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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.
[ ] TRANSITION REPORT UNDER 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.
----------------------------------------------------
(Exact name of registrant as specified in its Charter)
California 94-3076294
------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
133 Copeland Street
Petaluma, California 94952
--------------------------------------
(Address of principal executive offices)
(707) 778-8900
-----------------------------
Registrant's telephone number
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, no par value,
45,698,661 shares as of August 1, 2002. Transitional Small Business Disclosure
Format:
Yes [ ] No |X|
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
SPECTRUM ORGANIC PRODUCTS, INC.
BALANCE SHEETS
ASSETS
(Unaudited) December 31,
June 30, 2002 2001
------------ ------------
Current Assets:
Cash $ 1,000 $ 1,200
Accounts receivable, net 3,510,400 3,427,900
Inventories, net 4,400,000 5,966,600
Prepaid expenses and other current assets 122,000 68,900
------------ ------------
Total Current Assets 8,033,400 9,464,600
Property and Equipment, net 3,258,600 3,239,000
Other Assets:
Goodwill, net -- 1,470,200
Other assets, net 108,900 126,000
------------ ------------
Total Assets $ 11,400,900 $ 14,299,800
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 477,000 $ 546,400
Line of credit 2,269,900 4,598,800
Accounts payable, trade 3,414,700 3,676,600
Accrued expenses 694,400 904,300
Current maturities of notes payable, former stockholder 375,000 281,300
Current maturities of notes payable and
capitalized lease obligations 382,100 375,200
Current maturities of notes payable, stockholders 100,500 111,700
------------ ------------
Total Current Liabilities 7,713,600 10,494,300
Notes payable, former stockholder, less current maturities 634,900 811,200
Notes payable and capitalized lease obligations, less
current maturities 470,500 671,300
Notes payable, stockholders, less current maturities 173,400 225,500
------------ ------------
Total Liabilities 8,992,400 12,202,300
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
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 issued and outstanding at June 30, 2002 and
December 31, 2001 9,404,500 9,373,700
Accumulated deficit (6,996,000) (7,276,200)
------------ ------------
Total Stockholders' Equity 2,408,500 2,097,500
------------ ------------
Total Liabilities and Stockholders' Equity $ 11,400,900 $ 14,299,800
============ ============
The accompanying notes are an integral part
of the financial statements
F-1
SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net Sales $ 10,109,300 $ 10,496,100 $ 21,392,900 $ 20,569,200
Cost of Goods Sold 7,752,400 7,527,000 16,086,900 14,959,100
------------ ------------ ------------ ------------
Gross Profit 2,356,900 2,969,100 5,306,000 5,610,100
------------ ------------ ------------ ------------
Operating Expenses:
Sales and Marketing 1,585,300 1,473,000 3,200,000 2,998,500
General and Administrative 759,400 825,400 1,581,900 1,620,500
Amortization of Goodwill -- 171,000 -- 396,400
------------ ------------ ------------ ------------
Total Operating Expenses 2,344,700 2,469,400 4,781,900 5,015,400
------------ ------------ ------------ ------------
Gain (Loss) on Sales of Product Lines
(Note 2) 42,100 (4,976,400) 42,100 (4,976,400)
------------ ------------ ------------ ------------
Income (Loss) from Operations 54,300 (4,476,700) 566,200 (4,381,700)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest Expense (129,300) (245,100) (296,600) (526,400)
Other 23,900 (4,500) 10,600 14,000
------------ ------------ ------------ ------------
Total Other Expenses (105,400) (249,600) (286,000) (512,400)
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes (51,100) (4,726,300) 280,200 (4,894,100)
Provision for Income Tax Expense -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ (51,100) $ (4,726,300) $ 280,200 $ (4,894,100)
============ ============ ============ ============
Basic and Fully Diluted Income (Loss)
Per Share $ (0.00) $ (0.10) $ 0.01 $ (0.11)
============ ============ ============ ============
Weighted Average Shares Outstanding 45,698,661 45,154,200 45,698,661 44,971,988
============ ============ ============ ============
The accompanying notes are an integral part
of the financial statements
F-2
SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30, June 30,
2002 2001
------------ ------------
Net Income (Loss) $ 280,200 $ (4,894,100)
Adjustments to Reconcile Net Income (Loss) to Net Cash Used in
Operating Activities:
Provision for allowances against receivables 162,800 (70,500)
Provision for reserves for inventory obsolescence (23,700) (196,200)
Depreciation and amortization 210,800 206,000
Amortization of goodwill -- 396,400
(Gain) Loss on sales of product lines (42,100) 4,976,400
Loss on sale of fixed assets -- 10,900
