SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _______________ to________________
Commission File No. 333-22997
Spectrum Organic Products, Inc.
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(Name of Small Business Issuer in its Charter)
California 94-3076294
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
133 Copeland Street
Petaluma, California 94952
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (707) 778-8900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Without Par Value Common Stock
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(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No ___
As of April 10, 2000, 44,164,186 shares of the Registrant's Common Stock
were outstanding. As of April 10, 2000, the market value of the Registrant's no
par value Common Stock, excluding shares held by affiliates, was $27,602,600
based upon a closing bid price of $0.625 per share of Common Stock on the NASDAQ
OTC Bulletin Board System.
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes ___ No X
The Registrant's net sales for its year ended December 31, 1999 were
$29,619,600.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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Introduction
This Form 10-KSB of Spectrum Organic Products, Inc., ("SPOP", the "Company"
or the "Registrant") contains forward-looking statements within the meaning of
the Private Litigation Reform Act of 1995 (the "Litigation Reform Act"). These
forward-looking statements are subject to risks and uncertainties that may cause
actual results to differ materially.
SPOP is a vertically integrated company focused on 5 revenue producing
areas: Food and Beverage, Dietary Supplements, Food Service, Private Label and
Ingredients. The Company was the result of the October 1999 merger of Spectrum
Naturals, Inc. ("SNI"), Spectrum Commodities, Inc. ("SCI"), Organic Food
Products, Inc. ("OFPI") and Organic Ingredients, Inc. ("OI").
On May 14, 1999, OFPI and SNI, and its affiliate, SCI, entered into a
definitive agreement to merge the companies. In addition, OFPI entered into a
definitive agreement to merge with OI. The combined transaction is herein
defined as the "Merger". OFPI was the Registrant prior to the Merger. However,
the Merger was accounted for as a reverse acquisition purchase with SNI as the
accounting acquirer since former SNI shareholders now hold more than 70% of the
post merger Common Stock of the Company. Following the closing of the Merger on
October 6, 1999, SNI, SCI and OI ceased to exist, the Registrant became the
surviving corporation, and the Company changed its name to "Spectrum Organic
Products, Inc."
SNI was incorporated in 1980 to bring nutrition and quality into the
vegetable oil category. At the start, natural oils were distributed and
manufactured in bulk, and 2 years later the "Spectrum Naturals" brand was
launched. In time, SNI expanded their line to include condiments under the
"Spectrum Naturals" brand and supplements under the "Spectrum Essentials" brand.
The brands are positioned from the sourcing of raw ingredients and setting the
benchmark for the chemical free extraction of vegetable oils. SNI was the first
to offer expeller pressed canola oil in the United States, 1988. The first to
offer certified organic olive oil, 1987. The first with verified non-GMO
culinary oils, 1999. The first to offer a healthy alternative to butter and
margarine, "Spectrum Spread" became available in 1993. SNI has also produced
certified organic vinegar since 1989, canola mayonnaise since 1987, and 10 fat
free and low fat salad dressings since 1996.
Expanding into the nutritional supplement product category, SNI
participated in areas of nutritional research and product development, becoming
the first company to market organic flax oil in the United States. SNI also
implemented the proprietary technologies trademarked as SpectraVac and LOCET.
SpectraVac, created in 1989, is an organic benign method of fresh oil extraction
without the use of chemicals, that eliminates the impact of oxygen, light and
heat. The result is a true cold pressed nutritionally rich product. LOCET (or
low oil content extraction technology), brought on line in 2000, will enable the
Company to extract oil from rare oil bearing nutraceuticals. Such nutraceuticals
include saw palmetto, evening primrose and DHA from algaes. LOCET employs
conventional and certified organic benign extraction methods to concentrate the
lipid healing compounds in these increasingly popular natural medicinals.
<PAGE>
In 1995, SNI formed Spectrum Commodities to serve other natural food
manufacturers with similar bulk ingredient needs. SCI's mission was to improve
the integrity of ingredients used in food manufacturing. SCI offered expeller
pressed oils in place of those made with petroleum solvents. Organic and non-GMO
oils are often preferred over their conventional counterparts. SCI also secured
exclusive distribution rights to new products such as organic palm and coconut
oils. SCI has a distribution network with railcar pumping stations and
warehouses on both coasts. SCI provides industrial quantities of organic and
expeller pressed culinary and nutritional oils and organic vinegars to
manufacturers, co-packers, private label and food service accounts, both
domestically and for export. Following the merger, SCI became part of SPOP's
Industrial Division.
OFPI (formerly the Registrant and traded under the stock symbol "OFPI") was
incorporated in 1987 as S&D Foods, Inc., and changed its name to Garden Valley
Naturals in 1995. Doing business as Garden Valley Naturals from 1987 to 1996,
OFPI manufactured and marketed pesticide-free or "organic" and "all natural"
pasta sauces, salsas and condiments under the brand names "Garden Valley
Naturals", "Garden Valley Organics", "Millina's Finest" and "Parrot." It began
marketing its Parrot line of salsas in 1987, its Garden Valley Naturals line of
condiments in 1991 and its Garden Valley Naturals line of pasta sauces and
salsas in 1984. In June 1996, Garden Valley Naturals merged with Organic Foods
Products, Inc., which also marketed a line of organic food products, including
pasta sauces, salsas and canned tomatoes, together with dry cut pastas and
organic children's meals. Following that merger, the surviving entity operated
under the Organic Food Products, Inc.
OI, operating under the d.b.a. "Organic Ingredients, Inc.", is a supplier
of industrial organic ingredients, including fruit/vegetable juices,
fruit/vegetable juice concentrates, fruit/vegetable purees, individually
quick-frozen or "IQF" frozen fruits and vegetables and apple cider vinegar. In
addition, OI has private label programs and packs products for retail chains. OI
sources its raw materials from the Western states of the United States as well
as Mexico, Canada, Costa Rica, Chile, Brazil, Peru, Argentina, Turkey, Denmark
and Italy. OI, formed in July of 1996 as a limited liability company, was
converted to a corporation in January of 1998 and, combined with SCI, make up
SPOP's Industrial Division.
Following the Merger, the Company, through its Consumer Brands and
Industrial Divisions, sells its products here in the U.S. as well as
internationally to natural or mainstream retailers and manufacturers. Retail
products are sold in, but not limited to, stores such as Price/Costco, Safeway,
A&P, Trader Joe's, Whole Foods, Raley's and Wild Oats.
BRANDED PRODUCTS
The Company introduces and discontinues products on a regular basis,
consistent with customary practices of other firms in the processed food
industry. The Company's current product lines, which include organic and
Orthodox Union Certified products, are as follows:
<PAGE>
Supplements ("Spectrum Essentials")
SPOP markets 10 daily essential fatty acid supplements under the Spectrum
Essentials brand. The supplements come in liquid, capsule and powder form. The
daily essential supplement oils include Borage, Evening Primrose, Flax, Hemp,
Norwegian Fish and Wheat Germ oils in various mixtures and flavors. The
Essentials brand also carries a fiber supplement for colon care.
Culinary Oils
SPOP carries non-GMO refined, unrefined, blended and organic cooking oils.
The 9 refined cooking oils include Almond, Apricot, Avocado, Canola, Coconut,
High Oleic Safflower, Sesame, Super Canola and Walnut. There are six unrefined
cooking oils: Corn, High Oleic Safflower, Extra Virgin Olive, Peanut, Sesame and
Toasted Sesame. There is only one blended oil, refined Canola and Olive mix. The
organic category has 11 types of cooking oils: Canola Semi- Refined, Coconut,
Extra Virgin Olive Unrefined, Olive International Collection (California), Olive
International Collection (Italy), Olive International Collection (Greek),
Safflower Semi-Refined, Sesame Unrefined, Toasted Sesame Unrefined, High Oleic
Sunflower Semi-Refined and Soy Semi-Refined.
