1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2000.
[ ] 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 small business issuer as specified in its Charter)
California 94-3076294
---------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
133 Copeland Street
Petaluma, California 94952
------------------------ -----
(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
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,
44,473,499 shares as of November 1, 2000. Transitional Small Business Disclosure
Format: Yes [ ] No [ x ]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENT
-----------------------------
SPECTRUM ORGANIC PRODUCTS, INC.
BALANCE SHEET
ASSETS
(Unaudited)
Sept. 30,
2000
-----------
Current Assets:
Cash $ 1,300
Accounts receivable, net 4,555,800
Inventories, net 5,445,200
Income tax refunds receivable 31,100
Prepaid expenses and other current assets 76,200
-----------
Total Current Assets 10,109,600
Property and Equipment, net 4,034,900
Other Assets:
Goodwill, net 9,919,100
Other intangible assets, net 72,400
Other assets 65,600
-----------
Total Assets $24,201,600
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdrafts $ 422,800
Lines of credit 5,545,800
Current maturities of notes payable, former
stockholder 387,500
Current maturities of notes payable and
capitalized lease obligations 1,728,400
Current maturities of notes payable, stockholders 227,600
Accounts payable, trade 6,133,100
Accrued expenses 623,800
------------
Total Current Liabilities 15,069,000
Notes payable, former stockholder, less current
maturities 1,046,700
Notes payable and capitalized lease obligations,
less current maturities 169,500
Notes payable, stockholders, less current
maturities 274,000
------------
Total Liabilities 16,559,200
------------
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized,
no shares issued or outstanding --
Common stock, without par value, 60,000,000
shares authorized, 44,473,499 issued and
outstanding 8,616,000
Additional paid-in capital 304,200
Accumulated deficit (1,277,800)
------------
Total Stockholders' Equity 7,642,400
------------
Total Liabilities and Stockholders' Equity $ 24,201,600
============
The Accompanying Notes are an Integral Part
of the Financial Statements
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<TABLE>
<CAPTION>
SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENT OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Gross Sales $ 11,411,200 $ 4,519,400 $ 34,977,000 $ 18,751,900
Discounts and Allowances 883,100 678,300 1,878,000 1,474,000
------------ ------------ ------------ ------------
Net Sales
10,528,100 3,841,100 33,099,000 17,277,900
Cost of Goods Sold 8,016,800 1,888,900 24,266,700 11,525,500
------------ ------------ ------------ ------------
Gross Profit 2,511,300 1,952,200 8,832,300 5,752,400
------------ ------------ ------------ ------------
Operating Expenses:
Sales & Marketing 1,231,300 953,900 4,796,400 2,426,000
General & Admin. Expenses 1,074,800 643,100 3,168,800 1,861,800
Write-down of Assets Held for Sale 250,000 -- 388,400 --
Amortization of Goodwill 225,500 -- 684,200 --
------------ ------------ ------------ ------------
Total Operating Expenses 2,781,600 1,597,000 9,037,800 4,287,800
------------ ------------ ------------ ------------
Income (Loss) from Operations (270,300) 355,200 (205,500) 1,464,600
------------ ------------ ------------ ------------
Other Income (Expense):
Interest Expense, net (366,400) (173,200) (1,067,300) (392,100)
Gain on Asset Disposals
-- -- 50,000 --
Other
400 (2,600) 11,900 9,100
------------ ------------ ------------ ------------
Total Other Expenses (366,000) (175,800) (1,005,400) (383,000)
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes (636,300) 179,400 (1,210,900) 1,081,600
Provision For Income Tax Expense -- 73,900 -- 431,800
------------ ------------ ------------ ------------
Net Income (Loss) $ (636,300) $ 105,500 $ (1,210,900) $ 649,800
============ ============ ============ ============
Basic and Diluted Earnings
(Loss) Per Share $ (0.01) $ 0.01 $ (0.03) $ 0.02
============ ============ ============ ============
Weighted Avg. Shares Outstanding 44,423,844 32,890,918 44,169,015 32,910,895
============ ============ ============ ============
The Accompanying Notes are an Integral Part
of the Financial Statements
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<PAGE>
SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Sept. 30, Sept. 30,
2000 1999
----------- ------------
Net Income (Loss) $ (1,210,900) $ 649,800
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Provision for allowances against receivables (17,900) 7,500
