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 SEPTEMBER 30, 2002.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ________________
Commission File No. 333-22997
SPECTRUM ORGANIC PRODUCTS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its Charter)
California 94-3076294
---------------------- --------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
133 Copeland Street
Petaluma, California 94952
--------------------------------------
(Address of principal executive offices)
(707) 778-8900
-----------------------------
(Registrant's telephone number)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, no par value,
45,698,661 shares as of November 1, 2002.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
SPECTRUM ORGANIC PRODUCTS, INC.
BALANCE SHEETS
ASSETS
(Unaudited)
September 30, December 31,
2002 2001
------------ ------------
Current Assets:
Cash $ 1,000 $ 1,200
Accounts receivable, net 3,407,100 3,427,900
Inventories, net 4,462,400 5,966,600
Prepaid expenses and other current assets 106,600 68,900
------------ ------------
Total Current Assets 7,977,100 9,464,600
Property and Equipment, net 3,313,100 3,239,000
Other Assets:
Goodwill, net -- 1,470,200
Other assets, net 105,700 126,000
------------ ------------
Total Assets $ 11,395,900 $ 14,299,800
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 437,700 $ 546,400
Line of credit 1,525,000 4,598,800
Accounts payable, trade 3,701,100 3,676,600
Accrued expenses 816,400 904,300
Current maturities of notes payable, former stockholder 375,000 281,300
Current maturities of notes payable and
capitalized lease obligations 380,200 375,200
Current maturities of notes payable, stockholders 89,800 111,700
------------ ------------
Total Current Liabilities 7,325,200 10,494,300
Notes payable, former stockholder, less current maturities 546,800 811,200
Notes payable and capitalized lease obligations, less
current maturities 375,500 671,300
Notes payable, stockholders, less current maturities 151,200 225,500
------------ ------------
Total Liabilities 8,398,700 12,202,300
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized, no shares issued
or outstanding -- --
Common stock, without par value, 60,000,000 shares authorized,
45,698,661 issued and outstanding at September 30, 2002 and
December 31, 2001 9,418,400 9,373,700
Accumulated deficit (6,421,200) (7,276,200)
------------ ------------
Total Stockholders' Equity 2,997,200 2,097,500
------------ ------------
Total Liabilities and Stockholders' Equity $ 11,395,900 $ 14,299,800
============ ============
The accompanying notes are an integral part
of the financial statements
2
SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net Sales $ 9,726,400 $ 10,388,100 $ 31,119,300 $ 30,957,300
Cost of Goods Sold 6,972,100 7,670,600 23,059,000 22,629,700
------------ ------------ ------------ ------------
Gross Profit 2,754,300 2,717,500 8,060,300 8,327,600
------------ ------------ ------------ ------------
Operating Expenses:
Sales and Marketing 1,445,500 1,464,000 4,645,500 4,462,500
General and Administrative 735,100 817,400 2,317,000 2,437,900
Amortization of Goodwill -- 62,200 -- 458,600
------------ ------------ ------------ ------------
Total Operating Expenses 2,180,600 2,343,600 6,962,500 7,359,000
------------ ------------ ------------ ------------
Gain (Loss) on Sales of Product Lines
(Note 2) 97,700 -- 139,800 (4,976,400)
------------ ------------ ------------ ------------
Income (Loss) from Operations 671,400 373,900 1,237,600 (4,007,800)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest Expense (94,400) (179,500) (391,000) (705,900)
Other 10,500 1,500 21,100 15,500
------------ ------------ ------------ ------------
Total Other Expenses (83,900) (178,000) (369,900) (690,400)
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 587,500 195,900 867,700 (4,698,200)
Provision for Income Tax Expense 12,700 -- 12,700 --
------------ ------------ ------------ ------------
Net Income (Loss) $ 574,800 $ 195,900 $ 855,000 $ (4,698,200)
============ ============ ============ ============
Basic and Fully Diluted Income (Loss)
Per Share $ 0.01 $ 0.00 $ 0.02 $ (0.10)
============ ============ ============ ============
Weighted Average Shares Outstanding 45,698,661 45,560,354 45,698,661 45,170,889
============ ============ ============ ============
The accompanying notes are an integral part
of the financial statements
3
SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, September 30,
2002 2001
------------ ------------
Net Income (Loss) $ 855,000 $ (4,698,200)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by (Used in) Operating Activities:
Provision for allowances against receivables 135,500 (54,300)
Provision for reserves for inventory obsolescence (7,700) (196,200)
Depreciation and amortization 319,600 309,800
Amortization of goodwill -- 458,600
(Gain) Loss on sales of product lines (139,800) 4,976,400
Loss on sale of fixed assets -- 63,300
Imputed interest on notes payable 16,800 27,000
Imputed interest on stock warrants issued 44,700 52,700
Capitalized interest on construction in progress (20,000) (39,400)
Increase in cash surrender value of life insurance -- (6,700)
Restricted shares issued in lieu of director's fees -- 20,000
Changes in Assets and Liabilities:
Accounts receivable 32,200 (1,978,100)
Inventories 52,200 (345,700)
Prepaid expenses and other assets (21,300) 18,800
Bank overdraft (108,700) 109,900
Accounts payable 23,500 (1,250,000)
Accrued expenses (86,900) 256,400
------------ ------------
Net Cash Provided By (Used In) Operating Activities 1,095,100 (2,275,700)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (378,100) (304,800)
Proceeds from sale of assets -- 5,500
Proceeds from sale of product lines and related inventories 3,068,300 2,778,100
Transaction fees on sale of product lines (137,200) (139,700)
------------ ------------
Net Cash Provided by Investing Activities 2,553,000 2,339,100
------------ ------------
Cash Flows from Financing Activities:
Proceeds from line of credit 32,838,000 31,879,000
Repayment of line of credit (35,911,800) (31,419,800)
Repayment of notes payable (238,100) (242,800)
Repayment of notes payable, former stockholder (187,500) (218,700)
Repayment of notes payable to stockholders (96,300) (130,200)
Proceeds from notes payable -- 50,000
Repayment of capitalized lease obligations (52,600) (30,700)
Restricted shares purchased by board member -- 50,000
------------ ------------
Net Cash Used in Financing Activities (3,648,300) (63,200)
------------ ------------
Net Increase (Decrease) In Cash (200) 200
Cash, beginning of the year 1,200 900
------------ ------------
Cash, end of the period $ 1,000 $ 1,100
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 12,700 $ 800
Cash paid for interest $ 341,400 $ 666,000
Non-Cash Financing Activities:
Conversion of notes payable to common stock -- $ 164,000
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. These financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include certain disclosures
required by accounting principles generally accepted in the United States
of America. Accordingly, the statements should be read in conjunction with
Spectrum Organic Products, Inc. financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. Operating results for the nine-month period ended
September 30, 2002 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 2002 or future periods.
Certain reclassifications have been made to the September 30, 2001
unaudited interim financial statements to be consistent with the
presentation at September 30, 2002. These reclassifications had no impact
on net income or retained earnings. In accordance with Emerging Issues Task
Force Issue 01-09, slotting fees of $281,000 and $264,300 for the nine
months ended September 30, 2002 and 2001, respectively, have been captured
within net sales instead of marketing expense.
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, vinegar 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.
On June 11, 2001 the Company sold its tomato-based consumer product lines
to Acirca for $3,128,100 in cash which included $778,100 for saleable
inventory and $350,000 that was deposited into an escrow account to be
applied towards indemnity claims of Acirca. To the extent the escrowed
funds were not utilized for any indemnity claims of Acirca, they were to be
released to the Company in two equal installments at the six month and one
year anniversaries of the sale. The first installment of $175,000 was
received in full in December 2001. The final installment of $173,200 was
received on July 17, 2002 and consisted of $175,000 plus interest earned on
the escrowed funds less $6,700 paid to Acirca in full satisfaction of their
indemnity claims.
Since both product line sales comprised all of the remaining assets of both
OI and OFPI, the remaining net goodwill associated with the reverse
acquisition of both companies in October 1999 was written off as a result
of the sales. Accordingly, the Company recorded the following gains and
losses on the product line sales for the nine months ended September 30,
2002 and 2001:
5
--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 (3,100) --
Transaction fees (137,200) (139,700)
Reserve for remaining inventories not
purchased (39,300) (50,000)
----------- -----------
Gain (loss) before collection of
previously escrowed funds (158,400) (4,976,400)
Collection of escrowed funds 298,200 --
----------- -----------
Net Gain (Loss) on Sales of Product Lines $ 139,800 $(4,976,400)
=========== ===========
In both cases, the Company applied the cash proceeds received against the
outstanding borrowing under its revolving line of credit.
Included in accounts receivable at September 30, 2002 was $146,900 of the
cash consideration for saleable OI inventories, which was received on
October 11, 2002. After accounting for the subsequent 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 $4,628,200.
The transaction fees represented investment banking, legal and accounting
fees associated with closing the sales. The investment banking fees were
paid to Moore Consulting, a sole proprietorship owned 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
6
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 will be conferring with legal counsel to discuss the
next steps. There is both an informal appeals process available with
CAL-OSHA and a formal appeals process before an administrative law judge
which could result in reductions to the citations and proposed penalties.
