SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ________________
Commission File No. 333-22997
SPECTRUM ORGANIC PRODUCTS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-3076294
------------------------------ ---------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
133 Copeland Street
Petaluma, California 94952
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(Address of principal executive offices) (Zip Code)
(707)778-8900
-------------------------
Issuer's telephone number
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan conformed by court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, no par value,
45,140,354 shares as of May 11, 2001. Transitional Small Business Disclosure
Format: Yes [ ] No [ X ]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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SPECTRUM ORGANIC PRODUCTS, INC.
BALANCE SHEETS
ASSETS
(Unaudited)
March 31, December 31,
2001 2000
------------ ------------
Current Assets:
Cash $ 1,000 $ 900
Accounts receivable, net 3,719,200 2,971,700
Inventories, net 7,694,800 6,676,400
Prepaid expenses and other current assets 101,500 84,600
------------ ------------
Total Current Assets 11,516,500 9,733,600
Property and Equipment, net 3,175,700 3,254,900
Other Assets:
Goodwill, net 9,495,600 9,721,100
Other assets, net 139,700 131,800
------------ ------------
Total Assets $ 24,327,500 $ 22,841,400
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 856,600 $ 539,000
Line of credit 6,312,800 5,432,200
Accounts payable, trade 6,442,300 6,057,600
Accrued expenses 833,300 715,400
Current maturities of notes payable, former stockholder 375,000 375,000
Current maturities of notes payable and capitalized lease
obligations 967,700 1,312,900
Current maturities of notes payable, stockholders 140,000 110,800
------------ ------------
Total Current Liabilities 15,927,700 14,542,900
Notes payable, former stockholder, less current maturities 874,300 961,400
Notes payable, stockholders, less current maturities 286,400 337,200
Notes payable and capitalized lease obligations, less
current maturities 387,000 149,900
------------ ------------
Total Liabilities 17,475,400 15,991,400
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized, no
shares issued or outstanding -- --
Common stock, no par value, 60,000,000 shares authorized,
45,140,354 and 44,495,828 issued and outstanding at
March 31, 2001 and December 31, 2000, respectively 8,745,200 8,616,200
Additional paid-in capital 345,100 304,200
Accumulated deficit (2,238,200) (2,070,400)
------------ ------------
Total Stockholders' Equity 6,852,100 6,850,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 24,327,500 $ 22,841,400
============ ============
The accompanying notes are an integral part
of the financial statements.
2
SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31, March 31,
2001 2000
------------ ------------
Gross Sales $ 11,002,600 $ 11,424,800
Discounts and Allowances 790,600 648,500
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Net Sales 10,212,000 10,776,300
Cost of Goods Sold 7,463,700 7,973,600
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Gross Profit 2,748,300 2,802,700
------------ ------------
Operating Expenses:
Sales and Marketing 1,584,100 1,856,700
General and Administrative 843,700 840,100
Amortization of Goodwill 225,400 219,000
------------ ------------
Total Operating Expenses 2,653,200 2,915,800
------------ ------------
Income (Loss) from Operations 95,100 (113,100)
------------ ------------
Other Income (Expense):
Interest Expense (281,200) (309,100)
Gains/(Losses) on Sale of Assets (2,500) 50,000
Other 20,800 (1,100)
------------ ------------
Total Other Expenses (262,900) (260,200)
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Loss Before Taxes (167,800) (373,300)
Provision for Income Tax Expense -- --
------------ ------------
Net Loss $ (167,800) $ (373,300)
============ ============
Basic and Fully Diluted Loss Per Share $ 0.00 $ (0.01)
============ ============
Weighted Average Shares Outstanding 44,785,702 43,914,186
============ ============
The accompanying notes are an integral part
of the financial statements.