Provision for reserves for inventory obsolescence (285,000) --
Depreciation and amortization 429,800 277,900
Amortization of goodwill 684,200 --
Loss on asset disposals and write-downs 338,400 --
Imputed interest on notes payable 42,100 --
Imputed interest on issuance of stock warrants 118,700 --
Increase in cash surrender value of life insurance (10,200) --
Amortization of original issue discount on
unsecured & subordinated notes payable 55,200 --
Changes in Assets and Liabilities:
Accounts receivable (986,500) (455,200)
Inventories 1,426,800 (735,700)
Prepaid expenses and other current assets 112,900 (343,400)
Accounts payable 192,900 424,100
Income taxes payable -- 324,000
Accrued expenses and other current liabilities (763,000) 237,800
------------ ------------
Net Cash Provided by Operating Activities 127,500 386,800
------------ ------------
Cash flows from Investing Activities:
Purchase of property and equipment (324,300) (971,800)
Proceeds from sale of assets 53,000 --
Acquisition and merger-related expenses (169,900) (298,500)
Loan to Shareholder -- (20,000)
------------ ------------
Net Cash Used in Investing Activities (441,200) (1,290,300)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from bank overdraft 193,500 195,900
Proceeds under revolving line of credit 33,113,200 10,440,200
Repayments under revolving line of credit (32,505,400) (10,412,700)
Repayment of notes payable, former stockholder (275,000) --
Repayment of notes payable to stockholders (209,800) --
Proceeds of long-term debt 276,100 1,121,700
Principal repayments under long-term debt (336,900) (407,300)
Repayment of capitalized lease obligations (41,500) (34,800)
Proceeds of loan against cash surrender value of life ins 98,400 --
Warrants exercised 1,300 --
------------ ------------
Net Cash Provided by Financing Activities 313,900 903,000
------------ ------------
Net Increase (Decrease) In Cash 200 (500)
Cash, beginning of the period 1,100 500
------------ ------------
Cash, end of the period $ 1,300 $ --
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 15,400 $ 107,800
Cash paid for interest $ 855,900 $ 392,000
============ ============
The Accompanying Notes are an Integral Part
of the Financial Statements
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</TABLE>
<PAGE>
SPECTRUM ORGANIC PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Interim Financial Statements:
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. Operating results for the nine-month period ended September 30,
2000 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 2000. These financial statements have
been prepared in accordance with the instructions to Form 10-QSB and do not
contain certain information required by generally accepted accounting
principles. These 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, 1999.
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. 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 combined company is held by former SNI stockholders after the merger,
the transaction was accounted for as a reverse merger, with SNI as
accounting acquirer and OFPI and OI as accounting acquirees.
Accordingly, the financial statements present the historical results of SNI
and SCI as accounting acquirer for all periods presented. Results of
operations for OFPI and OI are included from October 6, 1999 forward.
Numbers of shares and per-share amounts have been retroactively restated
where applicable for all periods presented.
3. Plant Closure:
In May 2000, the Company committed to a plan to close its leased facility
in Morgan Hill, California and transfer the production of the OFPI brands
to a third-party co-packer. Production at the Morgan Hill facility ceased
on July 21, 2000, however, the facility remains under lease while the
Company completes the sale or disposal of the surplus equipment remaining
there. Included in cost of sales for the nine month period ended September
30, 2000 was a provision of $53,100 for anticipated severance and leasehold
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SPECTRUM ORGANIC PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
expenses associated with the closing of the facility. In addition, a
write-down on assets held for sale of $388,400 was recorded for anticipated
losses on the sale or disposal of equipment and leasehold improvements at
the Morgan Hill facility. The equipment and leasehold improvements held for
sale were included in property and equipment at September 30, 2000 with a
net book value of $870,400. Depreciation of the Morgan Hill assets held for
sale ceased as of July 31, 2000.