Condiments
The Company distributes different condiments under the Spectrum Naturals
brand name. There is both a lite and a regular Canola Mayonnaise. The mayonnaise
uses expeller pressed canola oil. SPOP also carries a vinegar line that is third
party certified organic: filtered apple cider, unfiltered apple cider, brown
rice, seasoned brown rice, red wine, white wine and balsamic. There is also
non-organic Balsamic Vinegar from Modina, Italy that is aged 4 years. SPOP
carries a refrigerated spread as well. There are two types of spreads: Spectrum
Naturals Canola Spread, and Essential Omega Spread made with organic flax and
soy oils. There is also an organic salad dressing line. In the fat-free category
there are 4 dressings: Creamy Dill which contains dairy product, Creamy Garlic
which also contains dairy product, Garlic and Onion and Toasted Sesame that do
not have dairy product. In the low fat category there are 6 dressings: Bleu
Cheese which contains dairy product, Honey Dijon, Mango Madness, Roasted Pepper
which contain dairy product, Southwestern Caesar and Zesty Italian. SPOP's
dressing line also includes Omega-3 Vinaigrettes, which are full fat and made
with organic flax and soy oil. The Omega 3 vinaigrettes come in three flavors:
Ginger Garlic, Raspberry and Balsamic.
Cooking Spray
There are two cooking sprays that could be compared to its mass-market
counterpart "Pam." The Spectrum Super Canola skillet spray is made from high
oleic Canola Oil. The second spray, Organic Skillet Spray, is made from a blend
of organic Extra Virgin Olive Oil and Organic Canola Oil. Both skillet sprays
are low fat cooking products.
Shortening
SPOP has a non-hydrogenated Organic Palm Shortening that is used for any
type of cooking application where butter, margarine or shortening is used. The
SPOP shortening is a healthy alternative to hydrogenated shortening and
partially hydrogenated oils.
Organic Pasta Sauces and Pastas
SPOP markets 23 organic pasta sauces under the Garden Valley Organic and
Millina's Finest brand names. The pasta sauces are all natural and most are
fat-free. Varieties include Garden Vegetable, Sun-dried Tomato, Roasted Garlic
Tomato, Tomato Mushroom, Sweet Pepper and Onions, Hot and Spicy, Smoked Garlic
and Zesty Basil.
<PAGE>
The gourmet pasta sauce, Frutti Di Bosco, is another line SPOP carries.
This sauce is made in small batches which intensifies flavors. It is made with
the finest handpicked tomatoes, wild harvested mushrooms and 100% whole diced
tomatoes - no added water or tomato paste. The product is third party certified
organic. Frutti Di Bosco, or "Fruit of the Woods", comes in four flavors:
Puttanesca, Marinara with Garlic and Basil, Wild Chanterelle and
Truffle-Porcini.
SPOP also offers dry organic pastas including spaghetti, linguini,
fettuccine, angel hair, rotini, penne and bowties.
Organic Salsas
SPOP markets six organic salsas under the Garden Valley Organic brand name
including five varieties of fat-free and vinegar-free salsas (Sun-Dried Tomato,
Roasted Garlic Tomato, Black Bean, Black Bean and Corn and Chunky Organic
Tomato) in three levels of heat, mild, medium and hot. A medium green tomatillo
salsa is also available. SPOP also markets a line of six organic salsas under
the Parrot brand name. Varieties include chunky, black bean, tomatillo, spicy
gourmet as well as an enchilada sauce.
Organic Condiments
SPOP offers three organic mustards under the Garden Valley Organic brand
name. All the mustards use organic mustard seed for flavoring and are offered in
yellow, stoneground and dijon. SPOP offers organic ketchup and organic crushed
garlic under the Millina's Finest brand name. All condiments are fat-free and
sugar-free.
Children's Meals
SPOP offers five canned organic kid's meals under the label Grandma
Millina's Kitchen Kid's Meals. The meals are composed of pasta rings in tomato
sauce, pasta rings in tomato cheese sauce, letters and numbers in tomato sauce,
pasta rings and veggie franks, and beans with veggie franks.
Functional Beverages
SPOP markets a functional beverage called Energy Plus, sold in 7.7 oz. cans
in a single flavor.
INDUSTRIAL PRODUCTS
The Company offers a wide variety of certified organic products. The
Company's current product lines are as follows:
Citrus Products
The Industrial Division supplies single strength juice, concentrate, and
citrus byproducts including oils, pulps and essences. All citrus products are
made from orange, lemon, grapefruit, lime and tangerine fruits.
Fruit Juices and Juice Concentrates
The Industrial Division also carries apple, pineapple, orange, lemon, lime
grapefruit, blackberry, cranberry, pear, peach, raspberry, strawberry and white
grape juices and concentrates.
Fruit Puree and Concentrates
There are various fruits in puree and concentrate form. These fruits
include apple, apricot, blackberry, kiwifruit, mango, nectarine, peach, pear,
strawberry and raspberry.
<PAGE>
Vegetable Juice and Concentrate
Besides fruits, there are also vegetable juices and concentrates. These
various vegetables include: beet, bell pepper, carrot, celery, lettuce, parsley,
spinach, watercress, tomato, cabbage, cucumber, broccoli, garlic and
cauliflower.
Vegetable Puree
The company also carries puree of butternut squash, cabbage, carrot,
celery, eggplant, garlic, onion and spinach. These purees can be used in various
forms, the most popular being baby food.
Essences
The Industrial Division of SPOP carries apples, blackberries, peaches,
raspberries and strawberries in their essence forms.
Whole Frozen Fruit
There are three frozen fruits carried by the OI division: blackberries,
raspberries and strawberries.
Fresh Bulk Fruit
Besides frozen fruit, the Industrial Division carries fresh apricots
(including machine-pitted apricots), apples, blackberries, grapes, pears,
kiwifruit, peaches, raspberries, strawberries, nectarines and limes.
Fresh Bulk Vegetables and Prepared Vegetables
The line carried by the Industrial Division on the fresh bulk and prepared
vegetables include beets, bell peppers, carrots, celery, lettuce, parsley,
spinach, butternut squash, watercress, garlic, tomato paste and diced tomatoes.
The Industrial Division also offers private label programs for organic food
retailers. These programs include frozen juice concentrates, bottled
single-strength juices, apples sauces and apple-blended sauces, various fruit
juices and IQF fruits and vegetables. In addition, the division provides
numerous national brands and retailers with canned tomatoes, pasta sauces,
salsas and culinary and nutritional oils. Each of these products can be packaged
in a variety of sizes and styles.
Sales and Distribution
SPOP sells its products primarily through distributors, independent
commissioned food brokers and specialty food brokers to natural food and
specialty food stores, club stores, including Price/Costco, and retail chains
and independent grocery stores, including Safeway, A&P, Trader Joe's and
Raley's. Currently SPOP products are offered in over 6,000 health food stores
nationwide, 38 club stores in Northern California and 2,000 grocery stores
located throughout the U.S. and in the Far East, Middle East, Canada, and
Europe. In order to increase its distribution and sales, SPOP offers special
promotional pricing and occasionally may pay "slotting fees," which are payments
made by food processors and distributors to retail stores in order to acquire
retail shelf space for their food products. Such fees have not been significant
to date.
Through OI, the Industrial Division historically has sold all of its
products to food manufacturers worldwide. From time to time, OI has utilized the
services of food brokers. OI currently sells to major food manufacturers
worldwide. These manufactures include companies such as Gerber, H.J. Heinz, J.M
Smucker Company, Horizon Organic Dairy, Vita Mills, Mountain Sun, Wild Oats,
Cascadian Farms, Muir Glen, Kirin, Mitsui, Mitsubishi, etc.
<PAGE>
A broker incentive plan has been implemented based on semi-annual quotas to
motivate brokers to increase their sales of SPOP products. SPOP has also entered
into "preferred vendor" arrangements with certain retail store chains to obtain
closer working relationships and enhanced retail merchandising and promotional
support.
Following the Merger, SPOP has focused on its core natural foods
distribution, and is entering into new distribution arrangements with
mass-market accounts where profitable. Management believes there is an
opportunity to enter conventional supermarkets as they become more committed to
providing a variety of organic and natural food products, and as consumers
become more health conscious.
Marketing and New Product Development
SPOP's product marketing emphasizes the organic, all natural and generally
low fat content, except healthy fat cooking oils and condiments, as a healthful
and tasty alternative to similar traditional food products. Each brand is
targeted toward specific consumer segments with appropriate products, flavor
variants, images and messages. SPOP promotes all its brands to natural food and
health food stores and the specialty or "gourmet" departments of grocery stores.
SPOP also promotes a pricing strategy in which its organic food products are
offered at prices only slightly higher than their non-organic counterparts
through strategic everyday value pricing programs with key retailers. In 1998,
United Natural Foods, Inc. and Tree of Life, Inc. accounted for approximately
37% and 13% of SOPI's revenues. In 1999, United Natural Foods, Inc. accounted
for approximately 19% of SPOP's revenues. A loss of these customers would have a
material adverse effect on SPOP's operations. Generally, each customer's
percentage of total revenues decreased in 1999 compared to 1998 due to the
additional revenues from the companies combined with the Merger.