3
SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31, March 31,
2001 2000
------------ ------------
Net Loss $ (167,800) $ (373,300)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Provision for allowances against receivables (86,900) 15,100
Provision for reserves for inventory obsolescence (37,800)
Depreciation and amortization 99,600 208,900
Amortization of goodwill 225,400 219,000
Loss (Gain) on sale of assets 2,500 (50,000)
Imputed interest on note payable, former stockholder 6,600 18,800
Imputed interest on common stock purchase warrants 29,300 --
Amortization of original issue discount on
unsecured subordinated notes -- 55,200
Restricted shares issued in lieu of Directors fees 20,000 --
Changes in Assets and Liabilities:
Accounts receivable (680,700) (810,200)
Inventories (980,600) 638,800
Prepaid expenses and other current assets 21,200 (35,800)
Other assets (13,800) (1,200)
Accounts payable 462,200 (255,600)
Accrued expenses 118,700 (280,700)
Income tax payable -- (13,300)
------------ ------------
Net Cash Used in Operating Activities (982,100) (664,300)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (100,800) (89,900)
Proceeds from sale of assets 5,500 50,000
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Net Cash Used in Investing Activities (95,300) (39,900)
------------ ------------
Cash Flows From Financing Activities:
Increase in checks drawn against future deposits 317,600 445,900
Proceeds from lines of credit 10,245,700 11,002,900
Repayment of lines of credit (9,365,100) (10,502,200)
Repayment of notes payable, former stockholder (93,700) (93,800)
Repayment of notes payable to stockholders (24,800) (68,600)
Proceeds of notes payable 50,000 60,000
Repayment of notes payable (85,000) (130,500)
Repayment of capitalized lease obligations (17,200) (10,100)
Warrants exercised -- 600
Restricted shares sold to non-executive Director 50,000 --
------------ ------------
Net Cash Provided by Financing Activities 1,077,500 704,200
------------ ------------
Net Increase in Cash 100 0
Cash, beginning of the year 900 1,100
------------ ------------
Cash, end of the period $ 1,000 $ 1,100
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ -- $ 1,400
Cash paid for interest $ 260,700 $ 225,900
============ ============
The accompanying notes are an integral part
of the financial statements.
4
SPECTRUM ORGANIC PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation:
These are unaudited interim financial statements and include all
adjustments (consisting of normal recurring accruals) which, in the opinion
of Management, are necessary in order to make the financial statements not
misleading. Certain reclassifications have been made to the March 31, 2000
unaudited interim financial statements to be consistent with the
presentation at March 31, 2001. These reclassifications had no impact on
net income or retained earnings. Operating results for the three-month
period ended March 31, 2001 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 2001. These
financial statements have been prepared in accordance with the instructions
to Form 10-Q and do not include certain disclosures required by generally
accepted accounting principles. Accordingly, the statements should be read
in conjunction with Spectrum Organic Products, Inc. financial statements
and notes thereto included in the Company's Form 10-KSB for the year ended
December 31, 2000.
2. Business Combination:
On October 6, 1999, Spectrum Naturals, Inc. ("SNI"), its affiliate Spectrum
Commodities, Inc. ("SCI") and Organic Ingredients, Inc. ("OI"), all
California corporations, were merged with and into Organic Food Products,
Inc. ("OFPI"), also a California corporation (the "Merger"). Effective with
the Merger, the newly combined entity changed its name to Spectrum Organic
Products, Inc. Together, SNI and SCI prior to the Merger and the combined
companies after the Merger are referred to as "the Company" or "SPOP".
As a result of the Merger, SNI stockholders received 4,699.53 shares of
OFPI stock in exchange for each share of SNI stock previously held, for a
total of 32,336,495 shares representing approximately 73.8% of the
outstanding common stock after the Merger. OI stockholders received 39.5
shares of OFPI stock in exchange for each share of OI stock previously
held, for a total of 3,950,000 shares representing approximately 9.0% of
the outstanding common stock after the Merger. Existing OFPI stockholders
held 7,275,665 of the outstanding shares, or approximately 17.2% of the
common stock outstanding after the Merger. Since a controlling interest in
the Company is held by former SNI stockholders after the Merger, the
transaction was accounted for as a reverse acquisition, with SNI as
accounting acquirer and OFPI and OI as accounting acquirees.
3. Plant Closure:
In May 2000, the Company committed to a plan to close its leased
manufacturing facility in Morgan Hill, California. Production of the OFPI
brands at this facility were transferred to a third-party co-packer which
also purchased certain manufacturing equipment from the Company. As a
result, production at the Morgan Hill facility ceased on July 21, 2000. The
facility currently remains under lease while the Company returns the
facility to its condition on the date it was leased. Management is
cooperating with the owner to secure new tenants and anticipates being free
of its obligations under the lease or of sub-leasing the facility by
September 30, 2001. Rental payments for the three-month period ended March
31, 2001 for the Morgan Hill facility were $21,200. All rental payments
through September 30, 2001 have been accrued and are included in accounts
payable at March 31, 2001.
