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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, 2002
[ ] 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 of incorporation) (I.R.S. Employer
Identification Number)
5341 Old Redwood Highway
Petaluma, California 94954
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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
--------------
(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 10, 2003 there were 45,705,571 shares of the Registrant's common
stock outstanding.
As of March 10, 2003 the aggregate market value of the Registrant's no par value
common stock, excluding shares held by affiliates, was $2,774,520 based upon a
closing bid price of $0.31 per share of common stock on the OTC Bulletin Board
System.
PART I
ITEM 1. BUSINESS
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Introduction
Spectrum Organic Products, Inc. ("SPOP" or "the Company") competes in three main
areas: natural and organic foods under the Spectrum Naturals(R) brand, essential
fatty acids nutritional supplements under the Spectrum Essentials(R) brand, and
industrial ingredients for use by other manufacturers sold under the Spectrum
Ingredients name. 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 hydrogenated or trans fats
and are offered in a variety of sizes and flavors in both organic and
conventional, non-GMO 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.)
product lines include organic and conventional non-GMO culinary oils, organic
vinegar and nutritional oils offered to other manufacturers for use in their
products. In addition, they bring incremental purchasing power to the Company
resulting in higher margins for the consumer branded products.
This Form 10-K 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.
Business Combination and Subsequent Divestitures
The Company was formed on October 6, 1999 by the four-way reverse merger of
three private companies: Spectrum Naturals, Inc. ("SNI"), its affiliate Spectrum
Commodities, Inc. ("SCI") and Organic Ingredients, Inc. ("OI"), into the public
company 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 and SCI as acquirer and OI and OFPI as acquirees.
On June 11, 2001 the Company sold the OFPI tomato-based product lines to Acirca,
Inc., an unrelated third party. Accordingly, operating results for 2001 include
the results associated with the OFPI disposed product lines from January 1 until
the date of sale.
On April 25, 2002 the Company sold the OI industrial ingredient product lines in
fruits, vegetables, concentrates and purees to Acirca. Accordingly, operating
results for 2002 include the operating results associated with the OI disposed
product lines from January 1 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.
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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(R) brand was launched. Over time SNI
expanded its product lines to include condiments and salad dressings under the
Spectrum Naturals(R) brand and nutritional supplements under the Spectrum
Essentials(R) 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 utilizing mechanical (expeller)
pressing techniques. 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 healthy
fat salad dressings since 1996. Spectrum Spread(R), a healthy alternative to
butter or margarine was introduced in 1993.
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 the Company 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. The SCI product lines are now offered for sale
under the Spectrum Ingredients ("SI") 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 OTC
Bulletin Board System under the ticker symbol "SPOP".
The Company 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 Whole Foods, Wild Oats, Raley's and Trader
Joe's.
SPECTRUM NATURALS(R)CULINARY 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 culinary product lines, which include organic and Orthodox
Union Certified products, include the following:
Culinary Oils
The Company's largest culinary product line is olive oil. SPOP markets organic
and conventional extra virgin olive oil in various sizes. The Company also
offers olive oils from various geographic regions including Greece, Spain, Italy
and California.
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SPOP also markets other refined, unrefined, blended and organic cooking oils
under the Spectrum Naturals(R) 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 for use as a healthy alternative to butter or margarine:
Spectrum Naturals Canola Spread and Essential Omega Spread made with organic
flax and soy oils. SPOP also introduced the first organic margarine during 2000.
Salad Dressings
The Company also markets organic salad dressings in full-fat, low-fat and fat
free 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. During 2002
the Company introduced eight new flavors of dressings and dips in new packaging.
Cooking Sprays
There are five six-ounce cooking sprays that compete with their mass-market
counterpart "Pam". The Spectrum Super Canola Spray Oil is made from high oleic
canola oil and the Extra Virgin Olive Spray Oil is made from a blend of extra
virgin olive oil and canola oil. Recently introduced in the six-ounce size are
Canola Spray Oil with Butter Flavor, Grapeseed Spray Oil and Extra Virgin Olive
Spray Oil with Garlic Flavor. There is also a 16-ounce version of the Spectrum
Super Canola Spray Oil.
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(R) shortening is a healthy alternative to hydrogenated
shortening and partially hydrogenated oils.
IQF Whole Frozen Fruits and Vegetables
There are eight Individually Quick Frozen whole frozen fruits offered by the
Company for sale in foodservice sizes: bananas, raspberries, strawberries,
peaches, mango, papaya, blueberries and pineapple. IQF whole vegetables include
peas and corn.
SPECTRUM ESSENTIALS(R)NUTRITIONAL SUPPLEMENT PRODUCT LINES
SPOP markets essential fatty acid nutritional supplements under the Spectrum
Essentials(R) brand. The supplements are available 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 sizes, flavors and
blends. The Spectrum Essentials(R) brand also includes two fiber supplements for
colon care.
SPECTRUM INGREDIENTS PRODUCT LINES
The Company offers a wide variety of certified organic and non-organic
industrial ingredients to other food manufacturers, which include the following:
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Page 4
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 and
bulk capsules.
PRIVATE LABEL PRODUCT LINES
The private label product lines include programs for natural and organic food
retailers such as Wild Oats and Tree of Life. These programs include canola oil,
mayonnaise, olive oil, various fruit juices and tomato-based products.
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, 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 and
Canada. 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 2002 United Natural Foods, Inc. accounted for approximately 50% of the
Company's net sales, versus 39% in 2001 and 29% in 2000. 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 overall success as the largest distributor in the organic and
all-natural foods industry.
The Spectrum Ingredient product lines historically have been sold to domestic
food manufacturers.
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.
To date the Company has focused on its core natural foods distribution network.
SPOP 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 healthy fat
products containing no hydrogenated fats 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.
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Page 5
The Company primarily uses outside resources in developing its new consumer
branded products. Research and development expenses are included in general and
administrative expense.
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 5341 Old Redwood Highway, Suite 400, Petaluma, which houses the
sales, marketing, finance, human resource, administration, operations personnel
and executive offices.
SPOP uses co-packers to process and package its vinegars, condiments, dressings,
mayonnaise, shortening, spreads and encapsulated nutritional products. In July
2002 the Company's third party warehousing and distribution provider closed its
facility in Lathrop, California and relocated the warehousing and distribution
of the Company's consumer products to its facility in Rancho Cucamonga,
California. Warehousing and distribution of the Spectrum Ingredients industrial
oils continues to be handled at the Copeland Street facility.
The Company's primary co-packer of branded products represented approximately
11% of the cost of goods sold in 2002 versus 6% in 2001 and 9% in 2000. While a
change in co-packers 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.
Organic raw materials are available from a limited number of sources. The
Company had one vendor of canola oil that supplied approximately 11% of SPOP's
raw material purchases in 2002 versus 6% in 2001 and 9% in 2000. 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 and nutritional supplement 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. In the natural foods
category SPOP's principal competitors are private label offerings and Hain Pure
Foods. SPOP competes with numerous brands in the non-organic vegetable oil
category including Puritan and Wesson. In the organic culinary oil category,
competitors include Colavita, Hain and Dal Raccolto. The nutritional supplement
competitors include Health From The Sun and Barleans. The Company also faces
competition in the natural food condiment market from Eden, Canoleo, Nasoya,
Annie's and Braggs. Competitors in the non-organic condiments market include
H.J. Heinz Company and International Home Foods, which markets Best Foods
Mayonnaise.
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
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manufacturing facilities. As a manufacturer and distributor of foods, the
Company is subject to regulation by the U.S. Food and Drug Administration
("FDA"), the Federal Trade Commission ("FTC"), the United States Department of
Agriculture ("USDA") and the Occupational Safety and Health Administration
("OSHA") in connection with the manufacture, sale, safety, advertising,
handling, storage, transportation, labeling and processing of food products. In
order to offer organic and kosher 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 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 USDA adopted regulations with respect to the labeling and certification of
organic foods which were implemented on October 21, 2002. The Company has made
the required label revisions and is in compliance with the additional
requirements for third party organic certification.
The Spectrum Essentials(R) brand of nutritional supplements are subject to the
Dietary Supplement Health and Education Act of 1994 or "DSHEA", which went into
effect in March 1999. DSHEA defines dietary supplements as a new category of
food, separate from conventional food. DSHEA requires specific nutritional
labeling requirements for dietary supplements and permits substantiated,
truthful and non-misleading statements of nutritional support to be made in
labeling, such as statements describing general well-being resulting from
consumption of a dietary ingredient, or the role of a nutrient or dietary
ingredient in affecting or maintaining a structure or function of the body.
The Company is also subject to federal and state laws establishing minimum wages
and regulating overtime and working conditions.
Employees
As of March 10, 2003 SPOP had 70 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 59,000 square feet at a
combined monthly rate of $36,500. In December 2002 the Company consolidated its
office space into its new headquarters facility at 5341 Old Redwood Highway,
Petaluma, California. Management believes that these facilities are adequate for
the Company's needs.
ITEM 3. LEGAL PROCEEDINGS
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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.
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Page 7
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 of 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 of
New Jersey. The Company filed its opposition to that motion, however, the motion
to transfer venue was granted in January 2002. The case is currently in the
discovery phase. 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 December 31, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
An annual meeting of shareholders was held on November 6, 2002 at the Company's
headquarters in Petaluma, California. A definitive proxy statement was filed
with the SEC on October 9, 2002 and is incorporated herein by reference.
There were four matters brought before the shareholders for their approval:
1. To approve a revision to Section 15 of the Company's Bylaws increasing the
authorized number of directors from five to a minimum of five and a maximum
of nine.
2. To elect five Director Nominees to another term and to elect two Director
Nominees to their initial terms.
3. To approve an amendment to the Company's Amended and Restated 1995 Stock
Option Plan (the "Plan") increasing the number of shares of common stock
reserved for issuance under the Plan from 4,500,000 to 7,000,000 shares.
4. To ratify the appointment of BDO Seidman, LLP as the Company's independent
public accountants for the current fiscal year.
All four matters were approved by the shareholders. The following table
summarizes the results of the voting:
For Against Abstain Total Votes
--- ------- ------- -----------
1. Bylaw Revision 39,975,847 41,130 3,800 40,020,777
2. Election of Director
Nominees:
Jethren P. Phillips 42,684,257 4,880 78,401 42,767,538
John R. Battendieri 42,686,457 2,680 78,401 42,767,538
Phillip L. Moore 42,686,457 2,680 78,401 42,767,538
Charles A. Lynch 42,686,457 2,680 78,401 42,767,538
Thomas B. Simone 42,686,457 2,680 78,401 42,767,538
Neil G. Blomquist 42,686,457 2,680 78,401 42,767,538
Conrad W. Hewitt 42,686,457 2,680 78,401 42,767,538
3. Amend Stock Option Plan 39,701,153 260,400 4,200 39,965,753
4. Reappoint BDO Seidman, LLP 42,745,838 10,500 6,000 42,762,338
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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 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 the OTC Bulletin Board for the periods
indicated.
Price
-----
High Low
---- ---
Fiscal Year Ended December 31, 2002:
First Quarter $0.44 $0.18
Second Quarter 0.48 0.24
Third Quarter 0.60 0.36
Fourth Quarter 0.47 0.28
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
The last recorded sale price of the Company's common stock was $0.31 per share
on the OTC Bulletin Board System on March 4, 2003.
As of March 10, 2003 the Company had approximately 550 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.
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Shares Issued During the Years Ended December 31, 2002, 2001 and 2000
During the years ended December 31, 2002, 2001 and 2000, the Company issued
shares of its common stock as follows for the reasons indicated:
Cash and
Month Shares Non-Cash
Issued Issued Proceeds
------ ------ --------
Year Ended December 31, 2002:
Shares issued for the exercise of common stock
purchase warrants under the private placement
notes Nov 2002 6,910 $ --
========= ========
Year Ended December 31, 2001:
Shares issued to Thomas B. Simone, a non-
executive Director of the Company, under a
private sale Feb 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 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 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 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
========= ========
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.