The Company uses primarily outside resources in developing its new
products. Research and development expenses for 1999 and 1998 were $215,000 and
$46,000, respectively.
Manufacturing Facilities and Suppliers
SPOP manufactures its products in leased facilities located at 133
Copeland, Petaluma, California and 550 Monterey Road, Morgan Hill, California.
The Company's corporate headquarters is a leased facility located at 1304 South
Point Blvd., Suite 280, Petaluma which houses the sales, marketing and corporate
executive offices. The Company's finance, human resources and operations are
housed in the Copeland, Petaluma facility. The Industrial Division of SPOP is
headquartered in Aptos, California.
The Copeland, Petaluma facility manufactures and bottles SPOP's
"Essentials" product line and bottles the Company's culinary oils. Currently,
all of the Spectrum brands are stored and shipped from this location.
The Morgan Hill facility, a food processing and warehouse facility,
manufactures all the pasta sauces and salsas. Manufacturing involves mixing the
product's ingredients in 1,000-gallon kettles and then bottling, labeling and
casing the product for delivery to the customer. Some products are packaged in
shrink-wrapped combination packs consisting of two or more separate products in
one tray. Products manufactured at the Morgan Hill facility are stored and
shipped from a leased distribution warehouse located in San Jose, California.
<PAGE>
SPOP uses co-packers to process and package its vinegars, condiments,
dressings, Kids' Meals, Energy Plus, mayonnaise, shortening, pastas, spreads,
and encapsulated products.
While many raw materials are available from a number of sources, SPOP
currently purchases its organic and conventional products from two primary
suppliers and has written agreements covering a majority of its anticipated
purchases. The Company had a single company who supplied approximately 15% of
SPOP's raw material purchases in 1999 and 21% in 1998. The Company believes that
other suppliers are available who could provide products at similar prices and
terms. A change in suppliers, however, could cause a delay in manufacturing and
a possible loss of sales, which could adversely affect operating results.
The Company uses many different processing plants around the world to
co-pack its products. The Company's industrial products are produced in co-pack
arrangements under a contract with the processor or under a toll or fee
arrangement for one-time production runs, depending on the product, commodity,
and market conditions. The Company's primary manufacturer of branded products
represented approximately 10% of the cost of goods sold in 1999 and 11% in 1998.
While change in manufacturers could cause a delay in production and a possible
loss of sales, the Company believes other manufacturers are available who could
provide processing at similar prices and terms.
Competition
The natural food and health food industries in general and the pasta sauce,
salsa, condiment, culinary oil, supplement and fruit juice businesses in
particular, are highly competitive, and there are numerous multinational,
regional and local firms that currently compete, or are capable of competing,
with SPOP. In the non-organic pasta sauce market, the Company's competitors
include The Campbell's Soup Company, through its Prego brand, Unilever Canada
Limited, through its Ragu brand, Borden, Inc., through its Classico brand, and
Newman's Own. In the non-organic salsa market, the Company faces competition
from Campbell's Soup's Pace brand, the Old El Paso brand of International Home
Foods, Inc. and the La Victoria brand of products of Authentic Specialty Foods
(DESC). Competitors in the non-organic condiments market include H.J. Heinz
Company, Reckitt & Colman Inc., which markets French's mustard, and
International Home Foods, which markets Gulden's mustard as well as Best Foods
Mayonnaise. Competition in the functional beverage market includes Hansons and
Snapple. SPOP competes with numerous brands in the non-organic mainstream
category. Some of those competitors are Puritan and Wesson. In the natural
category SPOP's principal competitor is Hain Pure Foods. The Company competes
with national cut pasta manufacturers such as Borden, through its Ravarino &
Freschi brand, and New World Pasta Company, which sells pasta under the American
Beauty and Ronzoni brands.
In the organic market SPOP also competes with DeBoles, which makes a line
of pastas. In organic pasta sauce, SPOP's competitors include Muir Glen, Amy's
Kitchen and Enricos. In the organic salsa market, our competitors include Simply
Natural, Muir Glen and Enrico. The Company faces competition in the natural food
condiment market from Eden, Canoleo, Nasoya, Annie's, and Braggs. SPOP has no
known existing competitors in the natural foods industry in the organic culinary
oils. The supplement category's competitors are Health From The Sun and
Barleans.
<PAGE>
Competitive factors in the specialty foods industry include price, quality,
brand image and flavor. SPOP positions its product lines to be slightly more
expensive than their non-organic food counterparts but consistent with prices
charged by other organic food marketers. SPOP believes its products compete
favorably against other organic foods with respect to quality and flavor.
Trade Names and Trademarks
The Company has Federal registration for its Millina's Finest, Parrot
Brand, Garden Valley, Spectrum Naturals, Spectrum Essentials, Spectrum Spread
and Veg Omega3 trademarks. There can be no assurance that any trademark or trade
name registrations will be granted to the Company, or, if granted, that the
trademarks or trade names will not be copied or challenged by others.
Government Regulation
The Company is subject to various Federal, state and local regulations
relating to cleanliness, maintenance of food production equipment, food storage
and food handling, and the Company is subject to unannounced on-site inspections
of its manufacturing facilities. As a manufacturer and distributor of foods, the
Company is subject to regulation by the U.S. Food and Drug Administration
("FDA"), state food and health boards and local health boards in connection with
the manufacturing, handling, storage, transportation, labeling and processing of
food products. In order to offer organic food products, the Company is also
subject to inspection and regulation by third party certification agencies.
Regulations in new markets and future changes in the regulations may adversely
impact the Company by raising the cost to manufacture and deliver the Company's
products and/or by affecting the perceived healthfulness of the Company's
products. A failure to comply with one or more regulatory requirements could
interrupt the Company's operations and result in a variety of sanctions,
including fines and the withdrawal of the Company's products from store shelves.
The Company holds all material licenses and permits required to conduct its
operations.
The Company is also subject to Federal and state laws establishing minimum
wages and regulating overtime and working conditions.
As of April 10, 2000, SPOP had 99 employees including its executive
officers, sales and marketing, accounting, food production, processing and
warehousing employees and administrative personnel. SPOP's employees are not
covered by a collective bargaining agreement and the Company considers its
employee relations to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
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SPOP leases approximately 24,000 square feet for its manufacturing and
warehouse facility in Morgan Hill, California from a non-affiliate on a
seven-year lease expiring April 30, 2003, at a monthly rental of $7,081 plus
rental escalations of 3% per year. The Company also leases 20,000 square feet of
warehouse space in San Jose, California for use as a distribution center on a
month-to-month lease, at a monthly rental of $6,000. SPOP leases two facilities
in Petaluma, California to house manufacturing, warehousing, administrative
offices and the corporate headquarters. The Petaluma facilities occupy a total
of 56,000-sq. ft. at a monthly rate of $28,968. An additional 1,644-sq. ft.
space at a cost of $2,805 per month is leased in Aptos, California to house OI,
the Industrial Division headquarters.
<PAGE>
Management believes that these facilities are suitable and adequate for the
Company's needs.
ITEM 3. LEGAL PROCEEDINGS
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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 money 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 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 Organic 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 is currently
mediating this dispute with the parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's Common Stock was traded on the NASDAQ Small Cap Market under
the symbol "OFPI" from August, 1997 to May 26, 1999. Thereafter it traded on the
NASDAQ OTC Bulletin Board System, and still does under the new symbol "SPOP."
The following table sets forth for the quarter indicated the range of high
and low closing prices of the Company's Common Stock as reported by NASDAQ but
does not include retail markup, markdown or commissions.
Price
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By Quarter Ended: High Low
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March 31, 1998 ...................................... 3.625 2.625
June 30, 1998 ....................................... 4.25 3.00
September 30, 1998................................... 3.375 1.00
December 31, 1998 ................................... 0.9375 0.375
March 31, 1999 ...................................... 1.6875 0.5625
June 30, 1999 ....................................... 1.50 0.5312
September 30,1999 ................................... 1.0625 0.625
December 31, 1999 ................................... 0.50 0.4375
<PAGE>
As of April 10, 2000, the Company had approximately 700 record and
beneficial stockholders.
Dividend Policy
The Company has not in the past nor intends to pay cash dividends on its
Common Stock in the near future. The Company intends to retain earnings, if any,
for use in the operation and expansion of its business. The amount of future
dividends, if any, will be determined by the Board of Directors based upon the
Company's earnings, financial condition, capital requirements and other
conditions.