Imputed interest on notes payable 11,100 24,000
Imputed interest on stock warrants issued 30,800 38,700
Capitalized interest on construction in progress (12,400) (26,000)
Restricted shares issued in lieu of director's fees -- 20,000
Changes in Assets and Liabilities:
Accounts receivable 92,200 (292,000)
Inventories 130,600 35,400
Prepaid expenses and other assets (40,500) 28,300
Accounts payable (261,900) (1,684,900)
Accrued expenses (209,900) 120,600
------------ ------------
Net Cash Provided By (Used In) Operating Activities 328,000 (1,307,000)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (225,100) (163,400)
Proceeds from sale of assets -- 5,500
Proceeds from sale of product lines and related inventories 2,770,000 2,696,000
Transaction fees on sale of product lines (123,900) (139,400)
------------ ------------
Net Cash Provided by Investing Activities 2,421,000 2,398,700
------------ ------------
Cash Flows from Financing Activities:
Increase (Decrease) in checks drawn against future deposits (69,400) 382,200
Proceeds from lines of credit 21,977,200 22,011,300
Repayment of lines of credit (24,306,100) (23,095,900)
Repayment of notes payable (158,000) (232,200)
Repayment of notes payable, former stockholder (93,800) (171,900)
Repayment of notes payable to stockholders (63,300) (50,500)
Proceeds from notes payable -- 50,000
Repayment of capitalized lease obligations (35,800) (34,600)
Restricted shares purchased by board member -- 50,000
------------ ------------
Net Cash Used in Financing Activities (2,749,200) (1,091,600)
------------ ------------
Net Increase (Decrease) In Cash (200) 100
Cash, beginning of the year 1,200 900
------------ ------------
Cash, end of the period $ 1,000 $ 1,000
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 1,600 $ 800
Cash paid for interest $ 267,100 $ 477,500
Non-Cash Financing Activities:
Conversion of notes payable to common stock -- $ 157,500
The accompanying notes are an integral part
of the financial statements
F-3
SPECTRUM ORGANIC PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation:
These are unaudited interim financial statements and include all
adjustments (consisting of normal recurring accruals) which, in the opinion
of Management, are necessary in order to make the financial statements not
misleading. These financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include certain disclosures
required by accounting principles generally accepted in the United States
of America. Accordingly, the statements should be read in conjunction with
Spectrum Organic Products, Inc. financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
Certain reclassifications have been made to the June 30, 2001 unaudited
interim financial statements to be consistent with the presentation at June
30, 2002. These reclassifications had no impact on net income or retained
earnings. In accordance with EITF Issue 01-09, slotting fees of $156,400
and $167,800 for the six months ended June 30, 2002 and 2001, respectively,
have been reclassified from marketing expense to net sales. Operating
results for the six-month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2002 or future periods.
2. Sales of Product Lines:
On April 25, 2002 the Company entered into an Asset Purchase Agreement with
Acirca, Inc. pursuant to which the Company sold certain product lines from
the Company's Aptos-based industrial ingredients business. The product
lines sold included the Organic Ingredients ("OI") business in fruits,
vegetables, concentrates and purees as well as certain private label
product lines sold to key retailers. The Spectrum Ingredients(R) product
lines consisting of culinary oils, vinegar and nutritional supplements were
not part of the sale.
The total consideration was $3,184,400 in cash, which included $1,420,400
for saleable inventory sold to Acirca, subject to post-closing adjustments.
Also included in the total consideration received was $250,000 that was
deposited into an escrow account to be applied towards indemnity claims of
Acirca or, to the extent not utilized for any indemnity claims of Acirca,
to be released to the Company in two equal installments on August 30, 2002
and December 31, 2002.
On June 11, 2001 the Company sold its tomato-based consumer product lines
to Acirca for $3,128,100 in cash which included $778,100 for saleable
inventory and $350,000 that was deposited into an escrow account to be
applied towards indemnity claims of Acirca. To the extent the escrowed
funds were not utilized for any indemnity claims of Acirca, they were to be
released to the Company in two equal installments at the six month and one
year anniversaries of the sale. The first installment of $175,000 was
received in full in December 2001. The final installment of $173,200 was
received on July 17, 2002 and consisted of $175,000 plus interest earned on
the escrowed funds less $6,700 paid to Acirca in full satisfaction of their
indemnity claims.