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Shares Authorized for Issuance Under Equity Compensation Plans
The following table provides information regarding compensation plans under
which equity securities of the Company are authorized for issuance as of
December 31, 2002:
Available Shares
Shares to be Issued Weighted Average Remaining for Future
Plan Category Upon Exercise of Exercise Price of Issuance Under Equity
Outstanding Options Outstanding Options Compensation Plans
- ------------------ ------------------- ------------------- -------------------
Equity Compensation
Plans Approved by
Security Holders 3,898,115 $ 0.34 3,101,885
Equity Compensation
Plans not Approved
by Security Holders -- -- --
--------- ------ ---------
Totals 3,898,115 $ 0.34 3,101,885
========= ====== =========
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ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
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,
------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Operating Data:
Net Sales $40,660 $41,051 $42,199 $29,619 $22,187
Gross Profit 10,583 11,041 10,175 8,660 6,500
EBITDA, as Adjusted 2,274 2,442 1,189 1,421 1,492
Income (Loss) from Operations 1,776 (4,251) (688) 762 1,144
Net Income (Loss) 1,120 (5,206) (2,002) (113) 403
Weighted Average Shares Outstanding 45,700 45,279 44,234 35,095 32,336
Net Income (Loss) per Share $ 0.02 $ (0.12) $ (0.05) $ (0.00) $ 0.01
Cash Dividends Declared per Share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Cash Flow Data:
Cash Provided by (Used in)
Operating Activities $ 690 $ (907) $ 360 $ (172) $ 701
Cash Provided by (Used in)
Investing Activities 2,372 2,343 20 (1,530) (597)
Cash Provided by (Used in)
Financing Activities (3,062) (1,436) (379) 1,702 (258)
As of December 31,
------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Working Capital (Deficit) $ 597 $(1,030) $(4,257) $(3,323) $ 413
Total Tangible Assets 12,145 12,776 13,057 14,654 6,866
Total Assets 12,187 14,300 22,841 24,974 7,226
Total Long-term Debt 1,084 1,708 2,001 2,788 2,811
Total Stockholders' Equity 3,274 2,098 6,850 8,413 141
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. The number of shares outstanding and per-share amounts
have been retroactively restated where applicable for all periods presented.
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. On June
11, 2001 the Company sold the OFPI product lines to a third party, accordingly,
results for 2001 include the OFPI product lines from January 1 to the date of
sale. On April 25, 2002 the Company sold the OI product lines to a third party,
accordingly, results for 2002 include the OI product lines from January 1 to the
date of sale.
EBITDA, as adjusted reflects earnings from operations before interest, taxes,
depreciation, amortization, non-cash losses on asset writedowns, the sales of
product lines and the industrial accident. 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.
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The calculations for EBITDA, as adjusted are detailed in the following table
($ in thousands):
Years Ended December 31,
------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Income (loss) from operations $ 1,776 $(4,251) $ (688) $ 762 $ 1,144
(Gain) loss on sales of product lines (210) 4,803 -- -- --
Loss on industrial accident, asset
impairment writedown and plant
closure 254 950 436 -- --
Amortization of goodwill -- 521 910 222 --
Depreciation and amortization 454 419 531 437 348
-------- -------- -------- -------- --------
EBITDA, as adjusted $ 2,274 $ 2,442 $ 1,189 $ 1,421 $ 1,492
======== ======== ======== ======== ========
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.
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 its 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 the
forward-looking statements.
Introduction
Spectrum Organic Products, Inc. ("SPOP" or "the Company") competes in three main
product categories: natural and organic foods under the Spectrum Naturals(R)
brand, nutritional supplements under the Spectrum Essentials(R) brand, and
industrial ingredients sold by the Spectrum Ingredients sales force 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 Spectrum Naturals(R) brand, 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 hydrogenated fats and are
offered in a variety of sizes and flavors in both organic and conventional
offerings.
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Page 13
Within the Spectrum Essentials(R) brand, 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 (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 the 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 acquires.
In early 2001 it became clear to Management that the Company was severely
under-capitalized and cash constrained as a result of the merger. Furthermore,
the synergies anticipated at the date of the merger were elusive and the
difficulties of combining four disparate entities were greater than anticipated.
Therefore, on June 11, 2001 the Company sold the OFPI tomato-based product lines
to Acirca, Inc., an unrelated third party. Accordingly, results for the year
ended December 31, 2001 include the operating results associated with the OFPI
disposed product lines until the date of sale.
On April 25, 2002 the Company sold the OI industrial ingredient business in
fruits, vegetables, concentrates and purees to Acirca. Accordingly, results for
the year ended December 31, 2002 include the operating results associated with
the OI disposed product lines until the date of sale.
The two dispositions have significantly strengthened the Company from a
liquidity and working capital standpoint. The Company plans to focus its future
resources on its core business in healthy fats, butter substitutes and essential
fatty acid nutrition.
Critical Accounting Policies and 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 the 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. The
Company bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for the carrying values of assets and
liabilities that are not readily apparent from other sources. On an on-going
basis, the Company re-evaluates all of its estimates utilizing the most recent
information available to it. Actual results may differ materially from these
estimates under different assumptions or conditions and as additional
information becomes available in future periods. The most significant estimates
made by the Company are those concerning reserves against accounts receivable
and inventory, the industrial accident reserve and the deferred tax asset
valuation allowance. The following discussion provides further detail on those
estimates.
Accounts Receivable Allowances - The Company provides allowances against
accounts receivable for estimated bad debts, returns and deductions by customers
for trade promotions and programs. These allowances are based upon the Company's
historical experience with bad debt write-offs and customer deductions, customer
creditworthiness, payment trends and general economic conditions. Allowances for
bad debts and customer deductions were $416,000 at December 31, 2002 on gross
trade accounts receivable of $3,306,800. While this estimate is one of the more
significant estimates the Company makes in the preparation of its financial
statements, Management does not consider it to be highly uncertain.
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Page 14
Inventory Reserves - The Company provides reserves for obsolete, excess and
slow-moving inventories in order to properly value its inventory at the lower of
cost or market. The reserve estimates are based upon historical inventory usage,
spoilage, current market conditions and anticipated future demand. Reserves for
obsolete inventories were $548,000 at December 31, 2002 on total inventories of
$5,817,600. While this estimate is one of the more significant estimates the
Company makes in the preparation of its financial statements, Management does
not consider it to be highly uncertain.
Deferred Tax Asset Valuation Allowance - As of December 31, 2002 the Company had
net deferred tax assets of $1,997,900 primarily resulting from net operating
loss carryforwards ("NOLS"). At December 31, 2002 the NOLS consisted of
approximately $5,200,000 of Federal NOLS that expire at various times through
2021, and $2,800,000 of state NOLS that expire at various times through 2012.
The majority of the NOLS originated from the pre-merger operations of OFPI. As a
result of OFPI's acquisition by SNI, OFPI experienced an ownership change in
excess of 50% for federal and state income tax purposes. Therefore, an annual
limitation is placed by the taxing authorities on the Company's right 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, Management maintains a 100% valuation allowance against the net
deferred tax assets for all periods presented in the financial statements. This
valuation allowance is highly uncertain because its value depends upon the
future taxable income of the Company.
Industrial Accident Reserve - During June 2002 the Company established a reserve
of $200,000 to cover anticipated future expenses associated with an industrial
accident that occurred on April 25, 2002 (see Note 3). The reserve was
established to cover anticipated citations and fines from CAL-OSHA, applications
to the Workers Compensation Appeals Board of the State of California for serious
and willful misconduct penalties to be levied against the Company, and
attorney's fees. As of December 31, 2002 there was $153,700 remaining in the
industrial accident reserve. This reserve is highly uncertain because the
CAL-OSHA proposed fines of $137,900 have been appealed and the applications for
serious and willful misconduct penalties, if litigated, are an all-or-nothing
proposition under which the Company will either be liable for $125,000 in total
or nothing. Furthermore, the reserve does not cover potential criminal penalties
against the Company which the Sonoma County District Attorney's office can levy
for up to three years following the accident. Management does not believe the
Company or any of its employees were guilty of criminal behavior in connection
with the industrial accident. There have been no criminal actions filed against
the Company as of the date of this report.
- --------------------------------------------------------------------------------
Results of Operations for the Year Ended December 31, 2002 Compared to the Year
Ended December 31, 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 year ended December 31, 2002 EBITDA as adjusted
was $2,273,600 compared to $2,442,100 for the prior year, a decrease of $168,500
or 7%. The lower performance in 2002 was primarily attributable to increased
spending on marketing programs for the consumer branded product lines and
unabsorbed manufacturing overhead as a result of a shortage of flax seed due to
drought conditions in much of Canada during 2002 and the West Coast port
shutdown, which hampered the Company's ability to secure glass, partially offset
by reduced general and administrative expenses.
Revenues:
SPOP's net sales for the year ended December 31, 2002 were $40,660,200 compared
to $41,051,000 for 2001, a decrease of $390,800 or 1%. The decrease was
attributable to the lost sales associated with the disposed product lines,
partially offset by healthy sales growth in each of the Company's three major
product lines. Comparable net sales (after eliminating the sales of disposed or
discontinued product lines from both periods) increased by 20%.
- --------------------------------------------------------------------------------
Page 15
During the years ended December 31, 2002 and 2001, net sales by product line
were as follows:
2002 2001 % Change
---- ---- --------
Spectrum Naturals(R)Culinary Products $ 18,487,800 $ 15,944,400 +16%
Spectrum Essentials(R)Nutritional Supplements 9,524,400 8,030,100 +19%
Spectrum Ingredients/Private Label Products 9,433,200 7,348,800 +28%
------------ ------------ -----
Comparable Net Sales 37,445,400 31,323,300 +20%
Disposed/Discontinued Product Lines 3,214,800 9,727,700 -67%
------------ ------------ -----
Total Net Sales $ 40,660,200 $ 41,051,000 -1%
============ ============ =====
Within the Spectrum Naturals(R) brand, net sales increased substantially versus
the prior year in culinary oils (+11%), mayonnaise (+16%) and vinegar (+18%).
The Spectrum Essentials(R) brand net sales increased by 19%, driven by increased
demand for flax oil as consumer awareness of the importance of essential fatty
acids to overall health continued to rise. Net sales growth in the Spectrum
Essentials line would have been substantially higher in the absence of the flax
seed shortage during the fourth quarter, which left the Company unable to meet
demand until December. The Company has identified alternative sources of supply
for 2003 and does not expect to experience difficulty in meeting demand for flax
oil. The Spectrum Ingredients net sales growth was driven by strong demand for
industrial culinary oils, particularly in the baked goods trade.
Cost of Goods Sold:
The Company's cost of goods sold increased as a percent of net sales for the
year ended December 31, 2002 to 74.0% compared to 73.1% for the same period in
2001. The increase was primarily due to the effects of the April 2002 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 remaining reserve at December 31, 2002 of $153,700 to cover
anticipated citations and fines from CAL-OSHA, worker's compensation appeals and
attorney's fees. The balance of $100,400 represented cash expenditures 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 was unabsorbed manufacturing overhead due to two
other factors beyond the Company's control. The West Coast port shutdown, as a
result of the longshoremen's strike, hampered the Company's ability to secure
glass to keep its bottling line running at full capacity and the flax seed
shortage, due to drought conditions in much of the growing area, shut down the
SpectraVac flax oil production system for much of the fourth quarter. The
Company has secured an adequate supply of flax seed for 2003, however, the cost
will be significantly higher.
Gross Profit:
Gross profit as a percent of net sales (gross margin) was 26.0% for 2002 versus
26.9% for the prior year. The reduction was primarily due to the effects of the
industrial accident and the unabsorbed manufacturing overhead detailed above.
Sales and Marketing Expenses:
The Company's sales and marketing expenses for the year ended December 31, 2002
were $6,068,400 or 14.9% of net sales, versus $5,823,100 or 14.2% of net sales
for 2001. The increase in spending of $245,300 was primarily attributable to
higher spending on advertising, broker commissions, sampling and public
relations, partially offset by the elimination of eleven full time employees
formerly associated with the OI product lines disposed of on April 25, 2002.
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Page 16
General and Administrative Expenses:
The Company's general and administrative expenses for the year ended December
31, 2002 were $2,949,500 or 7.3% of net sales, versus $3,194,900 or 7.8% of net
sales for 2001. The decrease in spending of $245,400 was primarily attributable
to reduced incentive compensation expense, lower professional fees, reduced bad
debt expense and lower telephone expense.
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 the OI product lines on April 25,
2002. Amortization expense for the prior year was $520,700 based on an estimated
useful life of twelve years.
Gain or Loss on Sales of Product Lines:
The Company recorded a net gain from the sales of product lines during the year
ended December 31, 2002 of $210,300 and a non-cash loss of $4,803,200 during the
prior year. The computations for both years are detailed in Note 2 to the
financial statements.
Loss on Asset Impairment Writedown:
As described in Note 4 to the Financial Statements, the Company 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 during 2001 to reduce the goodwill to its net realizable
value of $1,470,200.
Interest Expense:
The Company's interest expense for the year ended December 31, 2002 was $480,600
versus $912,800 for 2001. The reduction of $432,200 or 47% was primarily
attributable to lower borrowing levels under the line of credit as a result of
the sales of product lines and significant reductions in the prime rate during
2001. Non-cash interest expense of $49,500 and $96,100 was incurred during 2002
and 2001, respectively, for the value of the common stock purchase warrants
issued to the private placement note holders.
Provision for Income Tax Expense:
During the year ended December 31, 2002 the Company recorded a provision for
income taxes of $189,800 which represented final 2001 income taxes paid to the
State of California of $7,200 plus estimated state income taxes due for 2002 of
$182,600. The Company has federal net operating loss carryovers sufficient to
offset all federal income taxes due on its estimated taxable income for 2002.