5
4. Inventories:
Inventories consisted of the following:
March 31, December 31,
2001 2000
----------- -----------
Raw materials $ 1,455,900 $ 1,130,300
Finished goods 6,766,600 6,111,600
----------- -----------
Total Inventories 8,222,500 7,241,900
Less: Provision for obsolete inventory (527,700) (565,500)
----------- -----------
Net Inventories $ 7,694,800 $ 6,676,400
=========== ===========
5. Commitments and Contingencies:
Litigation and Settlements
--------------------------
In November 1998, Global Natural Brands, Ltd. ("Global"), a company that
had provided management consulting services for OFPI filed suit alleging
unpaid wages and seeking money damages and injunctive relief. In April
2000, a settlement was reached with this company (which is also a
stockholder), and the case was dismissed. Under the terms of the settlement
and release, SPOP paid Global a total cash consideration of $145,000, and
issued 400,000 shares of SPOP stock, which were valued at the closing
market price on the date of settlement. In addition, SPOP will issue to
Global options to purchase 225,000 common shares at $2.25 per share over an
option term that expires on October 31, 2002. The options have not been
issued yet due to ongoing discussions with Global concerning language to be
included in the stock option agreement regarding any potential subsequent
sale or merger of the Company. The estimated fair value of the options of
$27,400 was included in accounts payable at March 31, 2001.
In February 1998, OFPI acquired the natural fruit juice and water bottling
operations of Sunny Farms Corporation for cash and common stock. A portion
of the common stock consideration was held in escrow, contingent upon
earn-out calculations for the year following the acquisition. Subsequently,
Sunny Farms sought voluntary relief pursuant to chapter 7 of the U.S.
Bankruptcy Code in November 1998. In October 2000, attorneys for the
bankruptcy trustee filed a complaint against the Company in the U.S.
Bankruptcy Court for the Northern District of California, challenging the
Company's earn-out calculations and requesting that a portion of the common
stock held in escrow be released.
The Company and the Sunny Farms bankruptcy trustee have reached an
agreement in principal subsequent to March 31, 2001 regarding the earn-out
calculations and subsequent shares to be released from escrow. An estimated
accrual of $100,000 for common shares to be released was included in
accounts payable at March 31, 2001.
6
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 its product does not infringe upon either patent, and
further, that the patents are unenforceable in any case. Management has
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. Management believes it has meritorious defenses and that a
loss is not probable at this time, therefore, no provision for loss has
been recorded at March 31, 2001.
Liquidity
---------
At March 31, 2001, the Company had negative working capital and was in
technical default of certain financial loan covenants with its primary
lender, Wells Fargo Business Credit ("WFBC"). As a result of the default,
WFBC has assessed an additional 100 basis points to the interest rates
charged under the revolving line of credit and the term debt. Management is
currently in negotiations with WFBC to establish new financial covenants
and believes that upon completion of those negotiations, the Company will
be back in compliance.
Furthermore, as of April 1, 2000 the Company was in default under $420,000
of subordinated promissory notes issued via a private placement to close
the Merger. As a result of the default, the interest rate under the notes
was increased from 10% to 15%, and 240,000 additional common stock warrants
to purchase SPOP common stock at $0.01 per share were granted during 2000.
As of March 31, 2001 all of the additional warrants had been exercised by
the note holders.
In February 2001, the Company attempted to clear the default by offering
the private placement note holders the option of converting their notes to
equity at a discounted price to the market value of SPOP stock, or a three
year payment schedule calling for interest only during 2001, with principal
and interest thereafter, plus common stock purchase warrants, retroactive
to October 1, 2000, equal to 10% of the outstanding principal, at the
closing bid price of SPOP stock at each quarter-end until the note is
retired. As of March 31, 2001, two note holders representing $52,500 of the
outstanding principal had elected the conversion to equity, seven note
holders representing $236,300 of the outstanding principal had elected the
payment schedule with common stock purchase warrants, and three had not yet
made a choice. Accordingly, at March 31, 2001, the Company has reclassified
$52,500 of the notes from current liabilities to common stock and $209,200
of the notes from current liabilities to long-term notes payable.