In connection with OFPI's February, 1998 acquisition of Sunny Farms, the
company is obligated to pay a 6% "coupon rate" on the portion of the purchase
price that was paid for in common stock. Amounts earned through December 31,
1999 were not material.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report. The
financial results reported herein do not necessarily indicate 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 1998 reflect those of SNI only. Operating
results for fiscal 1999 reflect SNI only from January 1, 1999 through October 6,
1999 and the newly merged entity from October 6, 1999 through December 31, 1999.
Upon the effectiveness of the Merger, SNI and OI ceased to exist; the
Registrant became the surviving corporation and the Company changed its name to
"Spectrum Organic Products, Inc."
<PAGE>
Incorporated in 1980, SNI became a provider of natural and organic edible
oils, condiments and essential fatty acid or "EFA" supplements. Introducing
innovative natural and organic products, the Company has developed markets for
its products worldwide. The Company developed the first certified organic olive
oil, the first expeller-pressed canola oil, the first fresh organic flax oil,
the first organic vinegars, and the first no tropical fat, non-dairy,
non-hydrogenated condiment spread known as " Spectrum Spread." The Company's
current lines of business consist of culinary oils, vinegars, mayonnaise,
dressings and spreads under the "Spectrum Naturals" brand, branded food
service/commissary sales to natural food retailers, delis, bakeries,
restaurants, and other institutions and EFA nutritional supplement oils under
the "Spectrum Essentials" brand.
With the Merger, the Company added the capability to manufacture and market
pesticide-free or "organic" and an "all natural" product previously manufactured
by OFPI and, through OI, became a supplier of additional industrial organic
ingredients. Products obtained in the acquisition of OFPI include canned
tomatoes, pasta sauces, dry cut pastas, salsas, condiments and organic
children's meals marketed under the brand names "Garden Valley Naturals",
"Garden Valley Organics," "Millina's Finest" and "Parrot." Operating under the
d.b.a. of OI, the Company supplies industrial organic ingredients, including
fruit juices, fruit juice concentrates, fruit purees and individually quick
frozen or "IQF" frozen fruits as well as vegetable juices, vegetable juice
concentrates, vegetable purees, IQF vegetables and apple cider vinegar. OI sells
industrial ingredients to a very broad list of domestic and international
customers that include major natural and organic food manufacturers in the
United States and Canada. Currently, the Company sources its raw materials from
the Western states of the United States as well as Mexico, Canada, Costa Rica,
Chile, Argentina, Turkey and Italy.
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
and 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.
<PAGE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
SPOP's net sales for the year ended December 31,1999 ("1999") were
$29,620,000 compared to $22,187,000 for the year ended December 31, 1998
("1998"), an increase of $7,433,000, or 33.5% compared to a 17.5% increase in
1998. The increase in sales in 1999 reflects the revenues of the newly merged
OFPI and OI following the October 6, 1999 closing date. Excluding these
revenues, SNI's comparable sales increased 16.4% from 1998 reflecting growth in
all of the product categories. The proportion of ingredient sales to total sales
increased with a comparable decline in proportion of retail sales due to the
impact of the newly merged companies. The proportion of supplemental sales to
total sales increased slightly from 1998.
Cost of Goods Sold
SPOP's cost of goods sold for 1999 was $20,960,000 or 70.8% of sales,
versus $15,511,000, or 69.9% of sales for 1998. The increase in cost-of-goods
sold as a percentage of sales was due primarily to higher proportion of lower
margin industrial sales and higher fixed manufacturing costs for products
acquired from OFPI.
Management is in process of evaluating organizational changes and
alternatives to reduce manufacturing and distribution costs in connection with
the merger. As a result, management believes SPOP's operations should become
more efficient and unit costs will decrease by the end of the 2000 fiscal year,
producing reductions in cost-of-goods sold as a percentage of sales in
subsequent periods.
Sales and Marketing Expenses
SPOP's sales and marketing expense for 1999 was $4,377,000, or 14.8% of
sales, versus $3,154,000 or 14.2% of sales for 1998. The increase in sales and
marketing expense reflected an increase in personnel required to build a sales
organization to support the higher sales anticipated with the merger. Promotion
costs increased as a percentage of sales reflecting programs targeted to regain
lost market share as a result of OFPI's reduced marketing activities prior to
the merger. The Company anticipates the newly formed sales organization and
targeted market spending will enable the Company to increase its market share in
certain categories.
General and Administrative Expenses
SPOP's general and administrative expenses for 1999 were $3,303,000, or
11.2% of sales, versus $2,378,000 or 10.7% of sales for 1998. The increase in
1999 was due, in large part, to higher professional services related to the
implementation of a new accounting system and increased overhead associated with
the Merger.
<PAGE>
Amortization of Goodwill
The Company recorded goodwill of $10,443,000 in connection with the Merger.
Amortized over 12 years, included in 1999 is $218,000 of amortization expense
for the period October 6, 1999 to December 31, 1999.
Net Interest Expense
SPOP's interest expense for 1999 was $749,000 versus $471,000 for 1998. The
increase in interest expense resulted from higher utilization of the revolving
credit line. The additional borrowing was used to increase inventory to meet
minimum service levels, pay past due vendors at OFPI, fund certain costs of the
Merger transaction, fund the reduction in Company's term debt as a result of the
refinancing and fund post merger operating losses. (See Liquidity and Capital
Resources).
Deferred Tax Assets
Since the Company could not determine that it was more likely than not that
the deferred tax assets would be realized, a 100% valuation allowance was
provided.
Year 2000 Compliance
SOPI completed a plan to identify all computer hardware and software, plant
equipment and services upon which it relies that may have been impacted by the
year 2000 problem by December 31, 1999. After identification of the problem
areas, the Company verified or took action to ensure those products or services
were year 2000 compliant. As a result of this action, the Company was year 2000
compliant in advance of December 31, 1999.
Issues similar to these also faced the Company's customers and vendors.
While the Company had not completed an assessment of year 2000 readiness of its
customers and vendors, from conducting business following December 31, 1999,
management believes that business with those customers and vendors was not
significantly disrupted by the year 2000 problem.
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 collateralized by substantially all
assets of the newly combined group, and bears interest at prime plus 1% to 1
1/4%. 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 will be limited to a
borrowing base consisting of certain accounts receivable and/or 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 note of
up to $1,500,000 to be repaid over 60 months beginning in August 2000. Due to
operating losses following the merger, the Company is in default of certain
financial covenants that were based on financial projections made at the time
the facility was put in place. Management is seeking from the bank waivers and a
reset of covenants to more accurately match the Company's financial condition.
<PAGE>
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 of 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 is added to the principal, the
interest rate increased to 15% and the note holder is granted 2,500 warrants per
unit for each month the principal is not paid up to six months. The warrants
granted due to the default have the same terms as those granted with the
promissory notes.
The Company is currently seeking additional capital from such potential
sources as refinancing the existing term debt, sale of certain low producing
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 the area of 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 cash at the end of the 1999 was $1,100 compared to $500 in
1998. During 1999, the Company used $171,900 in cash for operating activities,
compared to providing $700,800 in cash in 1998. The use of cash resulted
primarily from funding operating losses and higher inventory levels, partially
offset by an increase in accounts payable following the Merger. Cash used in
investing activities was $1,529,700 in 1999 compared to $597,000 in 1998,
reflecting higher purchases of fixed assets and Merger transaction costs in
1999. Cash provided by financing activities was $1,702,200 in 1999 compared to a
use of $257,700 in 1998. The increase in funds provided from financing reflected
an increase in proceeds from notes payable and lines of credit in 1999.
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 third-party material products at
reasonable prices; risk of nonpayment of 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 Account Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires
companies to recognize all derivatives contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on 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 derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of this new standard on July 1, 2000 to affect its
financial statements or results of operations.
ITEM 7. FINANCIAL STATEMENTS
- ----------------------------
Spectrum Organic Products, Inc.
Financial Statements
Years Ended December 31, 1999 and 1998
<PAGE>
Spectrum Organic Products, Inc.
================================================================================
Independent Auditors' Reports F-2 - F-3
Financial Statements
Balance sheets F-4 - F-5
Statements of operations F-6
Statements of stockholders' equity F-7
Statements of cash flows F-8 - F-9
Summary of accounting policies F-10 - F-13
Notes to financial statements F-14 - F-31
F-1
<PAGE>
Report of Independent Certified Public Accountants
To The Stockholders and Board of Directors of Spectrum Organic Products, Inc.