Since both product line sales comprised all of the remaining assets of both
OI and OFPI, the remaining net goodwill associated with the reverse
acquisition of both companies in October 1999 was written off as a result
of the sales. Accordingly, the Company recorded the following gains and
losses on the product line sales:
2
--Sales of Product Lines--
April 2002 June 2001
----------- -----------
Total cash consideration $ 3,184,400 $ 3,128,100
Less escrowed funds included above (250,000) (350,000)
----------- -----------
Net cash proceeds from sales $ 2,934,400 $ 2,778,100
Assets sold:
Inventories (1,420,400) (778,100)
Fixed assets, net of accumulated
depreciation (8,600) (10,500)
Goodwill, net of accumulated
amortization (1,470,200) (6,776,200)
Other assets (3,100) --
Transaction fees (123,900) (139,700)
Reserve for remaining inventories not
purchased (39,300) (50,000)
----------- -----------
Gain (loss) before collection of
previously escrowed funds $ (131,100) $(4,976,400)
Collection of June 2001 escrowed funds 173,200 --
----------- -----------
Net Gain (Loss) on Sales of Product Lines $ 42,100 $(4,976,400)
=========== ===========
In both cases, the Company applied the cash proceeds received against the
outstanding borrowing under its revolving line of credit.
Included in accounts receivable at June 30, 2002 was $164,300 of the cash
consideration for saleable OI inventories, which had not been received at
the date of this report and $173,200 representing the final installment of
the escrowed funds on the sale of OFPI, net of Acirca's indemnity claims,
which was received on July 17, 2002. After accounting for the subsequent
collection of the escrowed funds on the sale of the OFPI product lines,
which were not recorded at the time of the sale due to their contingent
nature, the final net loss on the sale of the OFPI product lines was
$4,628,200.
The transaction fees represented investment banking, legal and accounting
fees associated with closing the sales. The reserve recorded for remaining
inventories represented losses incurred or anticipated on inventories
previously sold by the Company under the disposed product lines that were
not purchased by Acirca.
3. Industrial Accident:
On April 25, 2002 a tragic industrial accident occurred at the Company's
manufacturing facility located in Petaluma, California in which two
employees died from asphyxiation during regular routine maintenance of
empty oil tanks. An investigation has been completed by the State of
California Division of Occupational Safety and Health ("CAL-OSHA") and the
Petaluma Police Department. At the date of this filing, the Company had not
yet received the report from CAL-OSHA on the investigation.
3
Included in cost of goods sold for the three months ended June 30, 2002 was
$254,100 in expenses directly attributable to the accident. Included in
that amount was a reserve of $200,000 to cover anticipated citations and
fines from CAL-OSHA, workers compensation appeals and attorneys fees. In
addition, the Company incurred $54,100 in cash expenses associated with the
accident for attorneys fees, safety consultants and assistance to the
families of the deceased employees. There have been no civil or criminal
actions filed against the Company at the time of this report.
4. Inventories:
Inventories consisted of the following:
June 30, December 31,
2002 2001
----------- -----------
Finished goods $ 4,330,700 $ 5,633,000
Raw materials 434,900 683,600
----------- -----------
Total Inventories 4,765,600 6,316,600
Less: Provision for obsolete inventory (365,600) (350,000)
----------- -----------
Net Inventories $ 4,400,000 $ 5,966,600
=========== ===========
5. Commitments and Contingencies:
Litigation and Settlements
--------------------------
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
owner 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.
4
GFA subsequently filed a motion to transfer venue to the U.S. District
Court for New Jersey. The Company filed its opposition to that motion,
however, the motion to transfer venue was granted in January 2002. A trial
date had not been set as of the date of this report.
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 June 30, 2002.
Liquidity
---------
The Company maintains a credit facility (the "Credit Agreement") with its
primary lender, Wells Fargo Business Credit, consisting of term debt and a
$9,000,000 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.