However, the State of California recently announced a two year moratorium on the
use of net operating loss carryovers, as a result of a budget crisis, effective
January 1, 2002. Consequently, the Company will owe state income taxes estimated
at $189,800 for 2002 as a result of the moratorium and alternative minimum
taxes. The Company will also be liable for state income taxes for 2003.
Net Income (Loss):
The Company reported net income of $1,120,000 for the year ended December 31,
2002 versus a net loss of $5,205,800 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.
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Page 17
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
maintained against the deferred tax assets for all periods presented.
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 affected to reduce the risk of price swings due to demand
fluctuations. These annual purchases can create temporary 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 eligible accounts receivable and inventory.
The Company could not operate its business without the Credit Agreement with
WFBC or one similar to it. At December 31, 2002 the Company satisfied all
financial covenants and other requirements under the Credit Agreement except for
one covenant setting a limit on capital expenditures for 2002 of $600,000.
Actual spending on capital expenditures was $631,500 in 2002. WFBC has granted
the Company a waiver with regards to their default rights in connection with
that covenant breach. 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 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 December 31, 2002 the Company had working capital of $596,700 which reflected
an improvement of $1,626,400 versus the prior year. As described in Note 2 to
the financial statements, the Company sold certain assets in April 2002 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 disposed product lines on EBITDA, as adjusted 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 December 31, 2002 was $589,300 compared to
$546,400 at December 31, 2001. During 2002 the Company generated $689,600 in
cash from operating activities, compared to using $906,900 in cash during 2001.
The improvement was primarily due to the one-time reduction in trade payables
made during the prior year with the cash proceeds from the sale of the
tomato-based product lines. 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 $2,371,700 compared to
$2,342,900 in 2001. There were no significant variances between years as both
periods included cash proceeds from the sales of product lines and related
inventories of approximately $3,000,000.
Cash used in financing activities was $3,061,500 in 2002 versus $1,435,700 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
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Page 18
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 December 31, 2002 the Company had $1,696,700 in available
borrowing capacity under its line of credit versus $955,800 at December 31, 2001
primarily as a result of the proceeds from the sale of the OI product lines.
Also contributing to the increased use of cash in financing activities during
2002 was the early retirement of the private placement notes and the repayment
of the loan outstanding against the cash surrender value of executive life
insurance.
Management believes that future cash flows from operations should provide
adequate funds to meet the Company's estimated cash requirements for the
foreseeable future. The Company competes primarily in the organic and all
natural foods industry and in the nutritional supplements category. While an
economic downturn could decrease demand for the Company's products, which in
turn could impact the Company's ability to meet its obligations to its
creditors, Management believes that to be unlikely. Recent history has shown the
three primary categories the Company competes in to be recession-resistant. Each
category features double-digit annual sales growth and Management believes the
Company's product offerings compete favorably with regards to taste and overall
quality.
The Company has contractual cash obligations for future periods primarily with
regards to debt service and non-cancelable leases. The following table discloses
the Company's expected contractual cash obligations for future periods:
Contractual Cash Obligations ($ Thousands)
2003 2004 2005 2006 2007 2011
---- ---- ---- ---- ---- ----
Long-term Debt $ 481 $ 461 $ 265 $ 16 $ -- $ 513
Capital Leases (1) 63 52 20 -- -- --
Operating Leases 186 246 250 250 250 --
----- ----- ----- ----- ----- -----
Total Contractual
Cash Obligations $ 730 $ 759 $ 535 $ 266 $ 250 $ 513
===== ===== ===== ===== ===== =====
(1) Includes amounts representing interest
Related Party Transactions and Other Financing Arrangements:
During the year ended December 31, 2002 there were two significant transactions
with related parties. An investment banking fee for the sale of the OI product
lines of $79,000 was paid to Moore Consulting, a sole proprietorship owned and
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. There were also consulting fees of $66,000 paid to Running
Stream Food and Beverage, Inc. ("RSFB") for private label sales and management
services. RSFB is owned and operated by John Battendieri, a non-executive
Director of the Company. The RSFB fees were negotiated by the Company as part of
the sale of the OI product lines and mirror the arrangements made between RSFB
and Acirca, Inc. (an unrelated party) for similar consulting services. The
consulting contract between the Company and RSFB covers the period April 16,
2002 through April 16, 2004 and calls for monthly consulting fees of $8,300 plus
expenses incurred. In the opinion of Management, both of these transactions were
fair, reasonable and consistent with terms the Company could have obtained from
unaffiliated third parties.
The Company does not utilize off-balance sheet financing arrangements. There
were no transactions with special purpose entities that gave the Company access
to assets or additional financing or carry debt that is secured by the Company.
The Company does not engage in trading activities of any kind involving
commodity contracts.
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Page 19
New Applicable Accounting Pronouncements:
In July 2002 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires that a liability
for expenses associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 also establishes that fair value is the
objective for initial measurement of the liability. Severance pay under SFAS
146, in many cases, would be recognized over time rather than up front. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002 with early application encouraged. Management
does not expect the adoption of SFAS 146 to have a material impact on the
Company's financial condition or results of operations.
In December 2002 the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation Transition and Disclosure", which provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation as prescribed in SFAS 123, "Accounting for
Stock-Based Compensation." Additionally, SFAS 148 requires more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. The provisions of SFAS 148 are effective for fiscal
years ending after December 15, 2002 with early application permitted in certain
circumstances. Management has evaluated the benefits of changing to the fair
value method of accounting for stock-based compensation and has elected to
continue to use the intrinsic value method. Accordingly, Management does not
expect the adoption of SFAS 148 to have a material impact on the Company's
financial condition or results of operations, but will comply with the
additional disclosure provisions.
In November 2002 the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which is effective for financial statements issued
after December 15, 2002. The Company has various guarantees included in
contracts in the normal course of business, primarily in the form of
indemnities. However, these guarantees do not represent significant commitments
or contingent liabilities in connection with the indebtedness of others.
In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires the consolidation of
certain special purpose or variable interest entities. FIN 46 is applicable to
financial statements issued after 2002, however, disclosures are required
currently if the Company expects to consolidate any variable interest entities.
There are no entities that will be consolidated with the Company's financial
statements as a result of FIN 46.
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Results of Operations for the Year Ended December 31, 2001 Compared to the Year
Ended December 31, 2000
- --------------------------------------------------------------------------------
Summary of Results:
Management believes that earnings before interest, taxes, depreciation,
amortization, losses on the sale of product lines 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 net sales for the year ended December 31, 2001 were $41,051,000 compared
to $42,198,800 for 2000, a decrease of $1,147,800, or 2.7% versus 2000. The
decrease in 2001 was primarily due to the lost sales associated with the
disposed 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%),
packaged mayonnaise (+15%) and individually quick frozen fruits and vegetables
(a new product category in 2001). Branded nutritional supplement sales increased
12% versus the prior year.
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Page 20
Comparable net sales (after eliminating sales of disposed or discontinued
product lines from both years) increased by 10% versus the prior year.
During the years ended December 31, 2001 and 2000, net sales by product line
were as follows:
2001 2000 % Change
---- ---- --------
Spectrum Naturals(R)Culinary Products $15,944,400 $13,727,100 +16%
Spectrum Essentials(R)Nutritional Supplements 8,030,100 7,181,600 +12%
Spectrum Ingredients/Private Label Products 7,348,800 7,509,400 - 2%
----------- ----------- ------
Comparable Net Sales 31,323,300 28,418,100 +10%
Disposed/Discontinued Product Lines 9,727,700 13,780,700 -29%
----------- ----------- ------
Total Net Sales $41,051,000 $42,198,800 - 3%
=========== =========== ======
Cost of Goods Sold:
The Company's cost of goods sold decreased as a percent of net sales for the
year ended December 31, 2001 to 73.1% compared to 75.9% 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.
Gross Profit:
Gross profit for the year ended December 31, 2001 was $11,041,300 versus
$10,175,100 for 2000, an increase of $866,200 or 8.5%. Gross profit as a percent
of net sales (gross margin) was 26.9% for 2001 versus 24.1% 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 $5,823,100 or 14.2% of net sales, versus $5,974,000 or 14.2% of net sales
for 2000. The decrease in spending of $150,900 was primarily attributable to
reduced spending on trade shows and consulting fees, partially offset by
increased advertising.
General and Administrative Expenses:
The Company's general and administrative expenses for the year ended December
31, 2001 were $3,194,900 or 7.8% of net sales, versus $3,542,700 or 8.4% of net
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.
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 entry to record the sale. The goodwill associated
with the acquisition of OI was amortized over a twelve-year life during both
years.
- --------------------------------------------------------------------------------
Page 21
Gain or Loss on Sales 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 costs and eliminating escrowed funds not collected
prior to December 31, 2001 from the consideration received, the Company recorded
a non-cash loss on the sale of the OFPI product lines of $4,803,200 during 2001.
Loss on Asset Writedowns and Plant Closure:
As a result of negotiations that were underway at December 31, 2001 for the sale
of the Organic Ingredients product lines, the Company determined that the net
goodwill associated with the OI 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.
Also as described in Note 4 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 lower borrowing levels following the sale of the OFPI product
lines, 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 $96,100 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 pro-forma net income of $547,400 versus a pro-forma 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.
Related Party Transactions and Other Financing Arrangements:
During the year ended December 31, 2001 there were three significant
transactions with related parties. The Company paid consulting fees of $70,000
for management advisory services rendered by Moore Consulting, a sole
proprietorship owned and operated by Phillip Moore, a non-executive Director of
the Company. Also, an investment banking fee for the sale of the OFPI product
lines of $78,200 was paid to Moore Consulting. The fee paid represented 2.5% of
the total transaction value which, in the opinion of Management, was fair,
reasonable and consistent with terms the Company could have obtained from an
unaffiliated investment banker.
In February 2001 the Company sold 160,000 restricted shares under Regulation D
of the Securities Act of 1933 to 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 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 160,000 common stock purchase
warrants to the non-executive Director at an exercise price of $0.3125 per
share, which expire in February 2006.
- --------------------------------------------------------------------------------
Page 22
The Company does not utilize off-balance sheet financing arrangements. There
were no transactions with special purpose entities that gave the Company access
to assets or additional financing or carry debt that is secured by the Company.
The Company does not engage in trading activities of any kind involving
commodity contracts.
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, 2002 the average outstanding balance under the line of credit was
approximately $3,153,000 with a weighted average interest rate of 6.5%. The line
of credit agreement calls for the interest rate to float at the prime rate plus
100 basis points.
Certain Company debt items are sensitive to changes in interest rates. The
following table summarizes principal cash flows and related weighted average
interest rates by expected maturity date for long-term debt, excluding capital
leases ($ thousands):
Expected Maturity Date
Outstanding (Years Ended December 31)
Dec. 31, 2002 2003 2004 2005 2006 2007 2011
------------- ---- ---- ---- ---- ---- ----
Long Term Debt:
Fixed Rate $1,080.4 $275.2 $275.2 $228.2 $ 15.6 -- $286.2
Avg. Int. Rate 8.5% 9.3% 9.3% 9.2% 9.0% -- 6.5%
Variable Rate $429.0 $206.4 $185.8 $ 36.8 -- -- --
Avg. Int. Rate 5.5% 6.3% 5.9% 6.8% -- -- --
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, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Spectrum Organic Products, Inc.
Financial Statements
Years Ended December 31, 2002, 2001 and 2000
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
================================================================================
- --------------------------------------------------------------------------------
Page 23
Statement of Management Responsibility
Spectrum Organic Products' management is responsible for the preparation,
integrity and objectivity of the financial statements and other financial
information presented in this report. The accompanying 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 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 entirely 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/ Neil G. Blomquist /s/ Robert B. Fowles
- --------------------------- ------------------------------------
Neil G. Blomquist Robert B. Fowles
President and Chief Chief Financial Officer
Executive Officer and Secretary
- --------------------------------------------------------------------------------
Page 24
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, 2002 and 2001 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. 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, 2002 and 2001 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2002 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.
As discussed in note 8 to the financial statements, effective January 1, 2002
the Company adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets", as required for the accounting of its goodwill and other
intangible assets.
/s/ BDO Seidman, LLP
- ----------------------------------
BDO Seidman, LLP
San Francisco, California
February 21, 2003
- --------------------------------------------------------------------------------
Page 25
Spectrum Organic Products, Inc.