We have audited the accompanying balance sheet of Spectrum Organic Products,
Inc. as of December 31, 1999 and the related statement of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spectrum Organic Products, Inc.
as of December 31, 1999 and the results of its operations, changes in
stockholders' equity and its cash flows for the year ended in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
San Francisco, California
April 7, 2000
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Spectrum Naturals, Inc.
We have audited the accompanying balance sheets of Spectrum Naturals, Inc., as
of December 31, 1998, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spectrum Naturals, Inc. as of
December 31, 1998, and the results of its operations, stockholders' equity and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Moss Adams LLP
------------------
Moss Adams LLP
Santa Rosa, California
June 18, 1999 (except for Notes 7 and 12, as to which the date is July 2, 1999)
F-3
<PAGE>
Spectrum Organic Products, Inc.
Balance Sheets
================================================================================
Years ended December 31, 1999 1998
- --------------------------------------------------------------------------------
Assets (Notes 8 and 10)
Current Assets
Cash $ 1,100 $ 500
Accounts receivable, net (Note 2) 3,644,500 1,622,400
Inventories, net (Note 3) 6,585,800 2,784,900
Income tax refunds receivable (Note 12) 31,100 90,000
Prepaid expenses and other current assets 188,000 116,300
Deferred income taxes -- 73,100
- --------------------------------------------------------------------------------
Total current assets 10,450,500 4,687,200
Property and equipment, net (Note 5) 4,048,500 2,076,900
- --------------------------------------------------------------------------------
Other Assets
Goodwill, net (Note 1) 10,225,600 --
Other intangible assets, net (Note 6) 94,500 360,300
Other assets 155,000 101,900
- --------------------------------------------------------------------------------
Total Other Assets 10,475,100 462,200
- --------------------------------------------------------------------------------
Total Assets $24,974,100 $ 7,226,300
================================================================================
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Spectrum Organic Products, Inc.
Balance Sheets
==================================================================================================================
Years ended December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
<S> <C> <C>
Bank overdrafts 229,300 $ 187,000
Lines of credit (Note 8) 4,938,000 1,418,700
Current maturities of notes payable, former stockholder (Note 9) 381,200 199,300
Current maturities of notes payable and capitalized lease obligations (Note 10) 1,622,400 308,300
Current maturities of notes payable, stockholders (Note 11) 288,600 --
Accounts payable, trade 6,144,400 1,701,300
Accrued expenses 1,059,500 441,100
Income taxes payable (Note 12) 13,300 19,000
- ------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 14,676,700 4,274,700
Notes payable, former stockholder, less current maturities (Note 9) 1,305,900 1,687,100
Notes payable and capitalized lease obligations, less current maturities (Note 10) 154,700 955,800
Notes payable, stockholders, less current maturities (Note 11) 423,400 --
Deferred income taxes (Note 12) -- 168,000
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities 16,560,700 7,085,600
- ------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 15)
Stockholders' Equity (Notes 1 and 14):
Preferred stock, 5,000,000 shares authorized, no shares issued
or outstanding -- --
Common stock, without par value, 60,000,000 shares authorized,
43,914,186 and 32,336,495 issued and outstanding at
December 31, 1999 and 1998 8,296,000 95,500
Additional paid-in capital 185,500 --
(Accumulated deficit) retained earnings (68,100) 45,200
- ------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 8,413,400 140,700
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 24,974,100 $ 7,226,300
==================================================================================================================
See accompanying summary of accounting policies and notes to financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Spectrum Organic Products, Inc.
Statements of Operations
====================================================================================
Years ended December 31, 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Gross Sales $ 31,417,800 $ 23,951,000
Discounts And Allowances 1,798,200 1,763,900
- ------------------------------------------------------------------------------------
Net Sales 29,619,600 22,187,100
Costs Of Goods Sold 20,960,000 15,511,400
- ------------------------------------------------------------------------------------
Gross Profit 8,659,600 6,675,700
Operating Expenses:
Promotions And Advertising 4,376,800 3,154,400
General And Administrative Expenses 3,303,000 2,377,600
Amortization Of Goodwill (Note 1) 217,600 --
- ------------------------------------------------------------------------------------
Total Operating Expenses 7,897,400 5,532,000
- ------------------------------------------------------------------------------------
Income (Loss) From Operations 762,200 1,143,700
Other Income (Expense)
Interest Expense, net (749,300) (471,200)
Loss On Disposal Of Fixed Assets And Labels (102,900) (110,000)
Other Income 73,000 71,400
- ------------------------------------------------------------------------------------
Total Other Expenses (779,200) (509,800)
- ------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (17,000) 633,900
Provision For Income Tax Expense (Note 12) (96,300) (230,700)
- ------------------------------------------------------------------------------------
Net (Loss) Income $ (113,300) $ 403,200
- ------------------------------------------------------------------------------------
Basic And Diluted (Loss) Earnings Per Share (Note 14) $ (0.00) $ 0.01
====================================================================================
See accompanying summary of accounting policies and notes to financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Spectrum Organic Products, Inc.
Statements of Stockholders' Equity
====================================================================================================================================
Notes Retained Total
Common Stock Receivable Additional Earnings Stockholders'
(As Restated - Note 1) From Paid-In (Accumulated Equity
Shares Amount Stock Sales Capital Deficit) (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 32,336,495 $ 95,500 $ (10,000) $ -- $ (225,200) $ (139,700)
Redemption of common stock -- -- -- -- (132,800) (132,800)
Payment on notes receivable -- -- 10,000 -- -- 10,000
Net income for the year -- -- -- -- 403,200 403,200
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1998 32,336,495 95,500 -- -- 45,200 140,700
Exchange of Spectrum Organic Products, Inc.
shares for all outstanding shares of Organic
Food Products, Inc. in connection with the
reverse acquisition (Note 1) including
252,576 shares issued to investment bankers 7,528,241 5,332,300 -- -- -- 5,332,300
Exchange of Spectrum Organic Products, Inc.
shares for all outstanding shares of Organic
Ingredients Inc. in connection with the
reverse acquisition (Note 1) including 99,450
shares issued to investment bankers 4,049,450 2,868,200 -- -- -- 2,868,200
Exchange of Spectrum Organic Products, Inc.
stock options for Organic Food Products,
Inc. stock options in connection with the
reverse acquisition (Notes 1 and 14) -- -- -- 75,000 -- 75,000
Warrants issued in connection with a
private placement of unsecured subordinated
notes (Notes 10 and 14) -- -- -- 110,500 -- 110,500
Net loss for year -- -- -- -- (113,300) (113,300)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 43,914,186 $ 8,296,000 $ -- $ 185,500 $ (68,100) $ 8,413,400
====================================================================================================================================
See accompanying summary of accounting policies and notes to financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Spectrum Organic Products, Inc.
Statements of Cash Flows
=========================================================================================================
Years ended December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net (Loss) Income $ (113,300) $ 403,200
Adjustments To Reconcile Net (Loss) Income To Net Cash (Used in)
Provided by Operating Activities
Provision for allowances against receivables 344,300 (26,800)
Provision for reserves for inventory obsolescence 86,300 --
Depreciation and amortization 436,700 348,700
Amortization of goodwill 217,600 --
Deferred income taxes (57,900) (9,700)
Loss on disposal of fixed assets and labels 102,900 110,000
Imputed interest on note payable, former stockholder 47,400 19,200
Amortization of original issue discount on unsecured subordinated notes 55,200 --
- ---------------------------------------------------------------------------------------------------------
Changes in Assets and Liabilities:
Accounts receivable (679,000) 170,400
Inventories (1,641,300) (343,500)
Income tax refunds receivable 58,900 (90,000)
Prepaids expenses and other current assets 198,600 137,800
Other assets (36,900) (86,900)
Accounts payable 816,500 (62,600)
Accrued expenses 11,100 215,100
Income taxes payable (19,000) (84,100)
- ---------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Operating Activities (171,900) 700,800
- ---------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Repayment of note receivable - stockholder -- 34,500
Purchase of property and equipment (1,026,400) (593,100)
Trademark and label development expenditures -- (38,400)
Cash acquired in reverse acquisition 90,900 --
Merger transaction costs (594,200) --
- ---------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,529,700) (597,000)
- ---------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from bank overdraft 42,300 89,400
Proceeds from lines of credit 21,879,700 9,881,800
Repayment of lines of credit (20,890,500) (10,484,100)
Repayment of notes payable, former stockholder (246,700) --
F-8
<PAGE>
Spectrum Organic Products, Inc.