For those note holders who elected the conversion to common stock, non-cash
interest expense of $6,500 was recorded during the three months ended March
31, 2001 for the beneficial pricing effect upon conversion. For those note
holders who elected the payment schedule with common stock purchase
warrants, non-cash interest expense of $24,300 was recorded during the
first quarter for the value of the warrants.
7
The Company is highly leveraged and is currently seeking additional working
capital from various sources such as the sale of certain product lines and
the issuance of common stock. Management believes that the proceeds from
the new sources of working capital, if obtained, should provide adequate
funds to meet the Company's estimated cash requirements for the foreseeable
future. However, there can be no assurances that new sources of working
capital will be available on acceptable terms.
The majority shareholder, who holds approximately 70% of the outstanding
common stock of the Company, has represented that he has the intent and
ability to support the operations of the Company with additional funding
for the next fiscal year, if necessary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report. The
financial results reported herein are not necessarily indicative of the
financial results that may be achieved by the Company in any future period.
Investors should carefully consider the following information as well as other
information contained in this report. Information included in this report
contains "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. No assurance can be given that the
future results covered by the forward-looking statements will be achieved. The
following matters constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to vary materially from the future
results covered in such forward-looking statements. Other factors could also
cause actual results to vary materially from the future results covered in such
forward-looking statements.
The Company's operating results could vary from period to period as a result of
a number of factors. These factors include, but are not limited to, the
purchasing patterns of significant customers, the timing of new product
introductions by the Company and its competitors, the amount of slotting fees,
new product development and advertising expenses incurred by the Company,
variations in sales by distribution channel, fluctuations in market prices of
raw materials, competitive pricing policies, and situations that the Company
cannot foresee. These factors could cause the Company's performance to differ
from investor expectations, resulting in volatility in the price of the common
stock.
Introduction:
On October 6, 1999, Spectrum Naturals, Inc. ("SNI") and its affiliate, Spectrum
Commodities, Inc. ("SCI"), and Organic Ingredients, Inc. ("OI"), California
corporations were merged with and into Organic Food Products, Inc. ("OFPI" or
the "Registrant"), (collectively "SPOP" or the "Company"), pursuant to the
Agreement and Plan of Merger and Reorganization, dated May 14, 1999 (the
"Merger").
8
As a result of the Merger, SNI stockholders received 4,669.53 shares of OFPI
stock in exchange for each share of SNI stock previously held, for a total of
32,336,495 shares representing approximately 73.8% of the outstanding common
stock after the Merger. OI stockholders received 39.5 shares of OFPI stock in
exchange for each share of OI stock previously held, for a total of 3,950,000
shares representing approximately 9.0% of the outstanding common stock after the
Merger. Existing OFPI stockholders held 7,275,665 of the outstanding shares, or
approximately 17.2% of the common stock outstanding after the Merger. Since a
controlling interest in the Company is held by former SNI stockholders after the
Merger, the transaction was accounted for as a reverse acquisition, with SNI as
accounting acquirer and OFPI and OI as accounting acquirees.
Upon the effective date of the Merger, SNI, SCI and OI ceased to exist, the
Registrant continued as the surviving legal entity, and immediately changed its
name to Spectrum Organic Products, Inc.
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Results of Operations for the Three Month Periods Ending March 31, 2001 and
March 31, 2000
- --------------------------------------------------------------------------------
Summary of Results:
Management believes that Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") is an important measure of the Company's operating
performance. For the three months ended March 31, 2001, EBITDA was $420,200
compared to $314,800 for the prior year, an increase of $105,400 or 33.5%. The
improved performance in 2001 was primarily attributable to lower marketing
expenditures, partially offset by slightly lower gross profits in 2001.
Revenues:
SPOP's gross sales for the three months ended March 31, 2001 were $11,002,600
compared to $11,424,800 for 2000, a decrease of $422,200, or 3.7% versus 2000.
The decrease in 2001 was primarily due to lower sales of industrial organic
ingredients and the closeout sales of Sunny Farms beverage products during 2000,
partially offset by higher sales of branded culinary products and nutritional
supplements. Within the branded culinary products, sales were significantly
higher than prior year in packaged oil (+15%) and packaged mayonnaise (+13%).