Balance Sheets
=====================================================================================================
As of December 31, 2002 2001
- -----------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash $ 1,000 $ 1,200
Accounts receivable, net (Note 5) 3,075,200 3,427,900
Inventories, net (Note 6) 5,269,600 5,966,600
Prepaid expenses and other current assets 79,600 68,900
------------ ------------
Total Current Assets 8,425,400 9,464,600
------------ ------------
Property and Equipment, net (Notes 4, 7 and 13) 3,447,400 3,239,000
------------ ------------
Other Assets:
Goodwill, net (Notes 2, 4 and 8) -- 1,470,200
Other intangible assets, net (Note 9) 42,000 54,000
Other assets 271,900 72,000
------------ ------------
Total Other Assets 313,900 1,596,200
------------ ------------
Total Assets $ 12,186,700 $ 14,299,800
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Bank overdraft $ 589,300 $ 546,400
Line of credit (Note 10) 2,479,800 4,598,800
Accounts payable, trade (Note 6) 3,330,000 3,676,600
Accrued expenses (Note 18) 722,500 904,300
Income taxes payable (Note 14) 176,000 --
Current maturities of notes payable, former stockholder (Note 11) 187,500 281,300
Current maturities of notes payable, stockholders (Note 12) 87,600 111,700
Current maturities of notes payable & capital lease obligations
(Note 13) 256,000 375,200
------------ ------------
Total Current Liabilities 7,828,700 10,494,300
Notes payable, former stockholder, less current maturities (Note 11) 676,800 811,200
Notes payable, stockholders, less current maturities (Note 12) 128,400 225,500
Notes payable & capital lease obligations, less current maturities
(Note 13) 278,900 671,300
------------ ------------
Total Liabilities 8,912,800 12,202,300
------------ ------------
Commitments and Contingencies (Notes 10 and 18)
Stockholders' Equity (Notes 1, 16, 17, 18 and 19):
Preferred stock, 5,000,000 shares authorized, no shares issued or
outstanding -- --
Common stock, without par value, 60,000,000 shares authorized,
45,705,571 and 45,698,661 issued and outstanding at December 31,
2002 and 2001 9,430,100 9,373,700
Accumulated deficit (6,156,200) (7,276,200)
------------ ------------
Total Stockholders' Equity 3,273,900 2,097,500
------------ ------------
Total Liabilities and Stockholders' Equity $ 12,186,700 $ 14,299,800
============ ============
See accompanying summary of significant accounting
policies and notes to financial statements.
- -----------------------------------------------------------------------------------------------------
Page 26
Spectrum Organic Products, Inc.
Statements of Operations
=========================================================================================
For the years ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------
Net Sales (Note 5) $ 40,660,200 $ 41,051,000 $ 42,198,800
Cost of Goods Sold (Notes 3, 4, 6 and 18) 30,077,100 30,009,700 32,023,700
------------ ------------ ------------
Gross Profit 10,583,100 11,041,300 10,175,100
------------ ------------ ------------
Operating Expenses:
Sales and Marketing 6,068,400 5,823,100 5,974,000
General and Administrative 2,949,500 3,194,900 3,542,700
Amortization of Goodwill (Notes 2 and 8) -- 520,700 909,600
------------ ------------ ------------
Total Operating Expenses 9,017,900 9,538,700 10,426,300
Gain (Loss) on Sales of Product
Lines (Note 2) 210,300 (4,803,200) --
Loss on Asset Impairment Writedown and
Plant Closure Notes 4 and 7) -- (950,000) (436,500)
------------ ------------ ------------
Income (Loss) From Operations 1,775,500 (4,250,600) (687,700)
------------ ------------ ------------
Other Income (Expense):
Interest Expense (Notes 10, 11, 12 and 13) (480,600) (912,800) (1,381,500)
Other, Net 14,900 (42,400) 70,800
------------ ------------ ------------
Total Other Expense, Net (465,700) (955,200) (1,310,700)
------------ ------------ ------------
Income (Loss) Before Taxes 1,309,800 (5,205,800) (1,998,400)
Provision for Income Taxes (Note 14) (189,800) -- (3,900)
------------ ------------ ------------
Net Income (Loss) $ 1,120,000 $ (5,205,800) $ (2,002,300)
------------ ------------ ------------
Basic and Fully Diluted Income (Loss) Per
Share (Note 16) $ 0.02 $ (0.12) $ (0.05)
============ ============ ============
Weighted Average Shares Outstanding 45,699,627 45,278,517 44,234,378
============ ============ ============
See accompanying summary of significant accounting
policies and notes to financial statements.
- -----------------------------------------------------------------------------------------
Page 27
Statement of Stockholders' Equity
For the years ended December 31, 2000, 2001 and 2002
===============================================================================================================
Retained Total
Earnings Stockholders'
Common Stock (Accumulated Equity
Shares Amount Deficit) (Deficit)
- ---------------------------------------------------------------------------------------------------------------
Balances, January 1, 2000 43,914,186 $ 8,481,500 $ (68,100) $ 8,413,400
Restricted common shares issued in connection with
the settlement of litigation 400,000 318,800 -- 318,800
Exercise of warrants issued in connection with the
private placement notes (Notes 13 and 17) 181,642 1,400 -- 1,400
Warrants issued in connection with the private
placement notes (Notes 13 and 17) -- 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 19) 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 13) 630,000 168,200 -- 168,200
Warrants net exercised by the note holders under the
private placement (Notes 13 and 17) 230,883 -- -- --
Warrants issued in connection with the private
placement notes (Notes 13 and 17) -- 96,100 -- 96,100
Options issued to Global Natural Brands, Ltd. in
final settlement of litigation -- 25,300 -- 25,300
Shares issued to the Trustee for the Chapter 7
estate of Sunny Farms in final settlement of
litigation 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
Warrants net exercised by the note holders under the
private placement notes (Notes 13 and 17) 6,910 -- -- --
Warrants issued in connection with the private
placement notes (Notes 13 and 17) -- 49,500 -- 49,500
Non-qualified stock options issued -- 6,900 -- 6,900
Net income for the year -- -- 1,120,000 1,120,000
----------- ----------- ----------- -----------
Balances, December 31, 2002 45,705,571 $ 9,430,100 $(6,156,200) $ 3,273,900
=========== =========== =========== ===========
See accompanying summary of significant accounting
policies and notes to financial statements.
- ---------------------------------------------------------------------------------------------------------------
Page 28
Spectrum Organic Products, Inc.
Statements of Cash Flows
=============================================================================================================
For the years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 1,120,000 $ (5,205,800) $ (2,002,300)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used in) Operating Activities:
Provision for allowance against receivables 47,000 68,300 294,900
Provision for reserves for inventory obsolescence 262,200 300,500 614,500
Depreciation and amortization 454,300 418,800 531,000
Amortization of goodwill -- 520,700 909,600
Loss on asset writedowns and plant closure -- 950,000 436,500
(Gain) Loss on sale of product lines (210,300) 4,803,200 --
(Gain) Loss on sale of assets -- 84,100 (50,000)
Imputed interest on notes payable and warrants issued 71,300 107,600 169,300
Capitalized interest on construction in progress (27,800) (49,200) (54,800)
Increase in cash surrender value of life insurance (21,800) (18,900) (21,200)
Imputed expense on non-qualified stock options 6,900 -- --
Directors fees paid in common stock -- 20,000 --
Professional fees paid via issuance of notes payable -- -- 75,000
Amortization of original issue discount on unsecured
subordinated notes -- -- 55,200
Changes in Assets and Liabilities:
Accounts receivable 430,400 (524,500) 284,800
Inventories (1,057,700) (420,600) (704,000)
Income tax refunds receivable -- -- 31,100
Prepaid expenses and other current assets (10,700) 42,900 103,400
Other assets (21,800) 11,000 112,100
Accounts payable (346,600) (2,203,900) 24,000
Accrued expenses (181,800) 188,900 (436,300)
Income taxes payable 176,000 -- (13,300)
------------ ------------ ------------
Net Cash Provided by (Used in) Operating Activities 689,600 (906,900) 359,500
------------ ------------ ------------
Cash Flows From Investing Activities:
Purchase of property and equipment (631,500) (473,500) (308,500)
Proceeds from sale of product lines and related inventories 3,215,200 2,953,100 50,000
Transaction fees on sale of product lines (152,000) (139,700) --
Proceeds from sale of assets -- 3,000 383,000
Merger and related transaction costs -- -- (105,000)
Packaging development costs (60,000) -- --
------------ ------------ ------------
Net Cash Provided by Investing Activities 2,371,700 2,342,900 19,500
------------ ------------ ------------
Cash Flows From Financing Activities:
Increase in checks drawn against future deposits 42,900 7,400 309,700
Proceeds from lines of credit 43,931,000 43,677,700 44,317,300
Repayment of lines of credit (46,050,000) (44,511,000) (43,823,100)
Repayment of notes payable, former stockholder (250,000) (265,600) (381,300)
Repayment of notes payable to stockholders (121,200) (160,800) (264,000)
Proceeds of notes payable -- 132,700 276,100
Repayment of notes payable (442,600) (287,500) (754,300)
Repayment of life insurance loan (102,600) -- --
Repayment of capitalized lease obligations (69,000) (78,600) (61,000)
Restricted shares purchased by board member -- 50,000 --
Warrants exercised -- -- 1,400
------------ ------------ ------------
Net Cash Used in Financing Activities (3,061,500) (1,435,700) (379,200)
------------ ------------ ------------
Net Increase (Decrease) in Cash (200) 300 (200)
Cash, beginning of the year 1,200 900 1,100
------------ ------------ ------------
Cash, end of the year $ 1,000 $ 1,200 $ 900
------------ ------------ ------------
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 13,800 $ 800 $ 15,700
Cash paid for interest $ 446,300 $ 805,200 $ 1,031,500
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.
- -------------------------------------------------------------------------------------------------------------
Page 29
Spectrum Organic Products, Inc.
Summary of Significant Accounting Policies
================================================================================
Business Divestitures and Basis of Presentation
- -----------------------------------------------
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"). On June 11, 2001 and April 25, 2002 the Company divested the OFPI
and OI product lines, respectively, in order to raise working capital and focus
on its core business in healthy fats and oils. Accordingly, results of
operations for the years ended December 31, 2001 and 2002 include the operating
results of the disposed product lines until the dates of sale.
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 throughout the United
States, Canada, Europe and the Far East and to other manufacturers as industrial
organic ingredients. Company headquarters, principal manufacturing facilities
and industrial ingredient warehousing and distribution are located in Petaluma,
California. Warehousing and distribution of the Company's branded product lines
has been consolidated at a third-party facility in Rancho Cucamonga, 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.
Critical Accounting 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 the 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. The
Company bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for the carrying values of assets and
liabilities that are not readily apparent from other sources. On an on-going
basis, the Company re-evaluates all of its estimates utilizing the most recent
information available to it. Actual results may differ materially from these
estimates under different assumptions or conditions and as additional
information becomes available in future periods. The most significant estimates
made by the Company are those concerning reserves against accounts receivable
and inventory, the industrial accident reserve and the deferred tax asset
valuation allowance.
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
- --------------------------------------------------------------------------------
Page 30
employee stock-based compensation using the intrinsic value method prescribed in
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.
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 income or loss and net income or loss per share
for the years ended December 31, 2002, 2001 and 2000 would have been adjusted to
the pro-forma amounts presented below:
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Net income (loss) as reported $ 1,120,000 $(5,205,800) $(2,002,300)
Less: Total compensation expense under fair value
method for all stock-based awards, net of related
tax effects (109,700) (93,300) (46,200)
----------- ----------- -----------
Pro-forma net income (loss) $ 1,010,300 $(5,299,100) $(2,048,500)
=========== =========== ===========
Basic and diluted income (loss) per share:
As reported $ 0.02 $ (0.12) $ (0.05)
Pro-forma $ 0.02 $ (0.12) $ (0.05)
============================================================================================================
The fair value of option grants for 2002 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 2.5%, no
dividend yield and volatility of 142% to 214%.
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%.
Accounts Receivable 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. These allowances are based upon the Company's
historical experience with bad debt write-offs and customer deductions, customer
creditworthiness, payment trends and general economic conditions.
Inventory
- ---------
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Reserves are maintained for obsolete or unsaleable inventories to reduce the
carrying cost of such inventories to market value. The reserve estimates are
based upon historical inventory usage, spoilage, current market conditions and
anticipated future demand.
- --------------------------------------------------------------------------------
Page 31
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 tangible and intangible net assets of businesses acquired is
recorded as goodwill. Through December 31, 2001 goodwill was amortized under the
straight-line method over the estimated useful life of twelve years. In
accordance with SFAS 142, the Company ceased the amortization of goodwill as of
January 1, 2002. On April 25, 2002 the Company sold the Organic Ingredients
product lines and related goodwill which reduced goodwill to zero.
Trademark, label development and other intangible assets without an indefinite
life are amortized under the straight-line method over their estimated useful
lives, 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 cost or fair market value as
estimated by Management based on appraisals, current market value or comparable
sales value, as appropriate. Long-lived assets to be retained that are affected
by such impairment losses are depreciated or amortized at their new carrying
amount over the remaining estimated life. Long-lived assets to be sold or
otherwise disposed of are not subject to further depreciation or amortization.
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 deferred tax 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 there is
evidence of an arrangement (such as a customer purchase order), the price and
terms are final, delivery has occurred and collectibility is reasonably assured.
