and between Spectrum Naturals, Inc. and
Nimbus Publications, Inc. (6)
10.32 Assignment of Food Processing and Packing Credit
Agreement dated November 27, 2000 by and between
Triple H Food Processors, Inc. and Tri H Investors
to Spectrum Organic Products, Inc. (6)
10.33 Agreement for Purchase and Sale of Fixtures dated
November 27, 2000 by and between Spectrum Organic
Products, Inc. and Tri H Investors. (6)
10.34 Letter dated February 16, 2001 from Spectrum Organic
Products, Inc. to the note holders under the private
placement completed on October 6, 1999, offering
them the option of converting their notes, which
were in default, to equity or a new note with a
three year payment schedule with interest at 10% and
common stock purchase warrants. (6)
10.35 First Amendment to Credit and Security Agreement
dated October 18, 2001 by and between Spectrum
Organic Products, Inc. and Wells Fargo Business
Credit, Inc. (8)
10.36 Lease Termination Agreement dated October 1, 2001 by
and between Spectrum Organic Products, Inc., the
Inouye Family Trust, Naomi Kanda and the Namimatsu
Trust.
10.37 Sixth Amendment to Amended and Restated Redemption
Agreement dated June 13, 2001 by and between
Spectrum Organic Products, Inc., Debora Bainbridge
Phillips and Jethren P. Phillips.
23.01 Consent of Independent Certified Public Accountants
dated March 20, 2002 by BDO Seidman, LLP, San
Francisco, California
99.01 Joint press release of Acirca, Inc. and Spectrum
Organic Products, Inc. dated June 12, 2001 titled
"Acirca Acquires Millina's Finest Sauces". (7)
(1) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2, File No. 333-22997, declared
effective on August 11, 1997.
(2) Incorporated by reference to exhibits filed with the
Registrant's Form 8-K on February 25, 1998.
(3) Incorporated by reference to exhibits filed with the
Registrant's Form S-8 on August 30, 2000.
(4) Incorporated by reference to annexes filed with the
Registrant's Joint Proxy Registration Statement on Form S-4,
File No. 333-83675, declared effective July 30, 1999.
(5) Incorporated by reference to exhibits filed with the
Registrant's Form 10-KSB on October 13, 1999.
(6) Incorporated by reference to exhibits filed with the
Registrant's Form 10-KSB on April 2, 2001.
(7) Incorporated by reference to exhibits filed with the
Registrant's Form 8-K on June 26, 2001.
(8) Incorporated by reference to exhibits filed with the
Registrant's Form 10-Q on November 6, 2001.
(b) Reports on Form 8-K during the quarter ended December 31, 2001:
None.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Petaluma, California on
March 8, 2002.
Spectrum Organic Products, Inc.
By: /s/ Robert B. Fowles
--------------------------------
Robert B. Fowles
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jethren P. Phillips Chief Executive Officer and 3/8/02
- ----------------------------- Chairman of the Board
JETHREN P. PHILLIPS
/s/ Robert B. Fowles Chief Financial Officer 3/8/02
- -----------------------------
ROBERT B. FOWLES
/s/ Larry D. Lawton Controller (Principal 3/8/02
- ----------------------------- Accounting Officer)
LARRY D. LAWTON
/s/ John R. Battendieri Director 3/8/02
- -----------------------------
JOHN R. BATTENDIERI
/s/ Charles A. Lynch Director 3/8/02
- -----------------------------
CHARLES A. LYNCH
/s/ Phillip L. Moore Director 3/8/02
- -----------------------------
PHILLIP L. MOORE
/s/ Thomas B. Simone Director 3/8/02
- -----------------------------
THOMAS B. SIMONE
58