Nutritional supplement sales increased 11% versus the prior year.
During the three months ended March 31, 2001 and 2000, gross sales by source
were as follows:
2001 2000
---- ----
Consumer Brands - Culinary Products $ 4,993,200 $ 4,925,700
Consumer Brands - Nutritional Supplements 2,234,500 2,022,400
Industrial Ingredients 3,086,800 4,172,500
Private Label Products 688,100 304,200
------------ ------------
Total Gross Sales $ 11,002,600 $ 11,424,800
============ ============
9
Discounts and allowances as a percent of gross sales increased to 7.2% of gross
sales for 2001 compared to 5.7% in 2000. The increase was primarily the result
of increased promotion levels on nutritional supplements in both liquid and
capsule forms, as well as pasta sauces and packaged oils on the culinary side.
Cost of Goods Sold:
The Company's cost of goods sold decreased as a percent of gross sales for the
three-month period ended March 31, 2001 to 67.8% compared to 69.8% for the same
period in 2000. The decrease was due primarily to the lower costs associated
with the tomato-based products formerly produced at the Morgan Hill facility. On
July 21, 2000, SPOP ceased manufacturing the pasta sauce and salsa product lines
at its leased Morgan Hill, California facility. The products are now produced by
a third-party co-packer, which has enabled the Company to close the Morgan Hill
facility. As a result of this change, the Company's cost of goods sold for the
tomato-based products has been sharply reduced, since the Morgan Hill facility
was inefficient and under-utilized.
Gross Profit:
Gross profit for 2001 was $2,748,300 versus $2,802,700 for 2000, a decrease of
$54,400 or 1.9%. Gross profit as a percentage of gross sales was 25.0% for 2001
versus 24.5% for 2000, primarily due to the inclusion of the non-profitable
closeout sales of the Sunny Farms beverage products in the prior year. Also
contributing to the higher gross margin in 2001 was an improved sales mix, which
featured lower industrial sales and higher sales of the Company's consumer
branded culinary and nutritional supplement products.
Sales and Marketing Expenses:
The Company's sales and marketing expenses for 2001 were $1,584,100 or 14.4% of
gross sales, versus $1,856,700 or 16.3% of gross sales for 2000. The decrease as
a percent of sales in 2001 was primarily attributable to higher advertising
expenses in the prior year and reduced broker commissions in 2001.
General and Administrative Expenses:
The Company's general and administrative expenses for 2001 were $843,700 or 7.7%
of gross sales, versus $840,100 or 7.4% of gross sales for 2000. There were no
significant variances in spending versus the prior year levels.
Amortization of Goodwill:
The Company recorded goodwill of $10,848,200 in connection with the Merger.
Amortization expense for 2001 was $225,400, based on a twelve-year amortization
schedule, versus $219,000 of amortization expense for 2000.
Interest Expense:
The Company's interest expense for 2001 was $281,200 versus $309,100 for 2000.
The reduction of $27,900 or 9.0% was primarily attributable to lower non-cash
interest expenses associated with the private placement notes.
10
Gains or Losses on Sale of Assets:
Gains or losses on the sale of assets for the three months ended March 31, 2000
includes a $50,000 gain on the sale of the Sunny Farms and Pacific Rim
trademarks.
Net Loss:
The Company reported a net loss of $167,800 and $373,300 for the three-month
periods ended March 31, 2001 and March 31, 2000, respectively. The improvement
in 2001 was primarily due to reduced marketing expenses, partially offset by
slightly lower gross profit in 2001.
Seasonality:
Historically, the Company has experienced little seasonal fluctuation in
revenues. In relation to product purchasing, the Company will seasonally
contract for certain products for the entire year at harvest time, or at
planting time, to secure raw materials throughout the year. These purchases take
place annually from early spring to mid-summer and are effected to reduce the
risk of price swings due to demand fluctuations. These annual purchases can
create overages and shortages in inventory.