Included in cost of goods sold for the nine months ended September 30, 2002
was $254,100 in expenses directly attributable to the accident. Included in
that amount was a reserve of $177,300 to cover anticipated citations and
fines from CAL-OSHA, workers compensation appeals and attorneys fees. In
addition, the Company incurred $76,800 in cash expenses associated with the
accident for attorneys fees, safety consultants and assistance to the
families of the deceased employees. There have been no criminal actions
filed against the Company at the time of this report.
4. Inventories:
Inventories consisted of the following:
September 30, December 31,
2002 2001
------------ ------------
Finished goods $ 4,311,100 $ 5,633,000
Raw materials 532,900 683,600
------------ ------------
Total Inventories 4,844,000 6,316,600
Less: Provision for obsolete inventory (381,600) (350,000)
------------ ------------
Net Inventories $ 4,462,400 $ 5,966,600
============ ============
5. Commitments and Contingencies:
Litigation and Settlements
--------------------------
In October 2000 the Company was notified by counsel for GFA Brands, Inc.
that nutritional claims pertaining to Spectrum Naturals Organic Margarine
were infringing upon two patents issued in the United States that pertain
to particular fat compositions suitable for human ingestion. The patent
owner exclusively licensed each of these patents to GFA Brands. Management
believes that the margarine does not infringe upon either patent, and
further, that the patents are unenforceable. Management engaged legal
counsel that specialize in this area and received an opinion letter in
February 2001 confirming that, in the opinion of counsel, the manufacture
or sale of Spectrum Naturals Organic Margarine does not infringe upon the
GFA patents, either literally or under the doctrine of equivalents.
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 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. The Company has not established a provision for
future attorney's fees at September 30, 2002 since Management does not
believe it can be reasonably estimated.
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 September 30, 2002.
Liquidity
---------
The Company maintains a credit facility (the "Credit Agreement") with its
primary lender, Wells Fargo Business Credit, consisting of term debt and a
$9,000,000 revolving line of credit that is secured by substantially all
assets of the Company and bears interest at prime plus 1% to 1.25% per
annum. Advances under the revolving line of credit are limited to a
borrowing base consisting of certain accounts receivable and inventory.
At September 30, 2002 the Company had $2,872,200 in available borrowing
capacity under its line of credit versus $955,800 at December 31, 2001. As
disclosed in Note 2 to the financial statements, the Company recently
completed the sale of certain assets to an unaffiliated party which has
significantly strengthened the Company from a liquidity and working capital
standpoint. Moreover, Management believes that future cash flows from
operations should provide adequate funds to meet the Company's estimated
cash requirements for the foreseeable future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report. The
financial results reported herein are not necessarily indicative of the
financial results that may be achieved by the Company in any future period.
Investors should carefully consider the following information as well as other
information contained in this report. Information included in this report
contains "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. No assurance can be given that the
future results covered by the forward-looking statements will be achieved. The
following matters constitute cautionary statements identifying important factors
8
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:
Spectrum Organic Products, Inc. ("SPOP" or "the Company") competes in three
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 trans fats and are offered in
a variety of sizes and flavors in both organic and conventional offerings.
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 acquirees.
On April 25, 2002 the Company sold the OI industrial ingredient business in
fruits, vegetables, concentrates and purees to Acirca, Inc., an unrelated third
party. Accordingly, results for the nine months ended September 30, 2002 include
the operating results associated with the OI disposed product lines until the
date of sale.
9
On June 11, 2001 the Company sold the OFPI tomato-based product lines to Acirca.
Accordingly, results for the nine months ended September 30, 2001 include the
operating results associated with the OFPI disposed product lines until the date
of sale.
The two dispositions have significantly strengthened the Company from a
liquidity and working capital standpoint. The Company now plans to focus its
resources on its core business in healthy fats, butter substitutes and essential
fatty acid nutrition.
Critical Accounting Policies and Estimates:
The following discussion and analysis of the Company's financial condition and
results of operations is based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. 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, including those related to accounts receivable allowances,
inventory reserves and the deferred tax asset valuation allowance. Actual
results may differ materially from these estimates under different assumptions
or conditions and as additional information becomes available in future periods.
The Company believes the following are the more significant judgments and
estimates used in the preparation of its financial statements:
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 $610,500 at September 30, 2002 on gross
trade accounts receivable of $3,838,700. 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.