4. Commitments and Contingencies:
Litigation and Settlements
--------------------------
In 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 (who is also a stockholder), and
on August 10, 2000 the courts, as a result of the settlement, dismissed the
case. Under the terms of the settlement and release, SPOP will pay Global a
total cash consideration of $145,000, payable $25,000 upon execution of the
agreement by Global plus twelve equal monthly payments of $10,000, and the
issuance of 400,000 shares of SPOP stock, valued at $400,000. In addition,
SPOP will issue to Global options to purchase 125,000 common shares at
$2.25 per share at an option term yet to be determined. The transfer of
shares and the adjustment of the liability for the cash consideration were
recorded in the nine month period ended September 30, 2000 as a net charge
to Goodwill of $187,600, since the litigation preceded the merger.
Management believes that the terms of this settlement will not have a
significant effect upon the Company's financial position, results of
operations or cash flows.
In 1998, OFPI acquired certain natural fruit juice and water bottling
operations for cash and common stock. A portion of the common stock
consideration was held in escrow, contingent upon earn-out factors for the
year following the acquisition. An estimated accrual of $156,900 for common
shares to be released is included in accrued liabilities at September 30,
2000. The shares have not been released, however, due to a dispute with the
seller regarding the earn-out calculations. Management believes that the
outcome will not have a material effect upon the Company's financial
position, results of operations or cash flows upon settlement.
Liquidity
---------
At September 30, 2000, the Company had negative working capital and was in
technical default of certain 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 effective July 17, 2000.
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.
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<PAGE>
Furthermore, as of April 1, 2000 the Company is in default under the
subordinated promissory notes issued under 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. The resulting
$118,700 value of the warrants was included in interest expense for the
nine months ended September 30, 2000.
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
-------------------------------------------------------------------------------
The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report. The
financial results reported herein are not necessarily indicative of the
financial results that may be achieved by the Company in any future period.
Introduction:
On October 6, 1999, Spectrum Naturals, Inc. ("SNI") and its affiliate,
Spectrum Commodities, Inc. ("SCI"), and Organic Ingredients, Inc. ("OI"),
California corporations were merged with and into Organic Food Products, Inc.
(the "Registrant"), (collectively "SPOP" or the "Company"), pursuant to the
Agreement and Plan of Merger and Reorganization, dated May 14, 1999 (the
"merger").
As a result of the merger, SNI stockholders received 4,669.53 shares of
OFPI stock in exchange for each share of SNI stock previously held, for a total
of 32,336,495 shares representing approximately 73.8% of the outstanding common
stock after the merger. OI stockholders received 39.5 shares of OFPI stock in
exchange for each share of OI stock previously held, for a total of 3,950,000
shares representing approximately 9.0% of the outstanding common stock after the
merger. Existing OFPI stockholders held 7,275,665 of the outstanding shares, or
approximately 17.2% of the common stock outstanding after the merger. Since a
controlling interest in the combined company is held by former SNI stockholders
after the merger, the transaction was accounted for as a reverse merger, with
SNI as accounting acquirer and OFPI and OI as accounting acquirees. Accordingly,
operating results for fiscal year 1999 reflect those of SNI and SCI only.
Operating results for fiscal 2000 reflect the newly merged entity from January
1, 2000 through September 30, 2000.
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.
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,
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<PAGE>
the purchasing patterns of significant customers, the timing of new product
introductions by the Company and its competitors, the amount of slotting fees,
new product development and advertising expenses incurred by the Company,
variations in sales by distribution channel, fluctuations in market prices of
raw materials, competitive pricing policies, and situations that the Company
cannot foresee. These factors could cause the Company's performance to differ
from investor expectations, resulting in volatility in the price of the Common
Stock.
Investors should carefully consider the following information as well as
other information contained in this Report. Information included in this Report
contains "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. No assurance can be given that the
future results covered by the forward-looking statements will be achieved. The
following matters constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to vary materially from the future
results covered in such forward-looking statements. Other factors could also
cause actual results to vary materially from the future results covered in such
forward-looking statements.