Statements of Cash Flows
=========================================================================================================
Years ended December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
Repayment of notes payable to stockholders $ (126,400) $ --
Proceeds of notes payable 1,400,000 500,000
Repayment of notes payable (304,500) (220,000)
Repayment of capitalized lease obligations (51,700) (34,800)
Payment received on note receivable from stock sale -- 10,000
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 1,702,200 (257,700)
- ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash 600 (153,900)
Cash, beginning of the year 500 154,400
- ---------------------------------------------------------------------------------------------------------
Cash, end of the year $ 1,100 $ 500
- ---------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 120,700 $ 432,400
Cash paid for interest $ 786,700 $ 454,400
=========================================================================================================
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Issuance of common stock in connection with the acquisition of Organic
Food Products, Inc. and Organic Ingredients, Inc. accounted for as a
reverse merger $ 8,200,500 $ --
Fair market value of liabilities assumed in excess of assets acquired
in reverse merger with Organic Food Products, Inc. and Organic
Ingredients, Inc. 1,573,500 --
Exchange of stock options in connection with the acquisition of Organic
Food Products, Inc. 75,000 --
Warrants issued in connections with private placement of unsecured
subordinated notes 110,500 --
Purchase of property and equipment under capitalized lease obligations 160,700 33,200
Refinancing of lines of credit and notes payable 5,192,600 --
Redemption of common stock through issuance of note payable -- 132,700
=========================================================================================================
See accompanying summary of accounting policies and notes to financial statements.
9
</TABLE>
<PAGE>
Spectrum Organic Products, Inc.
Summary of Accounting Policies
================================================================================
Business Combination and Basis of Presentation
- ----------------------------------------------
As a result of the reverse merger described in Note 1, the financial statements
include the historical results of Spectrum Naturals, Inc. ("SNI"), the
accounting acquirer, for 1998 and the 1999 period prior to the October 6, 1999
merger date. Results of operations after October 6, 1999 also include the newly
acquired companies Organic Ingredients, Inc. ("OI") and Organic Food Products,
Inc. ("OFPI"). Effective with the merger, the newly combined entity changed its
name to Spectrum Organic Products, Inc. Together, SNI prior to the merger and
the combined companies after the merger are referred to as "the Company" or
"SOPI".
Nature of Operations
- --------------------
The Company manufactures, packages, and sells organic and natural food products,
including cooking and nutritional oils, condiments, dressings and spreads on a
wholesale basis to distributors and grocery and club store chains throughout the
United States. Company headquarters are located in Petaluma, California;
principal warehousing and manufacturing facilities are located in Petaluma and
Morgan Hill, California.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant estimates
made by the Company are those concerning reserves against accounts receivable
and inventory.
Stock-Based Compensation
- ------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, established a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from non-employees in exchange for equity instruments. As
permitted under SFAS No. 123, the Company has chosen to continue to account for
employee stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees. Accordingly, compensation cost for employee stock options is measured
as the excess, if any, of the fair market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock. Options
granted to non-employees are recorded over the service period at the estimated
fair value of the option granted. Pro forma disclosure of net income and
earnings per share is provided as if the Company had elected the fair value
method of accounting for all stock-based compensation awards.
F-10
<PAGE>
Spectrum Organic Products, Inc.
Summary of Accounting Policies
================================================================================
Accounts Receivable and Allowances
- ----------------------------------
The Company provides allowances for estimated credit losses, product returns,
spoilage, and other manufacturer charge back adjustments (for advertising
allowances, etc.) at a level deemed appropriate to adequately provide for known
and inherent risks related to such amounts.
The allowances are based on reviews of loss, return, spoilage, adjustment
history, contractual relationships with customers, current economic conditions,
and other factors that deserve recognition in estimating potential losses. While
management uses the best information available in making its determination, the
ultimate recovery of recorded accounts, notes, and other receivables is also
dependent on future economic and other conditions that may be beyond
management's control.
Inventory
- ---------
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Maintenance
and repairs that neither significantly add to the value of the property nor
appreciably prolong its life are charged to expense as incurred. Betterments or
renewals are capitalized when incurred.
Goodwill and Intangible Assets
- ------------------------------
The excess of purchase consideration including transaction costs over
identifiable net assets of businesses acquired is recorded as goodwill and
amortized on the straight-line method over the estimated useful life, generally
twelve years.
Trademark, label development and other intangible assets are amortized on the
straight-line method over the estimated useful life, generally five years.
Long-Lived Assets
- -----------------
Long-lived assets, including property and equipment, goodwill, and other
intangible assets, are assessed for possible impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable, or whenever management has committed to a plan to dispose of the
assets. Such assets are carried at the lower of book value or fair value as
estimated by management based on appraisals, current market value, and
comparable sales value, as appropriate. Assets to be held and used affected by
such impairment loss are depreciated or amortized at their new carrying amount
over the remaining estimated life; assets to be sold or otherwise disposed of
are not subject to further depreciation or amortization. In determining whether
an impairment exists, the company uses undiscounted future cash flows without
interest charges compared to the carrying value of assets.
F-11
<PAGE>
Spectrum Organic Products, Inc.
Summary of Accounting Policies
================================================================================
Income Taxes
- ------------
The Company accounts for corporate income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires an asset and liability approach.
This approach results in the recognition of deferred tax assets (future tax
benefits) and liabilities for the expected future tax consequences of temporary
timing differences between the book carrying amounts and the tax basis of assets
and liabilities. Future tax benefits are subject to a valuation allowance to the
extent of the likelihood that the deferred tax assets may not be realized.
Revenue Recognition
- -------------------
The Company recognizes revenues through sales of products primarily to
distributors and grocery and club store chains. Sales are recorded when goods
are shipped for most customers and upon delivery to retail locations for certain
customers. Potential returns, adjustments and spoilage allowances are provided
for in accounts receivable allowances.
Advertising Costs
- -----------------
Costs associated with the production of pamphlets and similar advertising
literature are capitalized and amortized over the period of distribution, which
is generally six to twelve months. Other advertising costs are expensed as
incurred.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of accounts receivable and accounts payable approximate
fair value because of the short maturity of these items. The Company's notes
payable (including notes payable-stockholders and notes payables-former
stockholder) approximate fair value based on rates currently available from the
bank for debt with similar terms and maturities. The fair value of the line of
credit approximates book value because the interest rate fluctuates with changes
in the prime rate. The fair value of the Company's commitments to purchase
inventory are based on current market prices available to the Company.
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standard Board has issued SFAS No. 133, Accounting for
Derivatives and Hedging Activities. It requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair market value.
Gains or losses resulting from changes in the value of those derivatives are
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving the offsetting changes in
fair value or cash flows. SFAS No. 133, as amended, is effective for all
quarters of fiscal years beginning after June 15, 2000. The Company historically
has not used derivatives and, accordingly, management believes that the adoption
of SFAS No. 133 will have no significant effect on its financial statements.
F-12
<PAGE>
Spectrum Organic Products, Inc.
Summary of Accounting Policies
================================================================================
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year financial statements
to be consistent with the current year presentation. These reclassifications had
no impact on prior year net income or retained earnings.
F-13
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
1. Business Combination
- -----------------------
On October 6, 1999 Spectrum Naturals, Inc. ("SNI") and Organic Ingredients, Inc.
("OI"), both 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 prior to the merger and the combined companies after the merger
are referred to as "the Company" or "SOPI".
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, the financial statements present the historical results of SNI as
accounting acquirer for all periods presented. Results of operations for OFPI
and OI are included from the October 6, 1999 merger date forward. Numbers of
shares and per-share amounts have been retroactively restated where applicable
for all periods presented.