Accordingly, sales and cost of goods sold are recognized when goods are shipped,
at which time title and risk of loss have passed to the customer. The vast
majority of the Company's sales are shipped under customer-arranged freight
terms. In all other cases, shipping charges to customers are included in revenue
with an offsetting expense included in cost of sales.
- --------------------------------------------------------------------------------
Page 32
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, 2002, 2001 and 2000 were $1,241,600,
$810,300 and $660,000, respectively.
Fair Value of Financial Instruments
- -----------------------------------
The Company's notes payable and capital lease obligations 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
differ materially from current market prices available to the Company and they
do not exceed 12 months in duration.
Net Income or Loss per Share
- ----------------------------
Basic income or loss per share is computed by dividing net income or loss
attributable to common shares by the weighted average number of common shares
outstanding during each period. Fully diluted income or loss per share is
similar to basic income or 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 fiscal year 2002 there was no difference between basic and fully diluted
income per common share because the dilutive effect of the exercise of common
stock options and warrants is insignificant.
For the fiscal years 2001 and 2000 there was no difference between basic and
fully diluted loss per common share because the effects of the exercise of
common stock options and warrants were anti-dilutive, given the net loss
incurred in those years. For each year presented, the following potential
convertible common shares were outstanding:
Number of Potential Convertible Shares
--------------------------------------
2002 2001 2000
---- ---- ----
Stock Options 3,898,115 3,225,315 2,010,115
Stock Warrants 682,606 843,156 608,156
--------- --------- ---------
Total Potential Convertible Shares 4,580,721 4,068,471 2,618,271
========= ========= =========
New Applicable Accounting Pronouncements
- ----------------------------------------
In May 2000 the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives". 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". 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 adopted this Issue
effective with the first quarter of 2002. EITF 01-09 requires the
characterization of certain vendor sales incentives such as promotions, trade
ads, slotting fees, and coupons as reductions of revenue. Certain of these
expenses, previously classified as sales and marketing costs, are now
characterized as offsets to revenue. Reclassifications have been made to prior
- --------------------------------------------------------------------------------
Page 33
period financial statements to conform to the current year presentation. Total
vendor sales incentives now characterized as reductions of revenue that
previously would have been classified as sales and marketing costs were
$341,600, $333,000 and 291,300 for 2002, 2001 and 2000, respectively.
In June 2001 the FASB finalized SFAS 141, "Business Combinations," and SFAS 142,
"Goodwill and Other Intangible Assets". 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 the recognition of 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. SFAS 142
changes the way that companies account for goodwill, in that goodwill is no
longer amortized but instead is tested (along with any other unamortized
intangible assets) for impairment at least annually. The Company adopted the
provisions of SFAS 142 effective January 1, 2002 (see Note 8).
In August 2001 SFAS 144, "Accounting for the Impairment or Disposal of
Long-lived Assets" was issued, superseding SFAS 121, "Accounting for the
Impairment of Long-lived Assets to be Disposed of". 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.
In July 2002 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires that a liability
for expenses associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 also establishes that fair value is the
objective for initial measurement of the liability. Severance pay under SFAS
146, in many cases, would be recognized over time rather than up front. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002 with early application encouraged. Management
does not expect the adoption of SFAS 146 to have a material impact on the
Company's financial condition or results of operations.
In December 2002 the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation as prescribed in SFAS 123, "Accounting for
Stock-Based Compensation". Additionally, SFAS 148 requires more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. The provisions of SFAS 148 are effective for fiscal
years ending after December 15, 2002 with early application permitted in certain
circumstances. Management has evaluated the benefits of changing to the fair
value method of accounting for stock-based compensation and has elected to
continue to use the intrinsic value method. Accordingly, Management does not
expect the adoption of SFAS 148 to have a material impact on the Company's
financial condition or results of operations.
In November 2002 the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which is effective for financial statements issued
after December 15, 2002. The Company has various guarantees included in
contracts in the normal course of business primarily in the form of indemnities.
However, these guarantees do not represent significant commitments or contingent
liabilities in connection with the indebtedness of others.
In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires the consolidation of
certain special purpose or variable interest entities. FIN 46 is applicable to
financial statements issued after 2002, however, disclosures are required
currently if the Company expects to consolidate any variable interest entities.
There are no entities that will be consolidated with the Company's financial
statements as a result of FIN 46.
- --------------------------------------------------------------------------------
Page 34
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.
- --------------------------------------------------------------------------------
Page 35
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
1. Business Combination and Subsequent Divestitures
- ----------------------------------------------------
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 June 11, 2001 the Company sold the OFPI tomato-based product lines to Acirca,
Inc., an unrelated third party. Accordingly, results for the year ended December
31, 2001 include the operating results associated with the OFPI disposed product
lines until the date of sale.
On April 25, 2002 the Company sold the OI industrial ingredient product lines in
fruits, vegetables, concentrates and purees to Acirca. Accordingly, results for
the year ended December 31, 2002 include the operating results associated with
the OI disposed product lines until the date of sale.
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 key retailer private label product
lines. The Spectrum Ingredients product lines consisting of culinary oils,
vinegars and nutritional supplements were not part of the sale.
The total consideration was $3,167,000 in cash, which included $1,417,000 for
saleable inventory sold to Acirca. 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. The first installment of
$125,000 was received in full on September 3, 2002. The final installment of
$124,700 was received on January 31, 2003 and consisted of $125,000 plus
interest earned on the escrowed funds less the escrow agent fees.
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. Due to the contingent nature of
the escrowed funds, they were not recorded as consideration until constructive
receipt.
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 for the years ended December 31, 2002 and 2001:
- --------------------------------------------------------------------------------
Page 36
----Sales of Product Lines----
2002 2001
----------- -----------
Total consideration $ 3,167,000 $ 3,128,100
Less escrowed funds included above (250,000) (350,000)
----------- -----------
Net cash proceeds from sales 2,917,000 2,778,100
Assets sold:
Inventories (1,417,000) (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 (6,300) --
Transaction costs (152,000) (139,700)
Reserve for remaining inventories not purchased (75,500) (51,800)
----------- -----------
Loss before collection of previously escrowed funds (212,600) (4,978,200)
Subsequent collection of escrowed funds 422,900 175,000
----------- -----------
Net Gain (Loss) on Sales of Product Lines $ 210,300 $(4,803,200)
=========== ===========
In both cases the Company applied the cash proceeds received against the
outstanding borrowings under its revolving line of credit.
Included in accounts receivable at December 31, 2002 was $124,700 of the
escrowed funds on the sale of OI, which was contractually due at December 31,
2002 and received on January 31, 2003 after final negotiations between the
parties were completed. After accounting for the escrowed funds and the OI
goodwill impairment writedown recorded in December 2001 (see Note 4), the final
net loss on the sale of OI was $912,900.
After accounting for the final collection of the escrowed funds and related
interest on the 2001 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 $4,630,000.
The transaction costs represented investment banking, legal fees and other
expenses associated with closing the sales. Investment banking fees totaling
$157,200 were paid to Moore Consulting, a sole proprietorship owned and operated
by Phillip L. Moore, a non-executive Director of the Company. The fees were 2.5%
of the total consideration on both 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.
On October 18, 2002 Management met with CAL-OSHA and received their report and
notice of proposed penalties. There were nine citations for safety violations
with total proposed penalties of $137,900. There were no willful citations and
the CAL-OSHA report acknowledged that all the safety violations have been 100%
abated by the Company. Management has filed a formal appeal with CAL-OSHA in the
hopes of reducing the citations and proposed penalties.
- --------------------------------------------------------------------------------
Page 37
Included in cost of goods sold for the year ended December 31, 2002 was $254,100
in expenses directly attributable to the accident. Included in that amount was a
remaining reserve at December 31, 2002 of $153,700 to cover anticipated
citations and fines from CAL-OSHA, workers compensation appeals and attorneys
fees. The remaining $100,400 represented cash expenses associated with the
accident for attorney's fees, safety consultants and assistance to the families
of the deceased employees. There have been no criminal actions filed against the
Company at the time of this report.
4. Asset Impairment Writedown and Plant Closure
- -----------------------------------------------
As a result of negotiations that were underway at December 31, 2001 for the 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 its estimated net realizable
value of $1,470,200 (see Note 8).
In May 2000 the Company committed to a plan to close its leased manufacturing
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.
5. Sales and Accounts Receivable
- --------------------------------
During the years ended December 31, 2002, 2001 and 2000, net sales by product
line were as follows:
2002 2001 2000
---- ---- ----
Spectrum Naturals(R)Culinary Products $ 18,487,800 $ 15,944,400 $ 13,727,100
Spectrum Essentials(R)Nutritional Supplements 9,524,400 8,030,100 7,181,600
Spectrum Ingredients/Private Label Products 9,433,200 7,348,800 7,509,400
------------ ------------ ------------
Comparable Net Sales 37,445,400 31,323,300 28,418,100
Disposed/Discontinued Product Lines 3,214,800 9,727,700 13,780,700
------------ ------------ ------------
Total Net Sales $ 40,660,200 $ 41,051,000 $ 42,198,800
============ ============ ============
In accordance with the Emerging Issues Task Force Issue No. 01-09, "Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products", the Company now accounts for slotting fees paid to a customer to
secure retail shelf space as a reduction to net sales rather than a sales and
marketing expense. Accordingly, operating results for 2001 and 2000 have been
restated to a comparable basis. Slotting fees for the years ended December 31,
2002, 2001 and 2000 were $341,600, $333,000 and $291,300, respectively.
- --------------------------------------------------------------------------------
Page 38
Accounts receivable consisted of the following:
December 31, 2002 2001
- -----------------------------------------------------------------------------
Trade $ 3,306,800 $ 3,821,800
Stockholder 20,000 20,000
Other 164,400 61,100
----------- -----------
Total accounts receivable 3,491,200 3,902,900
Less allowance for doubtful accounts and
customer allowances 416,000 475,000
----------- -----------
Net Accounts Receivable $ 3,075,200 $ 3,427,900
=========== ===========
During 2002 the Company had one customer that accounted for approximately 50% of
net sales and approximately 23% of trade accounts receivable at December 31,
2002. During 2001 the same customer accounted for approximately 39% of net sales
and approximately 11% of trade accounts receivable at December 31, 2001. During
2000 the same customer accounted for approximately 29% of net 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 2002, 2001 and 2000 foreign sales comprised 7%, 6% and 6%, respectively,
of total net sales and approximately 4%, 6% and 7% of trade accounts receivable
at December 31, 2002, 2001 and 2000, respectively.
6. Inventories
- --------------
Inventories consisted of the following:
December 31, 2002 2001
- -----------------------------------------------------------------------------
Finished goods $ 4,409,500 $ 5,633,000
Raw materials 1,408,100 683,600
----------- -----------
Total inventories 5,817,600 6,316,600
Less provision for obsolete inventory 548,000 350,000
----------- -----------
Net Inventories $ 5,269,600 $ 5,966,600
=========== ===========
For 2002, 2001 and 2000 the Company had one supplier of raw materials that
accounted for approximately 11%, 6% and 9%, respectively, of total purchases of
raw materials and one supplier of processing (co-packer) that accounted for
approximately 11%, 6% and 9%, respectively, of total cost of sales. At December
31, 2002, 2001 and 2000 approximately $564,500, $244,300 and $542,000 was owed
to these suppliers and included in accounts payable.
- --------------------------------------------------------------------------------
Page 39
7. Property and Equipment
- -------------------------
Property and equipment consisted of the following:
December 31, 2002 2001
- --------------------------------------------------------------------------
Machinery and equipment $ 4,338,600 $ 3,775,600
Furniture and fixtures 873,500 821,200
Construction in progress 442,200 463,100
Leasehold improvements 244,600 239,000
Vehicles 84,000 84,000
----------- -----------
Total property and equipment 5,982,900 5,382,900
Less accumulated depreciation 2,535,500 2,143,900
----------- -----------
Net Property and Equipment $ 3,447,400 $ 3,239,000
=========== ===========
During the years ended 2002, 2001 and 2000, the Company capitalized interest of
$27,800, $49,200 and $54,800 respectively, on construction in progress. There
was one significant project at December 31, 2002 for an ethanol fractionating
tower which Management has placed on hold while it evaluates other sites for its
manufacturing facility. Spending on the ethanol fractionating tower totaled
$155,000 at December 31, 2002. Management estimates that an additional $200,000
of expenditures are necessary to complete the project.
Depreciation expense was $442,300, $405,100 and $504,200 for 2002, 2001 and
2000, respectively.