--------------------------------------------------------------------------------
Results of Operations for the Three and Nine Month Periods Ending September 30,
2000 and September 30, 1999
--------------------------------------------------------------------------------
Net Results:
Spectrum Organic Products, Inc. ("SPOP" or the "Company") reported a net
loss of $636,300 and $1,210,900 for the three and nine month periods ended
September 30, 2000 ("2000"), respectively, compared to net income of $105,500
and $649,800 for the three and nine month periods ended September 30, 1999
("1999"). The net loss in 2000 was primarily due to increased selling, general
and administrative expenses, increased interest expense, losses associated with
the plant closure and the amortization of goodwill associated with the merger,
partially offset by the increased revenues attributable to the newly-merged
companies.
Revenues:
SPOP's gross sales for the three months ended September 30, 2000 were
$11,411,200 compared to $4,519,400 for 1999, an increase of $6,891,800, or 152%
over 1999. For the nine months ended September 30, 2000 gross sales were
$34,977,000 compared to $18,751,900 for 1999, an increase of $16,225,100, or 87%
over 1999. The increase in sales in 2000 consists primarily of the revenues
relating to the newly acquired product lines of OFPI and OI. Excluding the
incremental revenues of the product lines obtained with OFPI and OI, SPOP's
comparable sales for the nine months ended September 30, 2000 increased 19% from
1999 reflecting growth in mayonnaise, salad dressings and Spectrum Spread(R) in
the culinary category. Nutritional supplement sales in liquid, capsule and
powder forms also grew significantly, increasing 24% from the prior year.
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<PAGE>
Discounts and allowances as a percent of gross sales decreased to 7.7% for
the three month and 5.4% for the nine month periods ended September 30, 2000,
respectively, from 15.0% and 7.9% of gross sales for the same periods in 1999.
The declines are primarily the result of the increase in the proportion of
industrial ingredient sales, which do not entail discounting, to total sales as
a result of the merger.
Cost of Goods Sold:
The Company's cost of goods sold increased as a percent of gross sales for
the three month period ended September 30, 2000 to 70.3% compared to 41.8% for
the same period in 1999. The increase was due primarily to the higher proportion
of lower-margin industrial ingredient sales and higher fixed manufacturing costs
on the products acquired from OFPI. For the nine month period ended September
30, 2000 cost of goods sold increased as a percent of sales to 69.4% versus
61.5% for 1999. The increase was primarily due to the higher proportion of
lower-margin industrial ingredient sales and higher fixed manufacturing costs on
the products acquired from OFPI, partially offset by a favorable sales mix,
which featured higher volumes of nutritional supplements, the Company's highest
margin products.
Management has recently implemented several organizational changes to
reduce manufacturing costs in connection with the OFPI products acquired under
the merger. On July 21, 2000 SPOP ceased manufacturing the OFPI product lines at
its leased Morgan Hill, California facility. The products will now be produced
by a third-party co-packer, which will enable the Company to close the Morgan
Hill facility. Included in cost of sales for the nine month period ended
September 30, 2000 was a provision of $53,100 for anticipated severance and
leasehold expenses associated with the closing of the facility. As of September
30, 2000 the facility was still under lease by the Company and serving as a
storage facility for the surplus production equipment held for sale. Management
is cooperating with the owner of the facility to secure new tenants and
anticipates vacating the facility completely by the end of the year. As a result
of these changes, management believes that operations will become more efficient
and per unit production costs will decrease by the end of fiscal year 2000,
generating reductions in cost of goods sold as a percent of sales in subsequent
periods.
Sales and Marketing Expenses:
SPOP's sales and marketing expenses increased as a percent of gross sales
to 13.7% for the nine month period ended September 30, 2000, versus 12.9% for
the same period in 1999. This primarily reflected the increase in personnel and
related costs required to build a sales team capable of supporting the larger
organization after the merger. Also contributing were increased promotional
programs targeted to regain lost market share on OFPI brands and counter
competitive pressures in the market place. Sales and marketing expenses declined
for the third quarter to $1,231,300 or 10.8% of gross sales compared to
$1,727,500 or 14.2% of gross sales for the second quarter. The decrease was
primarily the result of timing variances in the recognition of expenses
associated with promotional programs. Management anticipates that the newly
organized sales team, targeted market spending, and the introduction of new
products will enable the Company to increase its market share in certain
categories.