Liquidity and Capital Resources:
The Company's bank overdraft as of March 31, 2001 was $856,600 compared to
$539,000 at December 31, 2000. During 2001, the Company used $982,100 in cash
from operating activities, compared to using $664,300 in cash in 2000. The
additional cash used was primarily due to higher inventory and accounts
receivable levels in 2001, financed by higher trade payables and increased
borrowings under the line of credit. Cash used in investing activities was
$95,300 in 2001 compared to $39,900 in 2000, which primarily reflected the sale
of the Sunny Farms and Pacific Rim trademarks during 2000. Cash provided by
financing activities was $1,077,500 in 2001 compared to $704,200 in 2000. The
increase in funds provided from financing during 2001 primarily reflected lower
payments against notes payable and higher net proceeds from the revolving credit
line.
In connection with the Merger, the Company paid down the existing debt and lines
of credit of SNI, OFPI and OI with a new loan facility totaling $11,717,000 with
Wells Fargo Business Credit ("WFBC"). The new facility, consisting of term debt
and a revolving line of credit, is secured by substantially all assets of the
Company, and bears interest at prime plus 1% to 1+1/4%. Advances under the
revolving line of credit are limited to a borrowing base consisting of certain
accounts receivable and inventory. Also included in the facility are two term
notes requiring payment over 60 months. Due to operating losses following the
Merger, the Company is in default of certain financial covenants that were based
on financial projections made at the time the facility was put in place. As a
result of the default, WFBC began assessing an additional 100 basis points to
the interest rates charged for the revolving line of credit and the two term
notes as of July 17, 2000. Due to the default status, the Company has classified
the entire balance due under the two term notes as a current liability.
Management is currently in negotiations to reset the financial covenants to more
accurately match the Company's financial condition and future projections.
11
Also in connection with the Merger, the Company completed a private placement of
16 Units to twelve individual investors in October 1999. Each Unit consisted of
a $25,000 unsecured and subordinated promissory note, with a six-month term,
bearing interest at 10%, plus warrants to purchase 10,000 shares of common stock
at $.01 per share. As of April 1, 2000, the Company was in default on the
repayment of the promissory notes. As a condition of the default the accrued
interest through March 31, 2000 of $20,000 was added to the principal, the
interest rate increased to 15% and the note holders were granted 15,000
additional penny warrants per Unit during 2000. As of March 31, 2001 all of the
initial 160,000 common stock purchase warrants and all of the 240,000 default
warrants had been exercised by the note holders.
In February 2001, the Company attempted to clear the default by offering the
private placement note holders the option of converting their notes to equity at
a discounted price to the market value of SPOP stock, or a three year payment
schedule calling for interest only during 2001, with principal and interest
thereafter, plus common stock purchase warrants, retroactive to October 1, 2000,
equal to 10% of the outstanding principal, at the closing bid price of SPOP
stock at each quarter-end until the note is retired. As of March 31, 2001, two
note holders representing $52,500 of the outstanding principal had elected the
conversion to equity, seven note holders representing $236,300 of the
outstanding principal had elected the payment schedule with common stock
purchase warrants, and three had not yet made a choice. Accordingly, at March
31, 2001, the Company has reclassified $52,500 of the notes from current
liabilities to common stock and $209,200 of the notes from current liabilities
to long-term notes payable.
For those note holders who elected the conversion to common stock, non-cash
interest expense of $6,500 was recorded during the three months ended March 31,
2001 for the beneficial pricing effect upon conversion. For those note holders
who elected the payment schedule with common stock purchase warrants, non-cash
interest expense of $24,300 was recorded during the first quarter for the value
of the warrants.
The Company is highly leveraged and is currently seeking additional working
capital from various sources such as the sale of certain product lines and the
issuance of common stock. Management believes that the proceeds from the new
sources of working capital, if obtained, should provide adequate funds to meet
the Company's estimated cash requirements for the foreseeable future. There can
be no assurances that all of the anticipated savings can be attained or that
additional capital will be available on acceptable terms. However, the majority
shareholder has indicated that he has the intent and ability to support the
operations of the Company with additional funding for the next fiscal year, if
needed.
The Company's future results of operations and the other forward-looking
statements contained in this report, in particular any statements concerning
plant efficiencies, capital spending, research and development, competition,
marketing and manufacturing operations and other information provided herein
involve a number of risks and uncertainties. In addition to the factors
discussed above, other factors that could cause actual results to differ
materially are general business conditions and the general economy, competitors'
pricing and marketing efforts, availability of third-party materials at
reasonable prices, risk of nonpayment of accounts receivable, risk of inventory
obsolescence due to shifts in market demand, timing of product introductions,
and litigation involving product liabilities and consumer issues.