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 $381,600 at September 30, 2002 on total inventories of
$4,844,000. 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, 2001 the Company had
net deferred tax assets of $2,865,100 primarily resulting from net operating
loss carryforwards ("NOLS"). At December 31, 2001 the NOLS consisted of
$7,300,000 of Federal NOLS that expire at various times through 2020, and
$2,800,000 of state NOLS that expire at various times through 2010. The majority
of the NOLS originated from the pre-merger operations of OFPI. As a result of
10
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 the second quarter 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 fees. As of September 30, 2002 there was $177,300
remaining in the industrial accident reserve. This reserve is highly uncertain
because the CAL-OSHA proposed fines of $137,900 are subject to appeal 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. There
have been no criminal actions filed against the Company as of the date of this
report.
- --------------------------------------------------------------------------------
Results of Operations for the Three Month Periods Ending September 30, 2002 and
September 30, 2001
- --------------------------------------------------------------------------------
Summary of Results:
Management believes that earnings before interest, taxes, depreciation,
amortization and gains or losses on asset disposals ("EBITDA as adjusted") is an
important measure of the Company's operating performance. For the three months
ended September 30, 2002 EBITDA as adjusted was $682,500 compared to $540,100
for the prior year, an increase of $142,400 or 26%. The improved performance in
2002 is discussed below and was primarily attributable to increased gross profit
and lower general and administrative expenses.
Revenues:
SPOP's net sales for the three months ended September 30, 2002 were $9,726,400
compared to $10,388,100 for 2001, a decrease of $661,700 or 6%. The decrease in
2002 was entirely due to lost sales associated with the disposed product lines.
Comparable net sales (after the elimination of disposed or discontinued product
lines from both periods) increased by 25%.
11
During the three months ended September 30, 2002 and 2001 net sales by product
line were as follows:
2002 2001 % Change
---- ---- --------
Spectrum Naturals(R)Culinary Products $ 4,753,500 $ 4,014,100 +18%
Spectrum Essentials(R)Nutritional Supplements 2,627,800 1,753,800 +50%
Spectrum Ingredients/Private Label Products 2,223,500 1,901,500 +17%
----------- ----------- ----
Comparable Net Sales 9,604,800 7,669,400 +25%
Disposed/Discontinued Product Lines 121,600 2,718,700 -96%
----------- ----------- ----
Total Net Sales $ 9,726,400 $10,388,100 -6%
=========== =========== ====
Within the Spectrum Naturals(R) brand, net sales increased substantially versus
the prior year in culinary oils (+33%), vinegar (+25%) and salad dressings
(+46%). The increase in net sales for the Spectrum Essentials(R) brand was
driven by increased demand for flax oil as consumers become more aware of the
importance of essential fatty acids to overall health. Spectrum Ingredients net
sales were driven by strong demand for industrial culinary oils (+42%).
Cost of Goods Sold:
The Company's cost of goods sold decreased as a percent of net sales for the
three-month period ended September 30, 2002 to 71.7% compared to 73.8% for the
same period in 2001. The improvement was primarily attributable to an improved
sales mix which featured 96% lower sales in the low margin OI and OFPI disposed
product lines partially offset by unabsorbed manufacturing overheads as a result
of flax seed shortages during the third quarter, which prevented the Company
from operating its SpectraVac(R) manufacturing system at full capacity as well
as glass shortages due to the West Coast port shutdown which hampered the
Company's ability to operate the oil bottling line at full capacity.
Gross Profit:
Gross profit as a percent of net sales (gross margin) increased to 28.3% for the
third quarter versus 26.2% for the prior year third quarter. The improvement was
primarily attributable to an improved sales mix which featured greater sales of
the Company's consumer branded products and lower sales of the low-margin
disposed product lines, partially offset by unabsorbed manufacturing overheads.
Sales and Marketing Expenses:
The Company's sales and marketing expenses for 2002 were $1,445,500 or 14.9% of
net sales, versus $1,464,000 or 14.1% of net sales for 2001. The decrease in
spending of $18,500 in 2002 was primarily attributable to the elimination of
eleven full time employees formerly associated with the OI business disposed of
on April 25, 2002 partially offset by increased advertising expenses, broker
commissions, sampling expenses, label development costs and trade show expenses.
General and Administrative Expenses:
The Company's general and administrative expenses for 2002 were $735,100 or 7.6%
of net sales, versus $817,400 or 7.9% of net sales for 2001. The decrease in
spending of $82,300 was primarily attributable to lower professional fees, legal
fees, and the elimination of two positions as a result of the sale of OI on
April 25, 2002.