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General and Administrative Expenses:
SPOP's general and administrative expenses for the nine months ended
September 30, 2000 decreased as a percent of gross sales to 9.1% versus 9.9% for
1999. The decrease in 2000 reflected increased efficiencies and economies of
scale associated with the new larger organization. General and administrative
expenses increased for the third quarter to $1,074,800 or 9.4% of gross sales
compared to $1,003,900 or 8.3% of gross sales for the second quarter. The
increase was primarily the result of increased professional fees associated with
the filing of the final income tax returns for SNI, SCI and OI and the filing of
an S-8 registration statement for the Company's Incentive Stock Option Plan.
Also contributing to the increase were increased banking fees as a result of the
negotiations to reset the financial covenants in the Company's credit facility.
Write-down of Assets Held for Sale:
Included in the three month period ended September 30, 2000 was a provision
of $250,000 for anticipated losses on the sale of the surplus bottling line
located at the Company's leased facility in Morgan Hill, California. The
bottling line represents the vast majority of the value of the surplus equipment
held for sale. The Company is in final negotiations to sell this equipment to
the third-party co-packer now producing the Company's tomato-based culinary
products. The sale will include a cash portion to be received at closing, plus
future credits against production costs for the products produced by the
co-packer. Due to material uncertainties regarding the future production
schedule of the tomato-based product lines, the Company will record the sale of
the bottling line at the cash value only.
Previously, the Company accrued $138,400 during the second quarter for
anticipated losses associated with leasehold improvements and minor surplus
equipment at the Morgan Hill facility. No provision was made at that time for
the bottling line since management believed that it could negotiate an all-cash
sale of the bottling line at close to its net book value.
Amortization of Goodwill:
The Company recorded goodwill of $10,820,800 in connection with the merger.
Amortization expense for the nine months ended September 30, 2000 was $684,200,
based on a twelve-year amortization schedule.
Net Interest Expense:
SPOP's interest expense for the three and nine month periods ended
September 30, 2000 was $366,400 and $1,067,300, respectively, versus $173,200
and $392,100 for the same periods in 1999. The increase was primarily the result
of higher utilization of the revolving credit line, and the interest expense
associated with the default under the private placement notes. Since the notes
were not repaid by March 31, 2000, the accrued interest through March 31 of
$20,000 has been added to the principal, the interest rate increased from 10% to
15%, and an additional 240,000 common stock warrants to purchase SPOP stock at
$.01 per share were granted. The resulting $118,700 value of the warrants was
included in interest expense for the nine months ended September 30, 2000. Also
included in interest expense for that period is $31,500 of interest paid to the
private placement note holders at the default rate for the period April 1
through September 30, 2000.
10
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The additional borrowing under the revolving credit line was used to pay
past due vendors at OFPI, fund the reduction in the Company's term debt as a
result of the refinancing, and fund payments due under various long-term notes.
(See Liquidity and Capital Resources)
Other Income:
Other income for the nine months ended September 30, 2000 includes a
$50,000 gain on the sale of the Sunny Farms and Pacific Rim trademarks and
related inventories.
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:
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. 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 2% for the revolving line of
credit and prime plus 2+1/4% for the term debt. The balance of the initial
proceeds was used for working capital purposes, to purchase raw materials and
equipment, to pay certain merger-related commitments, and to provide marketing
funds to introduce new products and to introduce existing products into new
markets.
Advances under the new revolving line of credit are limited to a borrowing
base consisting of certain accounts receivable and inventory. Included in the
facility are two term notes of $1,067,000 and $150,000 requiring payment over 60
and 18 months, respectively, and a capital expenditure facility for $276,100 of
qualified capital expenditures made by the Company through June 30, 2000. The
capital expenditure facility is to be repaid as a term note over 60 months
beginning in August 2000. Due to operating losses following the merger, the
Company is in technical default of certain financial covenants that were based
on financial projections made 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 for the revolving line of credit and the three
term notes as of July 17, 2000. Management is currently in negotiations to reset
the financial covenants to more accurately match the Company's financial
condition and future projections.