12
New Applicable Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities on the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133, as amended is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the adoption of
this new standard on January 1, 2001 did not affect its financial statements or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company does not hold market risk sensitive trading instruments, nor does it
use financial instruments for trading purposes. All sales, operating items and
balance sheet data are denominated in U.S. dollars, therefore, the Company has
no foreign currency exchange rate risk.
Certain Company debt items are sensitive to changes in interest rates. The
following table summarizes principal cash flows and related weighted average
interest rates by expected maturity date for long-term debt ($ thousands):
Expected Maturity Date
Outstanding (Years Ended December 31)
March 31, 2001 2001 2002 2003 2004 2005 2006+
-------------- ---- ---- ---- ---- ---- -----
Long Term Debt:
Fixed Rate $2,089.6 $506.9 $693.8 $532.9 $71.0 $35.7 $249.3
Avg. Int. Rate 11.5% 11.0% 10.7% 10.5% 10.0% 10.0% 10.8%
Variable Rate $731.6 $268.6 $268.6 $116.2 $55.2 $23.0 --
Avg. Int. Rate 10.3% 9.8% 9.0% 9.0% 9.0% 9.0% --
Due to the technical default status with the Company's primary lender, the
variable rate debt items in the table above have been classified as current
liabilities at March 31, 2001.
Throughout the course of its fiscal year, the Company utilizes a variable
interest rate line of credit at various borrowing levels. For the three months
ended March 31, 2001, the average outstanding balance under the line of credit
was approximately $5,931,000, with a weighted average interest rate of 10.6%.
The line of credit agreement calls for the interest rate to float at the prime
rate plus 100 basis points. Due to the technical default status, the interest
rate is currently set to float at the prime rate plus 200 basis points.
In the ordinary course of its business, the Company enters into commitments to
purchase raw materials over a period of time, generally six months to one year,
at contracted prices. At March 31, 2001, these future commitments were not at
prices in excess of current market, or in quantities in excess of normal
requirements. The Company does not utilize derivative contracts either to hedge
existing risks or for speculative purposes.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
In November 1998, Global Natural Brands, Ltd.("Global") and its four principals
filed a lawsuit against OFPI (the former Registrant) and its four principals,
alleging unpaid wages and seeking money damages and injunctive relief. Global
had provided managerial services to OFPI from April 1998 to October 1998, when
OFPI terminated its services. In May 1999, OFPI and its principals
cross-complained against Global and its principals, seeking damage for breach of
contract, breach of fiduciary duty, fraud, negligence and a declaratory relief
for indemnity and contribution, plus punitive damages.
SPOP assumed the litigation in connection with the Merger and reached a
settlement and release with Global in April 2000, and the case was dismissed.
Under the terms of the settlement and release, SPOP paid Global a total cash
consideration of $145,000, and issued 400,000 shares of SPOP stock, which were
valued at the closing market price on the date of settlement. In addition, SPOP
will issue to Global options to purchase 225,000 common shares at $2.25 per
share over an option term that expires on October 31, 2002. The options have not
yet been issued due to ongoing discussions with Global concerning language to be
included in the stock option agreement regarding any potential subsequent sale
or merger of the Company. The estimated fair value of the options of $27,400 was
included in accounts payable at March 31, 2001.
In February 1998, OFPI acquired the natural fruit juice and water bottling
operations of Sunny Farms Corporation for cash and common stock. A portion of
the common stock consideration was held in escrow, contingent upon earn-out
calculations for the year following the acquisition. Subsequently, Sunny Farms
sought voluntary relief pursuant to chapter 7 of the U.S. Bankruptcy Code in
November 1998. In October 2000, attorneys for the bankruptcy trustee filed a
complaint against the Company in the U.S. Bankruptcy Court for the Northern
District of California, challenging the Company's earn-out calculations and
requesting that a portion of the common stock held in escrow be released.