12
Amortization of Goodwill:
In accordance with Statement of Financial Accounting Standard No. 142, the
Company ceased the amortization of goodwill effective January 1, 2002. All
remaining unamortized goodwill at January 1, 2002 was written-off in connection
with the sale of OI on April 25, 2002. Amortization expense for the prior year
was $62,200 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 three
months ended September 30, 2002 of $97,700 which consisted of $125,000 in
previously escrowed funds received on the sale of OI, the final post-closing
adjustment on OI inventories sold of $20,800 and additional transaction fees of
$6,500.
Interest Expense:
The Company's interest expense for 2002 was $94,400 versus $179,500 for 2001.
The reduction of $85,100 or 47% was primarily attributable to lower borrowing
levels under the Company's line of credit as a result of the sale of the Organic
Ingredients product lines on April 25, 2002 and significant reductions in the
prime rate throughout CY 2001.
Income Taxes:
During the third quarter the Company recorded a provision for income taxes of
$12,700 which represented final CY 2001 income taxes paid to the State of
California of $7,200 plus estimated state income taxes due for CY 2002 of
$5,500. The Company has federal and state net operating loss carryovers
sufficient to offset all federal income taxes due on the quarter's reported net
income and all but alternative minimum income taxes due to the State of
California. Due to continued uncertainty regarding the Company's realization of
deferred tax assets, the Company maintained a 100% reserve at September 30, 2002
against the net deferred tax assets.
Net Income:
The Company reported net income of $574,800 versus $195,900 for the three-month
periods ended September 30, 2002 and September 30, 2001, respectively. The
improvement versus 2001 was primarily due to the gain on the sales of product
lines, the elimination of goodwill amortization effective January 1, 2002, lower
interest expense and reduced general and administrative expenses.
- --------------------------------------------------------------------------------
Results of Operations for the Nine-Month Periods Ending September 30, 2002 and
September 30, 2001
- --------------------------------------------------------------------------------
Summary of Results:
Management believes that earnings before interest, taxes, depreciation,
amortization, gains or losses on the sales of product lines and the industrial
accident ("EBITDA as adjusted") is an important measure of the Company's
13
operating performance. For the nine months ended September 30, 2002, EBITDA as
adjusted was $1,671,500 compared to $1,737,000 for the prior year, a decrease of
$65,500 or 4%. The lower performance in 2002 was primarily attributable to
increased spending on marketing programs for the consumer branded product lines,
partially offset by reduced general and administrative expenses.
Revenues:
SPOP's net sales for the nine months ended September 30, 2002 were $31,119,300
compared to $30,957,300 for 2001, an increase of $162,000. The increase was
attributable to healthy sales growth in all of the Company's product lines,
partially offset by the lost sales associated with the disposed product lines.
Comparable net sales (after eliminating the sales of disposed or discontinued
product lines from both periods) increased by 20%.
During the nine months ended September 30, 2002 and 2001, net sales by product
line were as follows:
2002 2001 % Change
---- ---- --------
Spectrum Naturals(R)Culinary Products $13,507,800 $11,929,800 +13%
Spectrum Essentials(R)Nutritional Supplements 7,454,700 5,743,600 +30%
Spectrum Ingredients/Private Label Products 7,056,500 5,658,000 +25%
----------- ----------- ----
Comparable Net Sales 28,019,000 23,331,400 +20%
Disposed/Discontinued Product Lines 3,100,300 7,625,900 -59%
----------- ----------- ----
Total Net Sales $31,119,300 $30,957,300 +1%
=========== =========== ====
Within the Spectrum Naturals(R) brand, net sales increased substantially versus
the prior year in culinary oils (+17%), mayonnaise (+14%) and vinegar (+26%).
The Spectrum Essentials(R) brand net sales increased by 30%, driven by increased
demand for flax oil as consumer awareness of the importance of essential fatty
acids to overall health continues to rise. The Spectrum Ingredients net sales
growth was driven by strong demand for industrial culinary oils (+55%).
Cost of Goods Sold:
The Company's cost of goods sold increased as a percent of net sales for the
nine-month period ended September 30, 2002 to 74.1% 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 reserve of $177,300 to cover anticipated citations and
fines from CAL-OSHA, worker's compensation appeals and attorney's fees. The
remaining $76,800 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 were reduced bottling efficiencies with the new
culinary oils packaging introduced during the first quarter.
14
Gross Profit:
Gross profit as a percent of net sales (gross margin) was 25.9% for 2002 versus
26.9% for the prior year. The reduction was primarily due to the effects of the
industrial accident and reduced bottling efficiencies associated with the new
culinary oils packaging.
Sales and Marketing Expenses:
The Company's sales and marketing expenses for the nine months ended September
30, 2002 were $4,645,500 or 14.9% of net sales, versus $4,462,500 or 14.4% of
net sales for 2001. The increase in spending of $183,000 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 business disposed of on April 25,
2002.