At June 30, 2002 the Company had $2,036,400 in available borrowing capacity
under its line of credit versus $955,800 at December 31, 2001. As disclosed
in Note 2 to the financial statements, the Company recently completed the
sale of certain assets to an unaffiliated third party which has
significantly strengthened the Company from a liquidity and working capital
standpoint. Moreover, Management believes that future cash flows from
operations should provide adequate funds to meet the Company's estimated
cash requirements for the foreseeable future.
ITEM 2. 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.
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.
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,
5
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.
Introduction:
Spectrum Organic Products, Inc. ("SPOP" or "the Company") competes in three
areas: natural and organic foods under the Spectrum Naturals(R) brand,
nutritional supplements under the Spectrum Essentials(R) brand, and industrial
ingredients for use by other manufacturers. The vast majority of the Company's
products are oil-based and the Company has positioned itself as the good fats
Company. Within the natural and organic foods category, the Company's products
include olive oils and other culinary oils, salad dressings, condiments and
butter-substitutes such as Spectrum Organic Margarine(R) and Spectrum Spread(R).
All of the Company's culinary products feature healthy fats, contain no trans
fats and are offered in a variety of sizes and flavors in both organic and
conventional offerings.
Within the nutritional supplement category, the Company's products include
organic flax oils, borage oil, Norwegian fish oil and other essential fatty
acids in both liquid and capsule forms. The Spectrum Essentials(R) products are
cold-pressed, nutritionally rich sources of Omega-3 and Omega-6 essential fatty
acids and are also offered in a variety of sizes and styles.
The Spectrum Ingredients(R) (formerly known as Spectrum Commodities, Inc.) sales
force offers organic culinary oils, vinegar and nutritional oils to other
manufacturers for use in their products. In addition, they bring incremental
purchasing power to the Company resulting in higher margins for our consumer
branded products.
The Company was formed on October 6, 1999 by the four-way reverse merger of
Spectrum Naturals, Inc. ("SNI"), its affiliate Spectrum Commodities, Inc.
("SCI"), Organic Ingredients, Inc. ("OI"), with and into Organic Food Products,
Inc. ("OFPI"). OFPI was the registrant prior to the merger, but since a
controlling interest in the 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.
On April 25, 2002 the Company sold the OI industrial ingredient business in
fruits, vegetables, concentrates and purees to Acirca, Inc., an unrelated third
party. Accordingly, results for the three and six month periods ended June 30,
2002 include the operating results associated with the OI disposed product lines
until the date of sale.
On June 11, 2001 the Company sold the OFPI tomato-based product lines to Acirca.
Accordingly, results for the three and six month periods ended June 30, 2001
include the operating results associated with the OFPI disposed product lines
until the date of sale.
The two dispositions have significantly strengthened the Company from a
liquidity and working capital standpoint. Additionally, the Company can now
focus its resources on its core business in healthy fats, butter substitutes and
essential fatty acid nutrition.
6
- --------------------------------------------------------------------------------
Results of Operations for the Three Month Periods Ending June 30, 2002 and June
30, 2001
- --------------------------------------------------------------------------------
Summary of Results:
Management believes that earnings before interest, taxes, depreciation,
amortization, gains or losses on the sales of product lines and the industrial
accident ("EBITDA as adjusted") is an important measure of the Company's
operating performance. For the three months ended June 30, 2002 EBITDA as
adjusted was $372,000 compared to $776,900 for the prior year, a decrease of
$404,900 or 52%. The lower performance in 2002 is discussed below and was
primarily attributable to decreased sales and gross profit and increased
marketing spending, partially offset by lower general and administrative
expenses.
Revenues:
SPOP's net sales for the three months ended June 30, 2002 were $10,109,300
compared to $10,496,100 for 2001, a decrease of $386,800 or 4%. The decrease in
2002 was entirely due to lost sales associated with the disposed product lines.
Comparable net sales (after the elimination of disposed or discontinued product
lines from both periods) increased by 15%. Within the consumer branded culinary
products, sales were significantly higher than prior year in packaged oils
(+15%) and packaged vinegar (+22%). Spectrum Ingredients sales were up
significantly versus the prior year (+37%) driven by strong demand for
industrial culinary oils and vinegar (both up 54%).