The assumed purchase prices of OI and OFPI were determined by multiplying the
number of combined Company shares issued to OI stockholders or retained by OFPI
stockholders by $.7083 per share, the average of the closing market prices for
OFPI stock for the three days immediately prior to the announcement of the
merger in February 1999. The total assumed purchase prices, plus transaction
costs of $918,700 (including $75,000 related to outstanding OFPI options), were
recorded as follows:
F-14
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
Total OFPI OI
- --------------------------------------------------------------------------------
Receivables $ 1,636,800 $ 541,700 $ 1,095,100
Inventories 2,310,000 977,200 1,332,800
Prepaids and other assets 273,000 190,800 82,200
Fixed assets and intangibles 1,118,900 1,074,500 44,400
Line of credit (1,894,100) (942,100) (952,000)
A/P and accruals (4,270,600) (3,012,500) (1,258,100)
Related party notes (838,400) (497,200) (341,200)
Goodwill 10,443,200 7,461,000 2,982,200
- --------------------------------------------------------------------------------
Total purchase, less $90,900
cash acquired $ 8,778,800 $ 5,793,400 $ 2,985,400
================================================================================
Goodwill amortization charged to operations for the post-merger period in 1999
was $217,600, based on a twelve-year life, using the straight-line method.
The following unaudited pro-forma financial data presents the results of
operations of SNI, OFPI and OI as if the merger had occurred on January 1, 1998.
The pro-forma information gives effect to certain adjustments, including the
amortization of goodwill. This pro-forma summary does not necessarily reflect
results of operations as they would have been if SNI, OFPI and OI had
constituted a single entity during such periods, and is not necessarily
indicative of results that may be obtained in the future.
Years ended December 31, 1999 1998
- --------------------------------------------------------------------------------
(In thousands except per share amounts)
Net sales $ 42,905,000 $ 41,800,000
Net loss (3,038,000) (4,901,000)
Basic and diluted loss per share (0.07) (0.11)
Weighted average shares 43,914,186 43,914,186
================================================================================
F-15
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
2. Accounts Receivable
- ----------------------
Accounts receivable consist of:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Trade $4,038,000 $1,608,600
Stockholder 13,700 30,500
Other 18,800 13,300
- --------------------------------------------------------------------------------
4,070,500 1,652,400
Less allowance for doubtful
accounts and chargebacks 426,000 30,000
- --------------------------------------------------------------------------------
$3,644,500 $1,622,400
================================================================================
For 1999, the Company had one customer which accounted for approximately 19% of
total sales volume and approximately 17% of total trade accounts receivable at
December 31, 1999. For 1998, the Company had two customers which accounted for
approximately 37% and 13%, respectively, of total sales volume and approximately
45% of accounts receivable at December 31, 1998.
3. Inventories
- --------------
Inventories consist of:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Raw materials $1,116,300 $1,072,200
Finished goods 5,929,500 1,712,700
- --------------------------------------------------------------------------------
7,045,800 2,784,900
Less: Provision for obsolete inventory 460,000 --
- --------------------------------------------------------------------------------
$6,585,800 $2,784,900
================================================================================
For 1999 and 1998, the Company had one supplier of raw materials which accounted
for approximately 15% and 21% of total purchases of raw materials and one
supplier of processing (co-packer) which accounted for approximately 10% and 11%
of total cost of sales. At December 31, 1999 and 1998, approximately $472,000
and $253,000 of accounts payable was owed to these suppliers.
F-16
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
4. Advertising
- --------------
Total capitalized advertising literature costs at December 31, 1999 and 1998
were $0 and $12,800, respectively. Total advertising expenses were $681,100 and
$397,200 for the years ended December 31, 1999 and 1998, respectively.
5. Property and Equipment
- -------------------------
A summary of property and equipment is as follows:
Years ended December 31, 1999 1998
- --------------------------------------------------------------------------------
Machinery and equipment $4,560,800 $2,493,500
Furniture and fixtures 700,100 478,600
Leasehold improvements 400,500 166,400
Vehicles 146,200 64,500
- --------------------------------------------------------------------------------
5,807,600 3,203,000
Less accumulated depreciation 1,759,100 1,126,100
- --------------------------------------------------------------------------------
$4,048,500 $2,076,900
================================================================================
Depreciation expense was $372,800 and $173,900 for 1999 and 1998, respectively.
6. Other Intangible Assets
- --------------------------
A summary of other intangible assets is as follows:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Trademarks $ 74,100 $ 30,700
Label development 80,800 550,700
Covenant-not-to-compete 76,500 76,500
- --------------------------------------------------------------------------------
231,400 657,900
Less accumulated amortization 136,900 297,600
- --------------------------------------------------------------------------------
$ 94,500 $360,300
================================================================================
During 1999, the Company determined that certain labels had become obsolete due
to label revisions. The Company accordingly wrote off label development costs,
net of accumulated amortization, of approximately $95,000.
F-17
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
7. Research and Development
- ---------------------------
Research and development costs are expensed as incurred and totaled $215,200 and
$46,000 for the years ended December 31, 1999 and 1998, respectively.
8. Line of Credit
- -----------------
The Company has available a $9,000,000 line of credit, subject to a borrowing
base limitation based upon a percentage of eligible accounts receivable and
inventory, bearing interest at prime plus 1% (9.5% at December 31, 1999),
expiring October 5, 2002. Borrowings under the revolving line of credit, which
is part of an $11,717,000 credit facility (see Note 10), totaled $4,938,000 at
December 31, 1999. The credit line is collateralized by substantially all assets
of the Company and life insurance policies on key officers. There were no
additional borrowings available under the line of credit at December 31, 1999.
The loan agreement requires compliance with certain covenants and conditions,
which the Company was not in compliance with as of December 31, 1999 and as of
the date of our report. The bank has not waived these violations. Management is
currently in negotiations with the bank to formulate new financial covenants and
believes that upon completion of those negotiations, the Company will be back in
compliance. Due to this covenant violation, the term loans totaling $1,217,000
have been classified as current on the balance sheet (Note 10 and 15).
At December 31, 1998, the Company had two lines of credit providing for maximum
borrowings of $2,000,000 and $600,000, subject to a borrowing base determined as
a percentage of eligible account receivables and inventory. These lines of
credit were secured by substantially all assets of the Company, a life insurance
policy in the name of the majority stockholder and the majority stockholders'
personal guarantee. The loan agreement also specified certain financial
covenants and conditions. Total borrowings under these lines of credit totaled
$1,418,700 at December 31, 1998.
F-18
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
9. Notes Payable, Former Stockholder
- ------------------------------------
Notes payable, former stockholder consists of the following:
Year ending December 31, 1999 1998
- --------------------------------------------------------------------------------
Note payable with interest due monthly at an
escalating rate ranging from 7.8% to 12%.
Principal is due in monthly installments of
$25,000 through May 2000, $37,500 from June 2000
through November 2000, thereafter at $31,250 until
paid in full. This note is secured by a collateral
assignment on a life insurance policy on the
majority stockholder. Additionally, the note is
secured by unissued shares of common stock in an
amount equivalent to the unpaid principal and
interest due under the note. This note is
subordinated to the line of credit and all notes
payable to the bank. $ 1,475,000 $ 1,621,700
Non-interest bearing, unsecured, note due in two
payments; $100,000 in 1999 and $513,300 five years
after the last principal payment on the above note
payable, expected to be December 2007. Interest
has been inputed at an effective annual interest
rate of 10.75% 212,100 264,700
- --------------------------------------------------------------------------------
1,687,100 1,886,400
Less current maturities 381,200 199,300
- --------------------------------------------------------------------------------
$ 1,305,900 $ 1,687,100
================================================================================
F-19
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
Maturities or payments required on principal under long-term debt for each of
the succeeding years ending December 31 are as follows:
Year ending December 31,
- --------------------------------------------------------------------------------
2000 $ 381,200
2001 375,000
2002 375,000
2003 343,700
2004 -
Thereafter 212,200
- --------------------------------------------------------------------------------
$1,687,100
================================================================================
10. Notes Payable and Capital Lease Obligations
- -----------------------------------------------
A summary of notes payable and capitalized lease obligations is as follows:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Notes payable to bank, due in 60 and 18 monthly
installments of principal of $17,800 and $8,300,
respectively, plus interest at prime plus 1.25%
(9.75% at December 31, 1999). These notes are
secured by substantially all assets of the
company.(a) $1,217,000 $ --
Senior Notes
Note payable to bank, which bore interest at prime
rate plus 1.75%. The agreement requires the
Company meet certain restrictions related to
financial ratios, cash flow, and non-bank debt,
and was secured by substantially all assets of the
Company and the majority stockholder's personal
guarantee. The Company was in violation of certain
loan covenants at December 31, 1998. The note was
refinanced during 1999 through a new term loan. -- 500,000
F-20
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
December 31, 1999 1998
- --------------------------------------------------------------------------------
Note payable to bank, (SBA loan), which bore
interest at prime rate plus 2.75%, secured by the
majority stockholder's personal guarantee. The
note was refinanced during 1999 through a new term
loan. $ -- $ 305,200
Note payable to bank, which bore interest at the
bank's reference rate plus 1.75%, secured by
equipment and the majority stockholder's personal
guarantee. The note was refinanced during 1999
through a new term loan. -- 166,500
Note payable to bank, (SBA loan), which bore
interest at prime rate plus 2.75%, secured by
substantially all assets of the Company and the
majority stockholder's personal guarantee. The
note was refinanced during 1999 through a new term
loan. -- 98,500
- --------------------------------------------------------------------------------
Total Senior Notes 1,217,000 1,070,200
- --------------------------------------------------------------------------------
Subordinated Notes
Note payable to California Economic Development
Lending Initiative, which bore interest at prime
plus 3.25%, secured by equipment, a life insurance
policy on the majority stockholder, and the
majority stockholder's personal guarantee. The
note was subordinated to the line of credit and all
notes payable to bank, and required the Company
meet certain restrictions relating to tangible net
worth, key financial ratios, incurrence of new
debt, payment of dividends, and redemption of
stock. The note was refinanced during 1999 through
a new term loan. -- 87,800
F-21
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
December 31, 1999 1998
- --------------------------------------------------------------------------------
10% private placement notes, unsecured, net of
unamortized original issue discount of $55,200.(b) 344,800 --
- --------------------------------------------------------------------------------
Capitalized lease obligations secured by property
and equipment 215,300 106,100
- --------------------------------------------------------------------------------
1,777,100 1,264,100
Less current maturities 1,622,400 308,300
- --------------------------------------------------------------------------------
$ 154,700 $ 955,800
================================================================================
(a) On October 6, 1999, the Company entered into a $11,717,000 credit facility
with a commercial lender which provided (1) term loans totaling $1,217,000;
(2) a revolving line of credit of up to $9,000,000 (see Note 8); and (3) a
capital equipment expenditure credit line of up to $1,500,000. The capital
equipment line was unused at December 31, 1999. A portion of the proceeds
from the term loan were used to pay off the existing notes. As the Company
was not in compliance with certain loan covenants (Note 8) the entire
balance has been classified as current.