General and Administrative Expenses:
The Company's general and administrative expenses for the nine months ended
September 30, 2002 were $2,317,000 or 7.4% of net sales, versus $2,437,900 or
7.9% of net sales for 2001. The decrease in spending of $120,900 was primarily
attributable to lower professional fees and the elimination of two positions as
a result of the sale of OI on April 25, 2002.
Amortization of Goodwill:
In accordance with SFAS 142, the Company ceased the amortization of goodwill
effective January 1, 2002. All remaining unamortized goodwill at January 1, 2002
was written-off in connection with the sale of OI on April 25, 2002.
Amortization expense for the prior year was $458,600 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 nine
months ended September 30, 2002 of $139,800 and a non-cash loss of $4,976,400
during the prior year. The computations for both years are detailed in Note 2 to
the financial statements.
Interest Expense:
The Company's interest expense for the nine months ended September 30, 2002 was
$391,000 versus $705,900 for 2001. The reduction of $314,900 or 45% 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 CY 2001.
Income Taxes:
During the nine months ended September 30, 2002 the Company recorded a provision
for income taxes of $12,700 which represented final CY 2001 income taxes paid to
the State of California of $7,200 plus estimated state income taxes due for CY
2002 of $5,500. The Company has federal and state net operating loss carryovers
sufficient to offset all federal income taxes due on the quarter's reported net
income and all but alternative minimum income taxes due to the State of
California. Due to continued uncertainty regarding the Company's realization of
deferred tax assets, the Company maintained a 100% reserve at September 30, 2002
against the net deferred tax assets.
15
Net Income (Loss):
The Company reported net income of $855,000 for the nine months ended September
30, 2002 versus a net loss of $4,698,200 for the prior year. The improvement in
2002 was primarily due to the non-cash loss during the prior year on the sale of
product lines, the elimination of goodwill amortization effective January 1,
2002 and lower interest expense, partially offset by increased marketing
spending in 2002 and the expenses associated with the industrial accident.
Seasonality:
Historically, the Company has experienced little seasonal fluctuation in
revenues. With regards to product purchasing, the Company will seasonally
contract for certain raw materials for the entire year at harvest time or at
planting time. These purchases take place annually from early spring to
mid-summer and are effected to reduce the risk of price swings due to demand
fluctuations. These annual purchases can create overages and shortages in
inventory.
Liquidity and Capital Resources:
The Company maintains a credit facility (the "Credit Agreement") with its
primary lender, Wells Fargo Business Credit ("WFBC"), consisting of term debt
and a $9,000,000 revolving line of credit that is secured by substantially all
assets of the Company and bears interest at prime plus 1% to 1.25% per annum.
Advances under the revolving line of credit are limited to a borrowing base
consisting of certain accounts receivable and inventory.
The Company could not operate its business without the Credit Agreement with
WFBC or one similar to it. At September 30, 2002 the Company satisfied all
financial covenants and other requirements under the Credit Agreement. WFBC has
recently set new financial covenants for the remainder of 2002 which are based
on the Company's current financial position and future projections. At September
30, 2002 the Company's financial position was substantially in excess of the
covenants under the Credit Agreement. Based on its prior experience with WFBC,
Management believes the Company will continue to meet future financial
covenants. Should the Company fail to meet future 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 September 30, 2002 the Company had working capital of $651,900 which
reflected an improvement of $1,681,600 from December 31, 2001. As described in
Note 2 to the financial statements, the Company sold certain assets which has
substantially improved the Company's liquidity and capital resources. The assets
sold included inventories and goodwill associated with the Organic Ingredients
business in fruits, vegetables, concentrates, purees and certain private label
products sold to key retailers. Trade accounts receivable associated with the
disposed product lines were not sold. The disposed product lines represented
approximately 20% of the Company's net sales for the year ended December 31,
2001 and approximately 12% of its gross profit. The impact of the disposition on
net income 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.
16
The Company's bank overdraft as of September 30, 2002 was $437,700 compared to
$546,400 at December 31, 2001. During 2002 the Company generated $1,095,100 in
cash from operating activities, compared to using $2,275,700 in cash during
2001. The improvement was primarily due to significantly higher trade accounts
receivable in the prior year due to seasonal fluctuations, and the sharp
reduction in trade payables made during the prior year with the cash proceeds
from the sale of the tomato-based product lines in September 2001. That sale
enabled the Company to bring its vendors current for the first time since the
merger.
Cash provided by investing activities during 2002 was $2,553,000 compared to
$2,339,100 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 $3,648,300 in 2002 versus $63,200 in 2001.