During the three months ended June 30, 2002 and 2001 net sales by product line
were as follows:
2002 2001 % Change
---- ---- -------
Spectrum Naturals(R)Culinary Products $ 4,387,500 $ 3,995,400 +10%
Spectrum Essentials(R)Nutritional Supplements 2,012,500 1,955,500 +3%
Spectrum Ingredients(R)/Private Label Products 2,729,100 1,987,100 +37%
Disposed/Discontinued Product Lines 980,200 2,558,100 -62%
------------ ----------- -------
Total Net Sales $10,109,300 $10,496,100 -4%
============ =========== =======
Cost of Goods Sold:
The Company's cost of goods sold increased as a percent of net sales for the
three-month period ended June 30, 2002 to 76.7% compared to 71.7% for the same
period in 2001. The increase was primarily due to the effects of the industrial
accident which included $254,100 of expenses directly attributable to the
accident, plus the impact of unabsorbed overhead as a result of the plant
shutdown following the accident. The directly attributable expenses of $254,100
included a reserve of $200,000 to cover anticipated citations and fines from
CAL-OSHA, worker's compensation appeals and attorney's fees. The remaining
$54,100 represented cash expenditures during the second quarter for attorney's
fees, safety consultants and assistance to the families of the deceased
employees.
7
Also contributing to the increase in cost of goods sold as a percent of net
sales versus the prior year were lower bottling efficiencies with the new
culinary oils packaging introduced during the first quarter.
Gross Profit:
Gross profit as a percent of net sales (gross margin) declined to 23.3% for the
second quarter versus 28.3% for the prior year. The sharp reduction was
primarily attributable to the effects of the industrial accident and the reduced
bottling efficiencies associated with the new culinary oils packaging.
Sales and Marketing Expenses:
The Company's sales and marketing expenses for 2002 were $1,585,300 or 15.7% of
net sales, versus $1,473,000 or 14.0% of net sales for 2001. The increase in
spending of $112,300 in 2002 was primarily attributable to increased advertising
expenses and consulting fees, partially offset by the elimination of eleven full
time employees formerly associated with the OI business disposed of on April 25,
2002.
General and Administrative Expenses:
The Company's general and administrative expenses for 2002 were $759,400 or 7.5%
of net sales, versus $825,400 or 7.9% of net sales for 2001. The decrease in
spending of $66,000 was primarily attributable to lower professional fees,
partially offset by increased legal fees and insurance premiums.
Amortization of Goodwill:
In accordance with SFAS 142, the Company ceased the amortization of goodwill
effective January 1, 2002. All remaining unamortized goodwill at January 1, 2002
was written-off in connection with the sale of OI on April 25, 2002.
Amortization expense for the prior year was $171,000 based on an estimated
useful life of twelve years.
Gain or Loss on Sales of Product Lines:
Since both product line sales comprised all of the remaining assets of OI and
OFPI, the remaining net goodwill associated with the reverse acquisition of both
companies in October 1999 was written-off as a result of the sales. Accordingly,
the Company recorded a net gain from the sales of product lines during the three
months ended June 30, 2002 of $42,100 and a non-cash loss of $4,976,400 during
the prior year on the sale of the OFPI product lines.
Interest Expense:
The Company's interest expense for 2002 was $129,300 versus $245,100 for 2001.
The reduction of $115,800 or 47% was primarily attributable to significant
reductions in the prime rate throughout CY 2001 and lower borrowing levels under
the Company's line of credit as a result of the sale of the Organic Ingredients
product lines on April 25, 2002.
Income Taxes:
No provision for income taxes was recorded for the quarter ended June 30, 2002
as the Company has federal and state net operating loss carryovers sufficient to
offset any state or federal income taxes that would be due on the quarter's
8
reported net income. Due to continued uncertainty regarding the Company's
realization of deferred tax assets, the Company maintained a 100% reserve at
June 30, 2002 against the net deferred tax assets.
Net Income (Loss):
The Company reported a net loss of $51,100 versus a net loss of $4,726,300 for
the three-month periods ended June 30, 2002 and June 30, 2001, respectively. The
improvement versus 2001 was primarily due to the non-cash loss during the prior
year on the sale of product lines, the elimination of goodwill amortization
effective January 1, 2002 and lower interest expenses, partially offset by
reduced gross profit in 2002 and the expenses associated with the industrial
accident.