8. Goodwill
- -----------
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 1999 merger. During 2001 and 2002 the Company divested the businesses
acquired in the merger in order to raise working capital. The following table
sets forth the transactions affecting goodwill for the years ended December 31,
2000, 2001 and 2002:
OFPI OI TOTAL
---- -- -----
Balances, January 1, 2000 $ 7,301,600 $ 2,920,100 $ 10,221,700
Amortization expense for 2000 (661,100) (248,500) (909,600)
Additional goodwill recorded in
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 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 4) -- (950,000) (950,000)
------------ ------------ ------------
Balances, December 31, 2001 -- 1,470,200 1,470,200
Sale of OI product lines (Note 2) -- (1,470,200) (1,470,200)
------------ ------------ ------------
Balances, December 31, 2002 $ -- $ -- $ --
============ ============ ============
- ---------------------------------------------------------------------------------------------------------
Page 40
In accordance with Financial Accounting Standards Board Statement No. 142, the
Company ceased the amortization of the remaining goodwill as of January 1, 2002.
Had SFAS 142 been in effect prior to January 1, 2002 reported results would have
been adjusted as follows:
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Net income (loss) as reported $ 1,120,000 $ (5,205,800) $ (2,002,300)
Goodwill amortization -- 520,700 909,600
------------ ------------- -------------
Adjusted net income (loss) $ 1,120,000 $ (4,685,100) $ (1,092,700)
============ ============= =============
Basic and fully diluted net income
(loss) per share:
As reported $ 0.02 $ (0.12) $ (0.05)
Effect of goodwill amortization -- 0.01 0.02
------------ ------------- -------------
Adjusted basic and fully diluted
net income (loss) per share $ 0.02 $ (0.11) $ (0.03)
============ ============= =============
9. Other Intangible Assets
- --------------------------
Other intangible assets consisted of the following:
December 31, 2002 2001
- --------------------------------------------------------------------------------
Trademarks $ 74,100 $ 74,100
Label development 80,800 80,800
Covenant not-to-compete 76,500 76,500
-------- --------
Total other intangible assets 231,400 231,400
Less accumulated amortization 189,400 177,400
-------- --------
Net Other Intangible Assets $ 42,000 $ 54,000
======== ========
Amortization expense was $12,000, $13,700 and $26,800 for the years ending
December 31, 2002, 2001 and 2000, respectively. The following table discloses
estimated amortization expense for intangible assets for each of the five
succeeding fiscal years:
2003 $ 5,100
2004 2,000
2005 2,000
2006 2,000
2007 2,000
10. 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 1% per annum (5.25% at
December 31, 2002) which expires on October 5, 2004. Borrowings under the
revolving line of credit totaled $2,479,800 at December 31, 2002 versus
$4,598,800 at December 31, 2001. The credit line is secured by substantially all
assets of the Company and life insurance policies on the Chairman of the Board
and Chief Executive Officer. As of December 31, 2002 the Company had $1,696,700
in excess borrowing capacity available under the line of credit versus $955,800
at December 31, 2001.
- --------------------------------------------------------------------------------
Page 41
The line of credit calls for the Company to maintain compliance with certain
financial covenants. At December 31, 2002 the Company was in compliance with all
covenants and other requirements under the Credit Agreement except for one
covenant setting a limit on capital expenditures for 2002 of $600,000. Actual
spending on capital expenditures was $631,500 in 2002. The bank has granted the
Company a waiver with regards to their default rights in connection with that
covenant breach.
11. Notes Payable, Former Stockholder
- -------------------------------------
Notes payable, former stockholder consisted of the following:
December 31, 2002 2001
------------------------------------------------------------------------------
Note payable with interest due monthly at 9% per
annum. Principal is due in monthly installments of
$15,625 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. (a) $578,100 $828,100
Non-interest bearing, unsubordinated and unsecured
note due on December 31 of the fourth year
following the calendar year which includes the
final payment on the above note, expected to be
2011. Interest has been imputed at an effective
interest rate of 6.5% per annum. (b) 286,200 264,400
--------- --------
Total Notes Payable - Former Stockholder 864,300 1,092,500
Less current maturities 187,500 281,300
--------- ---------
Long-term Portion of Notes Payable - Former
Stockholder $ 676,800 $ 811,200
========= =========
(a) In November 2002 the Company entered into the Seventh Amendment to the
Redemption Agreement with the former stockholder. Under the amendment the
interest rate was reduced from 12% to 9% per annum and monthly principal
payments were reduced from $31,250 to $15,625 until the note is paid in
full. The former stockholder retains the unilateral right to return to
monthly principal payments of $31,250 upon 60 days written notice to the
Company.
(b) The Seventh Amendment to the Redemption Agreement also deferred the final
payment under this note by two years since it is dependent on the final
payment on the secured note. The Company accounted for the two year
deferral on the unsecured note by lowering the imputed effective interest
rate.
Aggregate maturities or principal payments required on notes payable, former
stockholder for each of the succeeding years are included in Note 13.
- --------------------------------------------------------------------------------
Page 42
12. Notes Payable to Stockholders
- ---------------------------------
Notes payable to stockholders consisted of the following:
December 31, 2002 2001
- --------------------------------------------------------------------------------
Unsecured subordinated note due in monthly
installments of $4,300 including principal and
interest at 10% per annum $ 125,600 $ 204,000
Unsecured subordinated notes due in monthly
installments of $8,500 including principal and
interest at 10% per annum 90,400 133,200
--------- ---------
Total Notes Payable to Stockholders 216,000 337,200
Less Current Maturities 87,600 111,700
--------- ---------
Long-term Portion of Notes Payable-Stockholders $ 128,400 $ 225,500
========= =========
Aggregate maturities or principal payments required on notes payable to
stockholders are included in Note 13.
13. Notes Payable and Capital Lease Obligations
- -----------------------------------------------
Notes payable and capital lease obligations consisted of the following:
December 31, 2002 2001
- --------------------------------------------------------------------------------
Senior Debt:
Term notes payable to bank, due in monthly principal
installments of $17,200 plus interest at prime plus
1.25% per annum (5.5% at December 31, 2002), secured
by substantially all assets of the Company (a) $ 429,000 $ 635,300
Capital lease obligations secured by the related
property and equipment (b) 105,900 174,900
Subordinated Debt:
Private placement notes, unsecured, principal due in
annual installments of $28,100 through December 31,
2003 plus interest at 10% per annum and quarterly
common stock purchase warrants (see Note 17) priced
at the closing bid price of SPOP shares (c) -- 236,300
---------- ----------
Total Notes Payable and Capital Lease Obligations 534,900 1,046,500
Less current maturities 256,000 375,200
---------- ----------
Long-term Portion of Notes Payable and Capital Lease
Obligations $ 278,900 $ 671,300
========== ==========
(a) There are three separate term notes payable to the bank, two with 60 month
terms and one with 36 month terms.
(b) The cost of assets securing the capital lease obligations was $438,900 at
December 31, 2002 and 2001, with accumulated amortization of $240,000 and
$183,500 at December 31, 2002 and 2001, respectively.
- --------------------------------------------------------------------------------
Page 43
(c) The private placement notes were retired one year early on December 27,
2002 with borrowings under the line of credit since they represented the
Company's highest cost debt. Non cash interest expense of $49,500,
$96,100 and $118,700 was incurred during the years ended December 31, 2002,
2001 and 2000, respectively, for the value of the common stock purchase
warrants issued to the private placement note holders. The warrants were
valued utilizing the Black-Scholes pricing model with the following
assumptions: expiration date of December 31, 2003, risk free interest rates
of 2.5% to 5.0%, no dividend yield and volatility of 132% to 214%.
Aggregate maturities or principal payments required on all types of long-term
debt and capital lease obligations for each of the succeeding years are as
follows:
Total
Bank Term Stockholder Former Cap. Lease Long-
Years Ended December 31, Notes Notes Stockholder Obligations Term Debt
- ------------------------ ---------- ---------- ---------- ---------- ----------
2003 $206,400 $ 87,600 $187,500 $ 62,700 $ 544,200
2004 185,800 87,700 187,500 51,900 512,900
2005 36,800 40,700 187,500 20,100 285,100
2006 -- -- 15,600 -- 15,600
2011 -- -- 513,300 -- 513,300
---------- ---------- ---------- ---------- ----------
Total Future Payments 429,000 216,000 1,091,400 134,700 1,871,100
Less amounts
representing interest -- -- 227,100 28,800 255,900
---------- ---------- ---------- ---------- ----------
Total Long-Term Debt,
including current
maturities $429,000 $216,000 $864,300 $105,900 $ 1,615,200
========== ========== ========== ========== ==========
14. Provision for Income Taxes and Deferred Income Taxes
- --------------------------------------------------------
The provision for income taxes consisted of the following:
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ (1,400)
State 189,800 -- 5,300
--------- --------- ---------
Subtotal Current 189,800 -- 3,900
--------- --------- ---------
Deferred:
Federal -- -- --
State -- -- --
--------- --------- ---------
Subtotal Deferred -- -- --
--------- --------- ---------
Total Provision for Income Taxes $ 189,800 $ -- $ 3,900
========= ========= =========
- --------------------------------------------------------------------------------
Page 44
A reconciliation of the federal statutory rate to the tax provision of the
corresponding years follows:
Years Ending December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------
Tax expense (benefit) at effective federal
statutory rate $ 445,300 $(1,772,900) $ (679,500)
Disposal of non-deductible goodwill 499,900 2,303,900 --
Impairment loss on non-deductible goodwill -- 323,000 --
Goodwill amortization -- 177,100 309,300
Other non-deductible expense 11,800 57,700 21,200
State income tax expense, net of federal
effect 51,600 94,000 22,200
Valuation allowance (867,200) (1,104,200) 324,100
Other 48,400 (78,600) 6,600
------------ ----------- -----------
Total Provision for Income Taxes $ 189,800 $ -- $ 3,900
============ =========== ===========
Deferred tax assets and liabilities consisted of the following:
December 31, 2002 2001
- -------------------------------------------------------------------------------
Deferred Tax Assets:
Federal net operating loss carryovers $ 1,761,400 $ 2,384,100
Inventory allowances 182,300 154,800
Accounts receivable allowances 141,400 161,500
Accrued compensation 51,100 59,300
State income taxes 335,000 196,500
Other 13,800 236,500
----------- -----------
Gross Deferred Tax Assets 2,485,000 3,192,700
Deferred Tax Liabilities:
Depreciation and fixed asset write-down (443,800) (320,600)
Other (43,300) (7,000)
----------- -----------
Net Deferred Tax Assets, Before Allowance 1,997,900 2,865,100
Valuation allowance (1,997,900) (2,865,100)
----------- -----------
Net Deferred Tax Assets $ -- $ --
=========== ===========
As of December 31, 2002 the Company had federal net operating loss carryforwards
("NOLS") totaling approximately $5,200,000 that expire at various times through
2021. For state purposes, the Company had net operating loss carryforwards
totaling approximately $2,800,000 which expire at various times through 2012. In
addition, the Company had approximately $109,000 of state manufacturing
investment tax credit carryforwards and approximately $60,000 in state
alternative minimum tax carryforwards that expire in varying amounts through
2015.
Approximately $2,800,000 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. Therefore, 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 maintained against
the net deferred tax assets for all periods presented. The amount of the
valuation allowance has decreased by $867,200 and $1,104,200 during 2002 and
2001, respectively.
- --------------------------------------------------------------------------------
Page 45
15. 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 $34,800, $47,300 and $40,400
for the years ended December 31, 2002, 2001 and 2000, respectively.
16. 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 vested 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, 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. At an annual meeting of shareholders held on November 6, 2002
shareholders approved an increase in the number of shares that could be issued
under the 1995 Plan to 7,000,000. Under the amended 1995 Plan, the option price
shall not be less than the fair market value on the date of grant and options
expire unless exercised within ten years after the date of grant. Options
generally vest ratably over four years for employees and two years for
directors. Each option represents the right to purchase one share of the
Company's common stock at a fixed price per share at some future date.
The following table summarizes the activity under the 1995 Plan for the years
ended December 31, 2002, 2001 and 2000:
2002 2001 2000
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ------ --------- ------ ------- ------
Outstanding, beginning
of year 3,225,315 $ 0.48 2,010,115 $ 0.41 1,380,515 $ 0.59
Options granted 1,325,000 0.30 1,256,400 0.59 1,157,200 0.44
Expired options (652,200) 0.21 (41,200) 0.44 (527,600) 0.93
--------- ------ --------- ------ --------- ------
Outstanding, end of year 3,898,115 $ 0.34 3,225,315 $ 0.48 2,010,115 $ 0.41
========= ====== ========= ====== ========= ======
Options exercisable at
year end 1,784,282 $ 0.35 1,457,448 $ 0.67 627,289 $ 0.39
========= ====== ========= ====== ========= ======
Weighted average fair value of
options granted during the year $ 0.30 $ 0.59 $ 0.43
====== ====== ======
- ---------------------------------------------------------------------------------------------------------------
Page 46
The following table discloses exercise prices and remaining lives of options
outstanding or exercisable as of December 31, 2002:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Average Average Weighted
Number Remaining Weighted Number Remaining Average
Range of Outstanding Contractual Average Exercisable Contractual Exercise
Exercise Prices at 12/31/02 Life (Years) Exercise Price at 12/31/02 Life (Years) Price
- --------------------------------------------------------------------------------------------------------
$0.00-$0.25 1,262,800 8.9 $ 0.24 374,450 8.7 $ 0.24
$0.26-$0.50 2,622,315 7.7 0.38 1,396,832 6.7 0.36
$0.51-$2.50 13,000 4.4 2.50 13,000 4.4 2.50
- --------------------------------------------------------------------------------------------------------
$0.00-$2.50 3,898,115 8.1 $ 0.34 1,784,282 7.1 $ 0.35
========================================================================================================
As of December 31, 2002 there were 3,101,885 options remaining that are
available for future issuance under the Plan.