The increase was primarily due to the sharp reduction in the outstanding
borrowings under the Company's line of credit with the cash proceeds from the
sale of the OI product lines in April 2002. The second product line sale enabled
the Company to reduce its dependency on the line of credit for day-to-day
operations. At September 30, 2002 the Company had $2,872,200 in available
borrowing capacity under its line of credit versus $955,800 at December 31, 2001
primarily as a result of the proceeds from the sale of the OI product lines.
Management believes that future cash flows from operations should provide
adequate funds to meet the Company's estimated cash requirements for the
foreseeable future. The Company competes primarily in the organic and all
natural foods industry and in the nutritional supplements category. While an
economic downturn could decrease demand for the Company's products, which in
turn could impact the Company's ability to meet its obligations to its
creditors, Management believes that to be unlikely. Recent history has shown the
two primary categories the Company competes in to be recession-resistant. Both
categories feature double-digit growth year-on-year, and Management believes the
Company's product offerings compete favorably with regards to taste and overall
quality.
The Company does not utilize off-balance sheet financing arrangements. There
were no transactions with special purpose entities that give the Company access
to assets or additional financing or carry debt that is secured by the Company.
During the nine months ended September 30, 2002 there was one significant
transaction with a related party. An investment banking fee for the sale of the
OI product lines of $75,500 was paid to Moore Consulting, a sole proprietorship
operated by Phillip Moore, a non-executive director of the Company. Moore
Consulting has provided merger, acquisition and divestiture services to the
Company for several years. The fee paid represented 2.5% of the total
transaction value and, in the opinion of Management, was fair, reasonable and
consistent with terms the Company could have obtained from unaffiliated third
parties.
The Company's future results of operations and the other forward-looking
statements contained in this report, in particular any statements concerning
plant efficiencies, capital spending, research and development, competition,
marketing, manufacturing operations and other information provided herein
involve a number of risks and uncertainties. In addition to the factors
17
discussed above, other factors that could cause actual results to differ
materially are general business conditions and the general economy, competitors'
pricing and marketing efforts, availability of third-party materials at
reasonable prices, risk of nonpayment of accounts receivable, risk of inventory
obsolescence due to shifts in market demand, timing of product introductions,
and litigation involving product liability and consumer issues.
New Applicable Accounting Pronouncements:
In May 2000 the Emerging Issues Task Force ("EITF") reached a consensus on Issue
00-14, "Accounting for Certain Sales Incentives." This Issue addresses the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or are exercisable by a customer as a result of a single exchange
transaction.
In April 2001 the EITF reached a consensus on Issue 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services." This Issue addresses the recognition, measurement and
income statement classification of consideration, other than that directly
addressed by Issue 00-14, from a vendor to a retailer or wholesaler. Issue 00-25
will be effective for the Company's 2002 fiscal year. Both Issue 00-14 and 00-25
have been codified under Issue 01-09, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products". The Company has
implemented the guidance provided by Issue 01-09 effective January 1, 2002.
There was no material impact on the Company's financial position or results of
operations except that slotting fees are now accounted for as a reduction to net
sales, and the prior year results have been restated to a comparable basis.
Slotting fees for the nine months ended September 30, 2002 and 2001 were
$281,000 and $264,300, respectively.
In September 2001 the Financial Accounting Standards Board finalized Statements
No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after September 30, 2001. SFAS
141 also requires that the Company recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after September 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of certain intangible assets and goodwill based on the criteria in SFAS
141. The Company's financial position and results of operations have not been
affected by the adoption of SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. The Company has implemented SFAS 142
and ceased the amortization of goodwill to expense effective January 1, 2002.
Also as required by SFAS 142 the Company has reassessed the useful lives of its
intangible assets other than goodwill during the first quarter of 2002. The
Company has deemed the useful lives of its other intangible assets, which are
trademarks, label development costs and a covenant not-to-compete, as
appropriate.
18
In August 2001 Statement of Financial Accounting Standard No. 144, "Accounting
for the Impairment or Disposal of Long-lived Assets" ("SFAS 144") was issued.
SFAS 144 supersedes Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-lived Assets to be Disposed of" ("SFAS
121") and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 also amends Accounting Research Bulletin No.
51, "Consolidated Financial Statements" to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 retains the fundamental provisions of SFAS 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while resolving significant implementation issues
associated with SFAS 121. Among other things, SFAS 144 provides guidance on how
long-lived assets used as part of a group should be evaluated for impairment,
establishes criteria for when long-lived assets are held for sale, and
prescribes the accounting for long-lived assets that will be disposed of other
than by sale. SFAS 144 is effective for fiscal years beginning after December
15, 2001. The Company's financial position and results of operations have not
been affected by the adoption of SFAS 144.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company does not hold market risk sensitive trading instruments, nor does it
use financial instruments for trading purposes. All sales, operating items and
balance sheet data are denominated in U.S. dollars, therefore, the Company has
no foreign currency exchange rate risk.