Also in connection with the merger, the Company completed a Private
Placement of 16 Units in October 1999. Each Unit consisted of a $25,000
unsecured and subordinated promissory note bearing interest at 10%, plus
warrants to purchase 10,000 shares of common stock at $.01 per share from
January 1, 2000 to September 30, 2000. Net proceeds of approximately $370,000
were received, after offering expenses of approximately $30,000. 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 was added
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to the principal, the interest rate increased to 15% and each Unit earns an
additional 2,500 warrants for each month the principal remains unpaid for up to
six months. As of September 30, 2000 all of the initial warrants had been
exercised by the note holders. The additional 15,000 warrants due each Unit
under the default were issued in September, 2000 and have the same terms as the
initial warrants granted with the promissory notes, except that they expire on
March 31, 2001.
The Company is highly leveraged and is currently seeking additional capital
from such potential sources as the sale of certain surplus assets and issuance
of common stock. Management believes that the new credit facility and proceeds
from the new sources of capital, if obtained, coupled with anticipated cost
savings in manufacturing, should provide adequate funds to meet the Company's
estimated cash requirements for the year ending December 31, 2000. There can be
no assurances that all of the anticipated savings can be attained by year-end 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 bank overdraft position at September 30, 2000 was $422,800
compared to $229,300 at December 31, 1999. During the nine months ended
September 30, 2000, the Company provided $127,500 in cash from operating
activities, compared to providing $386,800 in cash from operating activities for
the same period in 1999. The decrease in cash provided from operating activities
was primarily due to operating losses, higher levels of accounts receivable,
reduced levels of accrued expenses and other current liabilities, partially
offset by lower inventory levels. Cash used in investing activities was $441,200
during 2000 compared to $1,290,300 in 1999, reflecting lower capital
expenditures and merger related expenses plus the proceeds received from the
sale of the Sunny Farms and Pacific Rim trademarks during 2000. Cash provided by
financing activities was $313,900 in 2000 compared to $903,000 in 1999. The
reduction in funds provided by financing activities reflected lower borrowings
under long-term debt, partially offset by increased borrowing under the
revolving line of credit.
The Company's future results of operations and the other forward-looking
statements contained in this document, in particular the statements concerning
plant efficiencies and capacities, 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 raw materials at reasonable
prices, risk of uncollectible accounts receivable, risks of inventory
obsolescence due to shifts in market demand, timing of product introductions,
and litigation involving product liabilities and consumer issues.
New Applicable Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 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
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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 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 Company
does not expect adoption of this new standard on January 1, 2001 to affect its
financial statements or results of operations.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. The guidance in SAB 101, as amended by SAB 101B, is
required to be followed starting with the fourth quarter of the current fiscal
year. Management does not believe that the guidance contained in SAB 101 will
have a material effect on the Company's results of operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of APB Opinion No. 25 for (a) the definition of employee for the
purpose of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a non-compensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 2, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. Management believes that the application of FIN 44 will not have a
material effect on the Company's financial position or results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
In November 1998, Global Natural Brands, Inc.("Global")and its four
principals filed a lawsuit against OFPI (the former Registrant) and its four
principals, alleging unpaid wages and seeking monetary damages and injunctive
relief. Global had provided managerial services to OFPI from April 1998 to
October 1998, when OFPI terminated its services. In January 1999, Global amended
its complaint by including a securities fraud claim, among other causes of
action. Meanwhile, Global sought to obtain a temporary restraining order, a
preliminary injunction and a writ of attachment against OFPI without success.
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 in April,
2000, reached a settlement and release with Global. Under the terms of the
settlement and release, SPOP will pay Global a total cash consideration of
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$145,000, payable $25,000 upon execution of the agreement by Global plus twelve
equal monthly payments of $10,000, and issue 400,000 shares of SPOP stock,
valued at $400,000. In addition, SPOP will issue options to purchase 125,000
shares at $2.25 per share at an option term yet to be determined. As of
September 30, 2000 the shares had been issued, $75,000 of the cash consideration
has been paid, and the Company was in negotiation to come to an agreement over
the term of the options to be issued. Management believes that the terms of this
settlement will not have a significant effect upon the Company's financial
position, results of operations or cash flows.
Item 2. Changes in Securities
------------------------------
None.
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
-----------------------------------------
None
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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 8, 2000 SPECTRUM ORGANIC PRODUCTS, INC.
By: /s/ Robert B. Fowles
-----------------------------------
Robert B. Fowles
Chief Financial Officer
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