17. 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 future date. At
the date of the merger the Company assumed outstanding common stock purchase
warrants of OFPI totaling 590,656. At December 31, 2002 there were 60,656 of
those warrants still outstanding which expired on February 11, 2003. In
addition, in connection with the renegotiation of the private placement notes,
the Company has issued quarterly common stock purchase warrants at the closing
bid price of SPOP shares at each quarter-end starting December 31, 2000 and
ending on December 31, 2002 as a result of the early retirement of the private
placement notes.
The following table discloses the activity related to common stock purchase
warrants for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
--------- --------- --------- --------- --------- ---------
Outstanding, beginning
of year 843,156 $1.43 608,156 $1.78 550,656 $1.96
IPO warrants expired (330,000) 2.79 -- -- -- --
Private placement
warrants exercised (a) (30,750) 0.33 (262,500) 0.05 (182,500) 0.01
Warrants issued in
connection with
restricted stock
purchase (b) -- -- 160,000 0.31 -- --
Private placement
warrants issued 200,200 0.32 337,500 0.26 240,000 0.01
--------- --------- --------- --------- --------- ---------
Outstanding, end of year 682,606 $0.50 843,156 $1.43 608,156 $1.78
========= ========= ========= ========= ========= =========
(a) These warrants included a net exercise feature which enabled the holder to
convert the net equity in the warrants into common stock in a cash-less
transaction. Accordingly, common shares issued in connection with the
exercise of the private placement warrants were 6,910, 230,883 and 181,642
for the years ended December 31, 2002, 2001 and 2000, respectively.
- --------------------------------------------------------------------------------
Page 47
(b) These warrants were issued in February 2001 in connection with the purchase
of 160,000 shares of SPOP restricted common stock by a non-executive
Director of the Company. 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 19.
The following table discloses exercise prices and remaining lives of the
outstanding common stock purchase warrants at December 31, 2002:
Weighted
Average
Number Exercise Expiration
Outstanding Price Date
----------- ------- -----------
Warrants assumed at the merger 60,656 $ 2.63 2/11/2003
Warrants issued under the private
placement notes 461,950 0.28 12/31/2003
Warrants issued to non-executive Director 160,000 0.31 2/15/2006
------- ------
Total Warrants Outstanding 682,606 $ 0.50
======= ======
18. Commitments and Contingencies
- ---------------------------------
Rental Agreements
- -----------------
The Company rents office, production and warehouse facilities under various
non-cancelable operating leases, which expire at various times through 2007.
Some of the leases include renewal provisions and base rent increases tied to
changes in the consumer price index. Total monthly rental payments for these
leases approximated $36,500 at December 31, 2002. The Company also rents office
equipment under operating leases that expire at various times through 2005 with
monthly lease payments approximating $3,500.
Rental expense for 2002, 2001 and 2000 totaled $360,800, $391,200 and $453,800,
respectively.
Future minimum lease payments under non-cancelable operating leases with terms
greater than one year are as follows:
2003 $ 185,600
2004 246,000
2005 250,000
2006 250,000
2007 250,000
----- ----------
Total $1,181,600
===== ==========
Bonus Agreements
- ----------------
The Company has entered into a bonus agreement with the family of a deceased
employee, who was instrumental to the Company's initial success, under which the
family will be paid $75,000 in fifteen monthly installments from May 2002
through July 2003. The entire $75,000 was included in other expense for the year
ended December 31, 2002.
- --------------------------------------------------------------------------------
Page 48
Royalty Agreements
- ------------------
The Company has entered into royalty agreements with various unrelated parties
for licensed technologies which provide for a percentage royalty to be paid on
sales of certain products. Included in accrued expenses were royalties of
$51,700 and $61,900 as of December 31, 2002 and 2001, respectively, in
connection with these agreements. Royalty expense included in cost of sales
under these agreements for the years ended December 31, 2002, 2001 and 2000 was
$243,500, $216,600 and $176,200, respectively.
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, 2002 and 2001 these future commitments, which
are at prices not in excess of those currently obtainable nor in quantities in
excess of normal requirements, aggregated approximately $6,623,000 and
$5,958,000, respectively.
Legal Proceedings
- -----------------
In October 2000 the Company was notified by counsel for GFA Brands, Inc. that
nutritional claims pertaining to Spectrum Naturals(R) 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(R) 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. The case is currently in the
discovery phase. 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 December 31, 2002.
Safety Violations and Workers' Compensation Appeals
- ---------------------------------------------------
In connection with the industrial accident that occurred on April 25, 2002 the
Company received nine citations from CAL-OSHA for safety violations with total
proposed penalties of $137,900. The Company has filed an appeal with CAL-OSHA in
the hopes of reducing the citations and proposed penalties. Also, the estates of
the deceased employees have both filed applications to the Workers' Compensation
Appeals Board of the State of California for an increased death benefit for
serious and willful misconduct by the Company. These two applications are for an
additional death benefit of $62,500 each, to be paid by the Company, should the
estates successfully establish that the Company intentionally and willfully
allowed unsafe working conditions to exist. The Company intends to defend itself
vigorously and believes it has meritorious defenses. As of December 31, 2002 the
Company had a reserve of $153,700 to cover the anticipated settlement of these
issues plus attorney's fees.
- --------------------------------------------------------------------------------
Page 49
19. Related Party Transactions
- -------------------------------
The Company paid consulting fees of $15,000, $70,000 and $45,000 during the
years ended December 31, 2002, 2001 and 2000, 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 investment banking fees of $79,000 in 2002 in connection
with the sale of the OI product lines and $78,200 in 2001 in connection with the
sale of the OFPI product lines as described in Note 2.
Also in connection with the sale of the Organic Ingredients product lines, the
Company entered into a private label consulting agreement with Running Stream
Food and Beverage, Inc. ("RSFB"). RSFB is owned and operated by John
Battendieri, a non-executive Director of the Company. During 2002 the Company
made payments of $66,000 plus expenses incurred to RSFB for private label
consulting and management services.
The Company paid interest at 10% per annum under notes payable to four
stockholders, one of whom is also a non-executive Director of the Company, of
$27,900, $38,300 and $57,100 for the years ended December 31, 2002, 2001 and
2000, respectively.
In February 2001 the Company sold 160,000 restricted shares under Regulation D
of the Securities Act of 1933 to 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 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
the non-executive Director for an additional 160,000 shares at an exercise price
of $0.3125 per share, which expire in February 2006.
20. 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, 2002:
Net Sales $ 11,284 $ 10,109 $ 9,726 $9,541 $ 40,660
Gross Profit 2,949 2,357 2,754 2,523 10,583
Operating Income (Loss) 512 54 671 539 1,776
Net Income (Loss) 331 (51) 575 265 1,120
Basic and Fully Diluted
Income (Loss) per Share $ 0.01 $ (0.00) $ 0.01 $ 0.00 $ 0.02
Year ended December 31, 2001:
Net Sales $ 10,130 $ 10,545 $ 10,510 $9,866 $ 41,051
Gross Profit 2,668 3,044 2,772 2,557 11,041
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 $ 10,703 $ 11,303 $ 10,542 $9,651 $ 42,199
Gross Profit 2,725 2,934 2,599 1,917 10,175
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)
- ------------------------------------------------------------------------------------------------------------
Page 50
Schedule II
Spectrum Organic Products, Inc.
Valuation and Qualifying Accounts
For the Years ended December 31, 2000, 2001 and 2002
Reserves
for Allowances Reserve for
Obsolete Against Industrial
Inventories Receivables Accident
--------- --------- ---------
Balances, January 1, 2000 $ 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 --
Additions charged to profit and loss 262,200 47,000 254,100
reserves (64,200) (106,000) (100,400)
--------- --------- ---------
Balances, December 31, 2002 $ 548,000 $ 416,000 $ 153,700
========= ========= =========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
- ----------------------------------------------------------------------------
None.
- ------------------------------------------------------------------------------------------------------------
Page 51
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 52 Chairman of the Board 10/06/99
Neil G. Blomquist 51 President and CEO, Director 09/01/02
Hubert H. Holcombe 59 Vice President - Operations 11/29/99
Robert B. Fowles 47 Chief Financial Officer and Secretary 06/26/00
N. Michael Langenborg 44 Vice President - Marketing 11/04/02
Stephen L. Terre 54 Vice President - Sales 11/18/02
John R. Battendieri 56 Director 06/01/88
Phillip L. Moore 53 Director (2) 10/06/99
Charles A. Lynch 75 Director (1)(2) 04/01/00
Thomas B. Simone 60 Director (1)(2) 12/15/00
Conrad W. Hewitt 65 Director (1) 11/06/02
(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 P. Phillips has been Chairman of the Board of Directors since the merger
in October 1999 which created Spectrum Organic Products, Inc. He also served as
Chief Executive Officer of the Company from the merger until August 31, 2002.
Mr. Phillips founded Spectrum Naturals, Inc. in 1980 and served as its Chief
Executive Officer and Chairman of the Board of Directors since its inception. In
1995 he founded Spectrum Commodities, Inc., 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
Humboldt.
Neil G. Blomquist was appointed President and Chief Executive Officer of the
Company on September 1, 2002. Prior to that he 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 and has been involved
in the organic and natural foods industry for more than 25 years. Mr. Blomquist
holds a Bachelor of Science degree in Business Management and Economics from the
University of South Dakota.
- --------------------------------------------------------------------------------
Page 52
Hubert H. 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 B. 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.
Nils Michael Langenborg joined Spectrum as Vice President-Marketing in November
2002. Prior to joining Spectrum Mr. Langenborg was the principal of Natural
Planograms, a category management company that he founded in April 2001 to
provide consumer-focused solutions to retailers and manufacturers of natural
products. Prior to that Mr. Langenborg served as Vice President of Marketing for
Traditional Medicinals, Inc. from July 1995 through March 2001 where he was
responsible for the creation, development and execution of all national
marketing support programs. Mr. Langenborg is a graduate of San Francisco State
University with dual majors in Marketing and Advertising and Small Business
Management.
Stephen L. Terre joined Spectrum as Vice President-Sales in November 2002. Prior
to joining Spectrum Mr. Terre served for 18 years as Vice President of Sales for
Traditional Medicinals, Inc. where he was responsible for all aspects of the
Company's sales efforts. Mr. Terre has devoted his entire career to the natural
foods industry and is a graduate of the University of California, San Diego.
John R. Battendieri founded Running Stream Food and Beverage, Inc. in April 2002
as a consulting service for private label food and beverage products for
Spectrum and other natural and organic food companies. Mr. Battendieri founded
Organic Food Products, Inc. in 1988 and served as its President and as a
director since 1988 and as its Chief Executive Officer from October 1998 until
the merger with Spectrum in October 1999. In 1987 he founded Santa Cruz
Naturals, an organic fruit juice company, which he sold to the J.M. Smucker
Company 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.
Phillip L. 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. Mr. Moore holds a Bachelor of
Science degree in Accounting and Business from Guilford College of North
Carolina. Mr. Moore is a member of the Compensation Committee.
Charles A. Lynch became a Director on April 1, 2000 and is Chairman of Market
Value Partners Company, a management and advisory source for existing and
emerging businesses. 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 currently serves as Chairman of the Board
of Fresh Choice, Inc. and also serves as an advisor to Shari's Management
Corporation. Mr. Lynch received his Bachelor of Science degree from Yale
University and an Honorary Degree of Doctors of Law from Golden Gate University.
Mr. Lynch is Chairman of the Compensation Committee and a member of the Audit
Committee.
- --------------------------------------------------------------------------------
Page 53
Thomas B. Simone has been a Director of the Company since December 2000 and is a
principal of Simone & Associates, a management and advisory firm that invests in
and consults with healthcare and natural products companies. Mr. Simone also
serves on the Board of United Natural Foods, Inc., the largest distributor of
natural products in the industry. 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. Mr. Simone is a member of the Audit Committee and Compensation
Committee.