Certain Company debt items are sensitive to changes in interest rates. The
following table summarizes principal cash flows and related weighted average
interest rates by expected maturity date for long-term debt excluding capital
leases ($ thousands):
Outstanding Expected Maturity Date
September 30, (Years Ended December 31)
-------------
2002 2002 2003 2004 2005 2006 2007+
---- ---- ---- ---- ---- ---- -----
Long Term Debt:
Fixed Rate $1,315.9 $176.2 $558.2 $259.6 $40.7 -- $281.2
Avg. Int. Rate 10.7% 11.1% 11.3% 11.3% 10.0% -- 8.6%
Variable Rate $ 480.5 $ 51.6 $206.4 $185.8 $36.7 -- --
Avg. Int. Rate 6.0% 6.3% 6.3% 6.9% 7.5% -- --
Throughout the course of its fiscal year, the Company utilizes a variable
interest rate line of credit at various borrowing levels. For the nine months
ended September 30, 2002 the average outstanding balance under the line of
credit was $3,614,100 with a weighted average interest rate of 6.6% per annum.
For the nine months ended September 30, 2001 the average outstanding balance
under the line of credit was $5,715,500 with a weighted average interest rate of
9.5%. The line of credit agreement calls for the interest rate to float at the
prime rate plus 100 basis points.
19
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 September 30, 2002 these future commitments were not at
prices in excess of current market, or in quantities in excess of normal
requirements. The Company does not utilize derivative contracts either to hedge
existing risks or for speculative purposes.
ITEM 4. DISCLOSURE 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 nine months ended September 30, 2002. Management is not aware of any
significant deficiencies in the design or operation of internal controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
In October 2000 the Company was notified by counsel for GFA Brands, Inc. that
nutritional claims pertaining to Spectrum Naturals Organic Margarine were
infringing upon two patents issued in the United States that pertain to
particular fat compositions suitable for human ingestion. The patent holder
exclusively licensed each of these patents to GFA Brands. Management believes
that the margarine does not infringe upon either patent, and further, that the
patents are unenforceable. Management engaged legal counsel that specialize in
this area and received an opinion letter in February 2001 confirming that, in
the opinion of counsel, the manufacture or sale of Spectrum Naturals Organic
Margarine does not infringe upon the GFA patents, either literally or under the
doctrine of equivalents.
The Company filed a complaint against GFA Brands for declaratory judgment of
non-infringement and invalidity of the two patents on August 28, 2001 in the
U.S. District Court for Northern California. The Complaint requests a
declaratory judgment that the margarine does not infringe either patent, a
declaratory judgment that both patents are invalid, that GFA Brands be enjoined
from threatening or asserting any action for infringement of either patent, and
attorney's fees.
GFA subsequently filed a motion to transfer venue to the U.S. District Court for
New Jersey. The Company filed its opposition to that motion, however, the motion
to transfer venue was granted in January 2002. The case is currently in the
discovery phase. A trial date had not been set as of the date of this report.
The Company has not established a provision for future attorney's fees at
September 30, 2002 since Management does not believe it can be reasonably
estimated.
20
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 September 30, 2002.
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
During the nine months ended September 30, 2002 the Company did not issue any
shares of its common stock.
The Company has not in the past nor does it intend to pay cash dividends on its
common stock in the foreseeable future. The Company intends to retain earnings,
if any, for use in the operation and expansion of its business.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
99.05 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.06 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on September 6, 2002
disclosing the promotion of Mr. Neil G. Blomquist to the position of
President and Chief Executive Officer. Mr. Blomquist was previously
President - Consumer Brands. Spectrum founder and former CEO Jethren P.
Phillips continues in his role as Chairman of the Board.
21
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: November 5, 2002 SPECTRUM ORGANIC PRODUCTS, INC.
By: /s/ Robert B. Fowles
-------------------------------
Robert B. Fowles
Duly Authorized Officer &
Chief Financial Officer
22
CERTIFICATIONS
I Neil G. Blomquist, Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Spectrum Organic
Products, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: November 5, 2002
/s/ Neil G. Blomquist
-----------------------------------
Neil G. Blomquist
Chief Executive Officer
23
I Robert B. Fowles, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Spectrum Organic
Products, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: November 5, 2002
/s/ Robert B. Fowles
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Robert B. Fowles
Chief Financial Officer
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