- --------------------------------------------------------------------------------
Results of Operations for the Six-Month Periods Ending June 30, 2002 and
June 30, 2001
- --------------------------------------------------------------------------------
Summary of Results:
Management believes that earnings before interest, taxes, depreciation,
amortization, gains or losses on the sales of product lines and the industrial
accident ("EBITDA as adjusted") is an important measure of the Company's
operating performance. For the six months ended June 30, 2002, EBITDA as
adjusted was $989,000 compared to $1,197,100 for the prior year, a decrease of
$208,100 or 17%. The lower performance in 2002 was primarily attributable to
increased spending on marketing programs for the consumer branded product lines
and lower gross profit, partially offset by reduced general and administrative
expenses.
Revenues:
SPOP's net sales for the six months ended June 30, 2002 were $21,392,900
compared to $20,569,200 for 2001, an increase of $823,700 or 4%. The increase
was attributable to healthy sales growth in all of the Company's product lines,
partially offset by the lost sales associated with the disposed businesses.
Comparable net sales (after eliminating the sales of disposed or discontinued
product lines from both periods) increased by 17%. The increase was driven by
strong demand for Spectrum Ingredients(R) culinary oils (+62%), growth in
Spectrum Naturals(R) packaged mayonnaise (+14%) and packaged vinegar (+26%) and
growth in Spectrum Essentials(R) nutritional supplements (+17%).
During the six months ended June 30, 2002 and 2001, net sales by product line
were as follows:
2002 2001 % Change
---- ---- --------
Spectrum Naturals(R)Culinary Products $ 8,186,700 $ 7,413,300 +10%
Spectrum Essentials(R)Nutritional Supplements 4,464,100 3,827,100 +17%
Spectrum Ingredients(R)/Private Label Products 5,080,200 3,881,200 +31%
Disposed/Discontinued Product Lines 3,661,900 5,447,600 -33%
------------ ------------ -----
Total Net Sales $ 21,392,900 $ 20,569,200 +4%
============ ============ =====
9
Cost of Goods Sold:
The Company's cost of goods sold increased as a percent of net sales for the
six-month period ended June 30, 2002 to 75.2% compared to 72.7% for the same
period in 2001. The increase was primarily due to the effects of the industrial
accident that included $254,100 of expenses directly attributable to the
accident, plus the impact of unabsorbed overhead as a result of the plant
shutdown following the accident. The directly attributable expenses of $254,100
included a reserve of $200,000 to cover anticipated citations and fines from
CAL-OSHA, worker's compensation appeals and attorney's fees. The remaining
$54,100 represented cash expenditures during the second quarter for attorney's
fees, safety consultants and assistance to the families of the deceased
employees.
Also contributing to the increase in cost of goods sold as a percent of net
sales versus the prior year were reduced bottling efficiencies with the new
culinary oils packaging introduced during the first quarter.
Gross Profit:
Gross profit as a percent of net sales (gross margin) was 24.8% for 2002 versus
27.3% for the prior year. The sharp reduction was primarily due to the effects
of the industrial accident and reduced bottling efficiencies associated with the
new culinary oils packaging.
Sales and Marketing Expenses:
The Company's sales and marketing expenses for the six months ended June 30,
2002 were $3,200,000 or 15.0% of net sales, versus $2,998,500 or 14.6% of net
sales for 2001. The increase in spending of $201,500 was primarily attributable
to higher spending on advertising, sampling and consulting fees, partially
offset by the elimination of eleven full time employees formerly associated with
the OI business disposed of on April 25, 2002.
General and Administrative Expenses:
The Company's general and administrative expenses for the six months ended June
30, 2002 were $1,581,900 or 7.4% of net sales, versus $1,620,500 or 7.9% of net
sales for 2001. The decrease in spending of $38,600 was primarily attributable
to lower professional fees and utility costs, partially offset by higher
insurance premiums and legal fees.
Amortization of Goodwill:
In accordance with SFAS 142, the Company ceased the amortization of goodwill
effective January 1, 2002. All remaining unamortized goodwill at January 1, 2002
was written-off in connection with the sale of OI on April 25, 2002.
Amortization expense for the prior year was $396,400 based on an estimated
useful life of twelve years.
Gain or Loss on Sales of Product Lines:
Since both product line sales comprised all of the remaining assets of OI and
OFPI, the remaining net goodwill associated with the reverse acquisition of both
companies in October 1999 was written-off as a result of the sales. Accordingly,
the Company recorded a net gain from the sales of product lines during the six
months ended June 30, 2002 of $42,100 and a non-cash loss of $4,976,400 during
the prior year on the sale of the OFPI product lines.