The Company and the Sunny Farms bankruptcy trustee have reached an agreement in
principal subsequent to March 31, 2001 regarding the earn-out calculations and
subsequent shares to be released from escrow. An estimated accrual of $100,000
for common shares to be released was included in accounts payable at March 31,
2001.
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 its product does not infringe upon either patent, and further, that the
patents are unenforceable in any case. Management has 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. Management believes it has
meritorious defenses and that a loss is not probable at this time, therefore, no
provision for loss has been recorded at March 31, 2001.
14
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
During the three months ended March 31, 2001, the Company issued unregistered no
par value restricted shares of its common stock as follows:
Cash and
Date Non-Cash
Issued Shares Issued Proceeds
------ ------------- --------
Shares issued to Thomas B. Simone, a non-
executive Director of the Company, under
a private sale (a) Feb 14, 2001 160,000 $ 50,000
Shares issued to Charles A. Lynch and
Phillip L. Moore, both non-executive
Directors of the Company, in lieu of cash
compensation for Board fees earned
during CY 2000 (b) Feb 15, 2001 64,000 20,000
Shares issued to two note holders under
the private placement conversion offer
to clear the default under the notes (c) Feb 28, 2001 210,000 52,500
Default common stock purchase warrants
exercised by the note holders under the
private placement completed in October
1999 (d) Various 195,900 2,000
------- --------
Total Unregistered Restricted Common Shares Issued 629,900 $124,500
======= ========
(a) These shares were purchased under a transaction approved by the Company's
disinterested members of the Board of Directors. The shares were purchased
at $.3125 per share, the closing price of the Company's common stock as
quoted on the NASDAQ OTC Bulletin Board System on the date the Board
approved the transaction. In addition to the shares purchased, the Company
issued common stock purchase warrants to Mr. Simone for an additional
160,000 shares at the same price, which expire five years from the date
issued. The Company applied the proceeds received from Mr. Simone toward
the expansion of its proprietary SpectraVac(TM) technology.
(b) These shares were also issued in a transaction approved by the Company's
disinterested Board members. The shares were issued at $.3125 per share,
the closing price of the Company's common stock as quoted on the NASDAQ OTC
Bulletin Board System on the date the Board approved the transaction. The
shares were issued in lieu of cash compensation for Board fees due to Mr.
Lynch and Mr. Moore for CY 2000 in the amount of $10,000 each.
(c) In February 2001, the Company attempted to clear the default under the
private placement notes by offering the note holders the option of
converting their notes to restricted common stock at a price of $.25 per
15
share, or a three-year payment schedule calling for interest only during
2001, with principal and interest thereafter, plus common stock purchase
warrants, retroactive to October 1, 2000, equal to 10.0% of the outstanding
principal, at the closing bid price of SPOP stock at each quarter-end until
the note is retired. On February 28, 2001, two note holders elected the
conversion option and the Company issued 210,000 shares of restricted
common stock in exchange for cancellation of both notes in the amount of
$26,250 each.
(d) During the three months ended March 31, 2001, the remaining outstanding
common stock purchase warrants issued to the private placement note holders
as a result of the default were exercised at a penny per share. The
proceeds were used for general corporate purposes.
All shares 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.
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.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
As of December 31, 1999 the Company was in technical default of certain
financial covenants specified in its credit facility with its major lender,
Wells Fargo Business Credit ("WFBC"). The facility consists of two term notes
and a revolving line of credit which are secured by substantially all assets of
the Company. The default occurred as a result of operating losses following the
Merger which were in excess of the financial projections made by the Company at
the time the credit facility was put in place. As a result of the default, WFBC
began assessing an additional 100 basis points to the interest rates charged
under the credit facility as of July 17, 2000. Due to the default status, the
Company has classified the entire balance due under the two term notes as a
current liability as of March 31, 2001.
There has been no default in the payment of any principal or interest
installments, and the Company is in compliance with all other aspects of the
credit facility. Management is currently in negotiation with WFBC to reset the
financial covenants to more accurately match the Company's current financial
position and future projections, and anticipates returning to an in-compliance
status upon the completion of those negotiations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
16
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 11, 2001 SPECTRUM ORGANIC PRODUCTS, INC.
By: /s/ Robert B. Fowles
---------------------------------
Robert B. Fowles
Duly Authorized Officer &
Chief Financial Officer
17