Conrad W. Hewitt joined the Board on November 6, 2002 and has been a consultant
to other companies since 1998. Prior to that he served as the Commissioner for
the State of California Department of Financial Institutions from 1997 to 1998,
and as the State of California Superintendent of Banking from 1995 to 1997. From
1962 to 1995 Mr. Hewitt was a Managing Partner with Ernst & Young's offices in
San Francisco, Seattle and Honolulu. Mr. Hewitt currently serves as a Director
on the boards of Global Intermodal Systems, Inc. in San Ramon, California, North
Bay Bancorp in Napa, California, ADPAC in San Francisco, California, Point West
Capital Corporation in San Francisco, California, and Click Books, Inc. in
Oakland, California. He is also on the Advisory Board of Directors for
Clark/Bardes Consulting in Dallas, Texas, and Private Capital Corporation in
Novato, California. Mr. Hewitt holds a Bachelor of Science degree in Finance and
Banking from the University of Illinois, and did his post graduate study at the
University of Southern California. He is a member of the National Association of
Corporate Directors and the American Institute of CPAs. Mr. Hewitt is Chairman
of the Audit Committee.
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. The Company files all the reports
required under Section 16(a) on behalf of its officers, directors and greater
than 10% beneficial owners. To the Company's knowledge, based solely on its
information concerning changes in ownership of common stock and other equity
securities 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, 2002 with the exception of the initial reports for Mr.
Langenborg and Mr. Terre, indicating no ownership of the Company's equity
securities, which were filed late.
- --------------------------------------------------------------------------------
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ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The following table summarizes the annual compensation awarded or paid during
the last three fiscal years for the Company's Chairman of the Board and the next
three 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) 2002 $ 208,000 $ 32,500 $ 9,000 --
Chairman of the Board 2001 205,000 -- 5,600 --
2000 240,000 -- 11,500 --
Neil Blomquist (2) 2002 $ 183,300 $ 26,400 $ 9,000 650,000
President and 2001 148,600 28,100 4,600 --
Chief Executive Officer 2000 150,000 -- 5,000 50,000
Hubert Holcombe 2002 $ 132,300 $ -- $ -- 75,000
Vice President, 2001 120,500 21,500 -- --
Operations 2000 120,000 -- -- 250,000
Robert Fowles (3) 2002 $ 136,300 $ 22,000 $ -- 100,000
Chief Financial Officer 2001 120,500 23,800 -- 250,000
and Secretary 2000 57,300 -- -- 250,000
(1) Mr. Phillips also served as Chief Executive Officer from October 6, 1999
until August 31, 2002.
(2) Mr. Blomquist was appointed President and Chief Executive Officer on
September 1, 2002. Prior to then he was President-Consumer Brands.
(3) Mr. Fowles was appointed Chief Financial Officer on June 26, 2000.
Under new arrangements which began January 1, 2001 the Company's non-executive
directors have the choice of (1) annual cash compensation of $10,000 and 20,000
stock options plus 5,000 additional stock options for Chairmanship of a
Committee at the market price on the date of grant with a four year vesting
schedule, or (2) 80,000 stock options for serving on the Board plus 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 valued at $0.3125 per share, the closing price of
the Company's common stock as quoted on the 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. During the ensuing
years and as a result of the merger, the 1995 Plan was amended and restated to
increase the aggregate number of shares of common stock authorized for issuance
- --------------------------------------------------------------------------------
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under the Plan from 625,000 to 7,000,000 shares. The Board of Directors
determines which individuals shall receive stock options, the vesting period and
the number of shares of common stock that may be purchased under each option. 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 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 within 90 days of termination. 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 associated with 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, 2002 there were 3,898,115 stock options outstanding under the
1995 Plan for officers, directors, consultants and employees (3,170,515 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, 2002. During the year there were no
exercises of stock options by the Named Executive Officers.
INDIVIDUAL GRANTS
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise or
Granted 2002 Base Price Expiration Date
----------- ------------ --------- -----------
Neil Blomquist 150,000 18.2% $ 0.25 February 28, 2012
Hubert Holcombe 75,000 9.1% 0.25 February 28, 2012
Robert Fowles 100,000 12.1% 0.25 February 28, 2012
Neil Blomquist 500,000 60.6% 0.41 October 18, 2012
The above options all vest ratably over the four-year period following the date
of grant.
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The following table sets forth the number of shares underlying outstanding
options at December 31, 2002 and their related value for the Named Executive
Officers:
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-money
at December 31, 2002 Options at December 31, 2002 (1)
-------------------------------- -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Neil Blomquist 865,515 675,000 $ -- $ 37,500
Hubert Holcombe 125,000 200,000 -- 18,750
Robert Fowles 187,500 412,500 16,875 75,625
--------- --------- ---------- ----------
Totals 1,178,015 1,287,500 $ 16,875 $ 131,875
========= ========= ========== ==========
(1) At closing stock price of $0.30 at December 31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The following table sets forth information concerning the ownership of common
stock, common stock warrants and vested common stock options 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 5341 Old Redwood Highway, Petaluma,
California.
Name Number of Shares (1) Percent of Class
---- ------------------- ----------------
Jethren P. Phillips 31,519,328 66.4%
John R. Battendieri 4,008,332 8.4
Neil G. Blomquist 1,720,183 3.6
Thomas B. Simone 466,733 *
Phillip L. Moore 388,566 *
Robert B. Fowles 212,500 *
Charles A. Lynch 192,230 *
Hubert H. Holcombe 143,750 *
Conrad W. Hewitt 23,666 *
------------ -------
All officers and directors as a
group (11 persons) 38,675,288 77.4%
============ =======
* Less than 1%
(1) The number of shares shown represents the total shares beneficially owned by
each individual and shares which are issuable upon the exercise of all stock
options or stock warrants which are currently exercisable or became exercisable
within 60 days after December 31, 2002. Specifically, the following individuals
have the right to acquire the following shares upon the exercise of such stock
options and warrants: Mr. Battendieri - 33,333 shares, Mr. Blomquist - 903,015
shares, Mr. Simone - 306,733 shares, Mr. Moore - 132,553 shares, Mr. Fowles -
212,500 shares, Mr. Lynch - 164,230 shares, Mr. Holcombe - 143,750 shares and
Mr. Hewitt - 23,666 shares.
- --------------------------------------------------------------------------------
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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 2002 the Company made payments of
$26,100 to Mr. Battendieri representing principal and interest payments under
the note.
The Company has retained Moore Consulting for investment banking and management
advisory services. Moore Consulting is operated as a sole proprietorship by
Phillip Moore, a non-executive Director of the Company. During 2002 the Company
made payments of $15,000 to Moore Consulting Company for management advisory
services. In addition, the Company paid Moore Consulting an investment banking
fee of $79,000 in connection with the sale of the Organic Ingredients product
lines.
Also in connection with the sale of the Organic Ingredients product lines, the
Company entered into a private label consulting agreement with Running Stream
Food and Beverage, Inc. ("RSFB"). RSFB is owned and operated by John
Battendieri, a non-executive Director of the Company. During 2002 the Company
made payments of $66,000 plus expenses incurred to RSFB for private label
consulting and management services.
The Company paid interest at 10% per annum under notes payable to three
shareholders during the year ended December 31, 2002 in the amount of $22,400.
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.
ITEM 14. CONTROLS AND PROCEDURES
- ---------------------------------
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of both the design and the operation of its disclosure
controls and procedures and have found them to be adequate. The Company has
formed a Disclosure Review Committee ("the DRC") which consists of various
senior managers from each functional area of the Company. The DRC considers the
materiality of new information and reports to the Company's Chief Financial
Officer.
There were no material changes in the Company's internal control system during
the year ended December 31, 2002. Management is not aware of any significant
deficiencies in the design or operation of internal controls.
- --------------------------------------------------------------------------------
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PART IV
ITEM 15. 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 24
Report of Independent Certified Public Accountants 25
Balance Sheets as of December 31, 2002 and 2001 26
Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 27
Statement of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000 28
Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 29
Summary of Significant Accounting Policies 30
Notes to Financial Statements 36
(2) Index to Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 51
(3) Exhibits:
Exhibit
No. Description
------- -----------
1.01 Form of Representatives' Warrant (1)
1.02 Form of Amended Representatives' Warrant (1)
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)
2.10 Asset Purchase Agreement dated April 25, 2002 by
and among Spectrum Organic Products, Inc., Organic
Ingredients, Inc. and Acirca, Inc. (9)
2.11 Escrow and Security Agreement dated April 25, 2002
by and among Spectrum Organic Products, Inc.,
Organic Ingredients, Inc. and Webster Trust
Company, NA. (9)
2.12 Transition Services Agreement dated April 25, 2002
by and between Spectrum Organic Products, Inc. and
Acirca, Inc. (9)
2.13 Non-competition Agreement dated April 25, 2002 by
and among Spectrum Organic Products, Inc., Organic
Ingredients, Inc., Jethren Phillips, and Neil
Blomquist. (9)
2.14 Sales Representative Services Agreement dated
April 25, 2002 by and between Spectrum Organic
Products, Inc. and Organic Ingredients, Inc. (9)
- --------------------------------------------------------------------------------
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2.15 Assignment and Assumption Agreement dated April
25, 2002 by and between Spectrum Organic Products,
Inc. and Organic Ingredients, Inc. (9)
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 (2)
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)
10.21 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)
- --------------------------------------------------------------------------------
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10.28 Guaranty Agreement dated June 6, 1997 by and
between Spectrum Naturals, Inc., Debora Bainbridge
Phillips and Jethren Phillips. (6)
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)
10.34 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)
10.37 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. (2)
10.38 Employment Agreement effective as of October 1,
2002 by and between Spectrum Organic Products,
Inc. and Neil G. Blomquist.
10.39 Second Amendment to Credit and Security Agreement
dated October 30, 2002 by and between Spectrum
Organic Products, Inc. and Wells Fargo Business
Credit, Inc.
10.40 Seventh Amendment to Amended and Restated
Redemption Agreement and Amended and Restated
Promissory Note effective November 1, 2002 by and
between Spectrum Organic Products, Inc., Debora
Bainbridge Phillips and Jethren P. Phillips.
10.41 Sublease Agreement dated October 23, 2002 by and
between Spectrum Organic Products, Inc. and
Alcatel USA Sourcing, LP.
10.42 Consent to Sublease Agreement dated November 13,
2002 by and between Spectrum Organic Products,
Inc., Alcatel USA Sourcing, LP and Redwood
Business Park IV, LLC.
23.02 Consent of Independent Certified Public
Accountants dated March 14, 2003 by BDO Seidman,
LLP, San Francisco, CA.
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)
99.02 Press release of the Company dated May 1, 2002
titled "Spectrum Organic Products Reports Sale of
Organic Ingredients". (9)
99.05 Press release of the Company dated August 29, 2002
titled "Spectrum Organic Products, Inc. appoints
new CEO". (10)
99.07 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes - Oxley Act of
2002.
99.08 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes - Oxley Act of
2002.
- --------------------------------------------------------------------------------
Page 61
(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 10-K on March 20, 2002.
(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.
(9) Incorporated by reference to exhibits filed with
the Registrant's Form 8-K on May 9, 2002.
(10) Incorporated by reference to exhibits filed with
the Registrant's Form 8-K on September 6, 2002.
(b) Reports on Form 8-K during the quarter ended December 31, 2002:
None.
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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 10, 2003.
Spectrum Organic Products, Inc.
By: /s/ Robert B. Fowles
-----------------------------
Robert B. Fowles
Chief Financial Officer
and Secretary
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 Chairman of the Board of Directors 3/10/03
- -----------------------------
JETHREN P. PHILLIPS
/s/ Neil G. Blomquist President and Chief Executive 3/10/03
- ----------------------------- Officer, Director
NEIL G. BLOMQUIST
/s/ Robert B. Fowles Chief Financial Officer and 3/10/03
- ----------------------------- Secretary
ROBERT B. FOWLES
/s/ Larry D. Lawton Controller (Principal Accounting 3/10/03
- ----------------------------- Officer)
LARRY D. LAWTON
/s/ John R. Battendieri Director 3/10/03
- -----------------------------
JOHN R. BATTENDIERI
/s/ Phillip L. Moore Director 3/10/03
- -----------------------------
PHILLIP L. MOORE
/s/ Charles A. Lynch Director 3/10/03
- -----------------------------
CHARLES A. LYNCH
/s/ Thomas B. Simone Director 3/10/03
- -----------------------------
THOMAS B. SIMONE
/s/ Conrad W. Hewitt Director 3/10/03
- -----------------------------
CONRAD W. HEWITT
- --------------------------------------------------------------------------------
Page 63
CERTIFICATION
I Neil G. Blomquist, Chief Executive Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Spectrum Organic
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003
/s/ Neil G. Blomquist
----------------------------------
Neil G. Blomquist
Chief Executive Officer
- --------------------------------------------------------------------------------
Page 64
CERTIFICATION
I Robert B. Fowles, Chief Financial Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Spectrum Organic
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003
/s/ Robert B. Fowles
-----------------------------------
Robert B. Fowles
Chief Financial Officer and
Secretary
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