10
Interest Expense:
The Company's interest expense for the six months ended June 30, 2002 was
$296,600 versus $526,400 for 2001. The reduction of $229,800 or 44% was
primarily attributable to significant reductions in the prime rate during 2001
and lower borrowing levels under the line of credit as a result of the sale of
the OI product lines on April 25, 2002.
Income Taxes:
No provision for income taxes was recorded for the six months ended June 30,
2002 as the Company has federal and state net operating loss carryovers
sufficient to offset any state or federal income taxes that would be due on the
first half year's reported net income. Due to continued uncertainty regarding
the Company's realization of deferred tax assets, the Company maintained a 100%
reserve at June 30, 2002 against the net deferred tax assets.
Net Income (Loss):
The Company reported net income of $280,200 for the six months ended June 30,
2002 versus a net loss of $4,894,100 for the prior year. The improvement in 2002
was primarily due to the non-cash loss during the prior year on the sale of
product lines, the elimination of goodwill amortization effective January 1,
2002 and lower interest expense, partially offset by increased marketing
spending in 2002 and the expenses associated with the industrial accident.
Seasonality:
Historically, the Company has experienced little seasonal fluctuation in
revenues. With regards to product purchasing, the Company will seasonally
contract for certain raw materials for the entire year at harvest time or at
planting time. These purchases take place annually from early spring to
mid-summer and are effected to reduce the risk of price swings due to demand
fluctuations. These annual purchases can create overages and shortages in
inventory.
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 $9,000,000 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.
The Company could not operate its business without the Credit Agreement with
WFBC or one similar to it. At June 30, 2002 the Company satisfied all financial
covenants and other requirements under the Credit Agreement. WFBC will be
setting new financial covenants for the remainder of 2002 and beyond in the near
future, which will be based on the Company's current financial position and
future projections. At June 30, 2002 the Company's financial performance was
substantially in excess of the covenants under the Credit Agreement. Based on
its prior experience with WFBC, Management believes the Company will continue to
meet future financial covenants. Should the Company fail to meet future
11
financial covenants (a "technical default"), WFBC would have certain rights,
including the right to call all amounts due immediately. However, Management
believes it would be 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 June 30, 2002 the Company had working capital of $319,800 which reflected an
improvement of $1,349,500 from December 31, 2001. As described in Note 2 to the
financial statements, the Company recently entered into an Asset Purchase
Agreement with an unrelated third party pursuant to which the Company sold
certain product lines, which has substantially improved the Company's liquidity
and capital resources. The assets sold included inventories and goodwill
associated with the Organic Ingredients business in fruits, vegetables,
concentrates, purees and certain private label products sold to key retailers.
Trade accounts receivable associated with the disposed product lines were not
sold. The disposed product lines represented approximately 20% of the Company's
net sales for the year ended December 31, 2001 and approximately 12% of its
gross profit. The impact of the disposition on EBITDA for the year ended
December 31, 2001 was immaterial. Further details on the disposition can be
found in the Company's Current Report on Form 8-K filed with the SEC on May 9,
2002.
The Company's bank overdraft as of June 30, 2002 was $477,000 compared to
$546,400 at December 31, 2001. During 2002 the Company generated $328,000 in
cash from operating activities, compared to using $1,307,000 in cash during
2001. The improvement was primarily due to the sharp reduction in trade payables
made during the prior year with the cash proceeds from the sale of the
tomato-based product lines in June 2001. That sale enabled the Company to bring
its vendors current for the first time since the merger.
Cash provided by investing activities during 2002 was $2,421,000 compared to
$2,398,700 in 2001. There were no significant variances between years as both
periods included cash proceeds from the sales of product lines of approximately
$2,700,000.
Cash used in financing activities was $2,749,200 in 2002 versus $1,091,600 in
2001. The increase was primarily due to the sharp reduction in the outstanding
borrowings under the Company's line of credit with the cash proceeds from the
sale of the OI product lines in April 2002. The second product line sale enabled
the Company to reduce its dependency on the line of credit for day-to-day
operations. At June 30, 2002 the Company had $2,036,400 in available borrowing
capacity under its line of credit versus $955,800 at December 31, 2001 primarily
as a result of the proceeds from the sale of the OI product lines.
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.
12
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.
There was one significant transaction with a related party during the second
quarter. An investment banking fee of $75,500 was paid to Moore Consulting, a
sole proprietorship operated by Phillip Moore, a non-executive director of the
Company. Moore Consulting has provided merger, acquisition and divestiture
services to the Company for several years. The fee paid represented 2.5% of the
total transaction value and, in the opinion of Management, was fair, reasonable
and consistent with terms the Company could have obtained from unaffiliated
third parties.
The Company's future results of operations and the other forward-looking
statements contained in this report, in particular any statements concerning
plant efficiencies, capital spending, research and development, competition,
marketing, manufacturing operations and other information provided herein
involve a number of risks and uncertainties. In addition to the factors
discussed above, other factors that could cause actual results to differ
materially are general business conditions and the general economy, competitors'
pricing and marketing efforts, availability of third-party materials at
reasonable prices, risk of nonpayment of accounts receivable, risk of inventory
obsolescence due to shifts in market demand, timing of product introductions,
and litigation involving product liability and consumer issues.
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 has
implemented the guidance provided by Issue 01-09 effective January 1, 2002.
There was no material impact on the Company's financial position or results of
operations except that slotting fees are now accounted for as a reduction to net
sales, and the prior year results have been restated to a comparable basis.
Slotting fees for the six months ended June 30, 2002 and 2001 were $156,400 and
$167,800, respectively.
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
13
amounts of certain intangible assets and goodwill based on the criteria in SFAS
141. The Company's financial position and results of operations have not been
affected by the adoption of 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. The Company has implemented SFAS 142
and ceased the amortization of goodwill to expense effective January 1, 2002.
Also as required by SFAS 142 the Company has reassessed the useful lives of its
intangible assets other than goodwill during the first quarter of 2002. The
Company has deemed the useful lives of its other intangible assets, which are
trademarks, label development costs and a covenant not-to-compete, as
appropriate.
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's financial position and results of operations have not
been affected by the adoption of SFAS 144.
ITEM 3. 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.
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):
14
Expected Maturity Date
Outstanding (Years Ended December 31)
June 30, 2002 2002 2003 2004 2005 2006 2007+
------------- ---- ---- ---- ---- ----- -----
Long Term Debt:
Fixed Rate $1,465.2 $ 302.8 $586.6 $259.6 $40.7 -- $275.5
Avg. Int. Rate 10.7% 11.2% 11.3% 11.3% 10.0% -- 8.6%
Variable Rate $ 532.1 $ 103.2 $206.4 $185.8 $36.7 -- --
Avg. Int. Rate 6.0% 6.3% 6.5% 7.0% 7.5% -- --
Throughout the course of its fiscal year, the Company utilizes a variable
interest rate line of credit at various borrowing levels. For the six months
ended June 30, 2002 the average outstanding balance under the line of credit was
$4,311,000 with a weighted average interest rate of 6.7% per annum. For the six
months ended June 30, 2001 the average outstanding balance under the line of
credit was $5,908,000 with a weighted average interest rate of 10.1%. The line
of credit agreement calls for the interest rate to float at the prime rate plus
100 basis points.
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 June 30, 2002 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
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.
GFA subsequently filed a motion to transfer venue to the U.S. District Court for
New Jersey. The Company filed its opposition to that motion, however, the motion
to transfer venue was granted in January 2002.
15
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 June 30, 2002. A trial date had not been
set as of the date of this report.
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
During the six months ended June 30, 2002 the Company did not issue any shares
of its common stock.
The Company has not in the past nor does it intend to pay cash dividends on its
common stock in the foreseeable future. The Company intends to retain earnings,
if any, for use in the operation and expansion of its business.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
99.03 Certification of Chief Executive Officer
99.04 Certification of Chief Financial Officer
(b) Reports of Form 8-K:
The Company filed a Current Report on Form 8-K on May 9, 2002
disclosing the sale of the Organic Ingredients product lines on April
25, 2002 and the accidental death of two employees during routine oil
tank maintenance on the same day. Included were pro-forma financial
statements which disclosed the changes necessary to the balance sheet
at December 31, 2001 as if the transaction was consummated on that
date, and to the statement of operations for the year ended December
31, 2001 as if the transaction had occurred on January 1, 2001.
16
SIGNATURES
Pursuant to the requirements 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.
Date: August 7, 2002 SPECTRUM ORGANIC PRODUCTS, INC.
By: /s/ Robert B. Fowles
-------------------------------
Robert B. Fowles
Duly Authorized Officer &
Chief Financial Officer
17