(b) The private placement notes were issued in October 1999 for a total face
amount of $400,000. The notes are unsecured and subordinated to all other
indebtedness of the Company. Each of the 16 Units sold in the placement
included a $25,000 note plus warrants to purchase 10,000 shares of SOPI
common stock at $.01 per share from January 1 to September 30, 2000. The
resulting $110,500 value of the warrants was allocated as original issue
discount to the face amount of the notes, and is being amortized to
interest expense over the six month base term of the notes.
The notes were originally due the earlier of (1) March 31, 2000, (2) the
Company raising additional capital of $1,000,000 or more, (3) sale or
merger of the Company, or (4) refinancing of any Company debt in the amount
of $1,000,000 or more. As provided in the agreements, since the notes were
not repaid by March 31, 2000, the accrued interest has been added to the
principal, and the interest rate has increased to 15%. For each month the
principal is not repaid up to six months, each Unit holder will receive an
additional 2,500 warrants with similar terms.
F-22
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
(c) The cost of assets securing the capital lease obligations was $356,800 with
accumulated depreciation of $116,300 at December 31, 1999.
Future minimum lease payments for equipment under capital lease agreements are
as follows:
Year ending December 31,
- --------------------------------------------------------------------------------
2000 $ 80,700
2001 80,200
2002 56,900
2003 28,900
2004 11,400
- --------------------------------------------------------------------------------
258,100
Less amounts representing interest 42,800
- --------------------------------------------------------------------------------
Present value of minimum payments 215,300
Less current maturities 60,600
- --------------------------------------------------------------------------------
$ 154,700
================================================================================
11. Notes Payable to Stockholders
- ---------------------------------
Notes payable to stockholders consist of:
1999 1998
- --------------------------------------------------------------------------------
10% unsecured notes, payable $17,400 monthly,
including principal and interest. $ 427,800 $ --
10% unsecured notes, payable $8,500 monthly
including principal and interest. 204,200 --
10% unsecured note, assumed in conjunction with
the merger, payable $7,100 monthly including
principal and interest. 80,000 --
F-23
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
1999 1998
- --------------------------------------------------------------------------------
712,000 --
Less current maturities 288,600
- --------------------------------------------------------------------------------
$ 423,400 $ --
================================================================================
Aggregate maturities or principal payments required on notes payable to
stockholder are as follows:
Year ending December 31,
- --------------------------------------------------------------------------------
2000 $ 288,600
2001 212,000
2002 124,500
2003 47,300
2004 39,600
- --------------------------------------------------------------------------------
$ 712,000
================================================================================
12. Income Taxes and Deferred Income Taxes
- ------------------------------------------
Income tax expense consists of:
Years ended 1999 1998
- --------------------------------------------------------------------------------
Current:
Federal $ 130,600 $ 192,900
State 23,600 47,500
- --------------------------------------------------------------------------------
154,200 240,400
- --------------------------------------------------------------------------------
Deferred:
Federal (45,100) (7,600)
State (12,800) (2,100)
- --------------------------------------------------------------------------------
(57,900) (9,700)
- --------------------------------------------------------------------------------
Total Income Tax Expense $ 96,300 $ 230,700
================================================================================
F-24
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
A reconciliation of the Federal statutory rate to the tax provision of the
corresponding years is as follows:
1999 1998
- --------------------------------------------------------------------------------
Tax (benefit) expense at effective Federal
statutory rate $ (5,800) $ 216,000
Non-deductible expense 95,900 13,400
State income tax benefit (expense), net of
Federal effect 7,100 30,000
Other (900) (28,700)
- --------------------------------------------------------------------------------
$ 96,300 $ 230,700
================================================================================
Deferred tax assets and liabilities at December 31, 1999 and 1998, consisted of:
1999 1998
- --------------------------------------------------------------------------------
Deferred Tax Assets:
Net operating loss carryovers $ 2,970,700 $ --
Goodwill amortization and write-down 1,091,600 --
Inventory valuation allowance 197,100 --
Accounts receivable allowances 182,500 11,700
Accrued bonuses 99,900 23,300
Accrued vacation 74,800 21,300
State tax credit carryforwards 53,800 --
State income taxes 21,400 24,100
Other 49,700 16,500
- --------------------------------------------------------------------------------
Gross Deferred Tax Assets 4,741,500 96,900
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation and fixed asset write-down (298,000) (187,600)
State tax benefit (252,800) (4,200)
Other (7,000) --
- --------------------------------------------------------------------------------
Gross Deferred Tax Liabilities (557,800) (191,800)
- --------------------------------------------------------------------------------
F-25
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
1999 1998
- --------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 4,183,700 $ (94,900)
Valuation allowance (4,183,700) --
- --------------------------------------------------------------------------------
Net deferred taxes $ -- $ (94,900)
================================================================================
The deferred taxes have been presented on the balance sheet as follows:
1999 1998
- --------------------------------------------------------------------------------
Net current deferred tax assets $ -- $ 73,100
Net non-current deferred tax liabilities -- (168,000)
- --------------------------------------------------------------------------------
$ -- $ (94,900)
================================================================================
As of December 31, 1999, the Company has Federal net operating loss
carryforwards (NOLS) totaling approximately $7,740,000, which expire at various
times through 2019. For state purposes, the Company has net operating loss
carryforwards totaling approximately $3,845,000, which expire at various times
through 2004. In addition, the Company has approximately $54,000 of state
manufacturing investment tax credit carryforwards which expire in 2004.
The NOLS originated primarily from pre-merger operations of OFPI. As a result of
OFPI's acquisition by SNI (Note 1), OFPI experienced a more than 50% change in
ownership for Federal and State income tax purposes. As a result, an annual
limitation will be placed upon the Company's ability to realize the benefit of
the pre-merger NOLS. In part because of this limitation, Company management is
unable to determine whether it is more likely than not that the net deferred tax
assets will be realized. Accordingly, a 100% valuation allowance against the net
deferred tax assets has been recorded in 1999.
Approximately $3,700,000 of the valuation allowance relates to deferred tax
assets, primarily the net operating loss carryovers and the goodwill
amortization and write-off, that carried over from OFPI. Therefore any
subsequently recognized tax benefits for these items will be allocated to reduce
the goodwill arising from the OFPI acquisition.
F-26
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
As a result of the reverse merger, OI and SNI were merged into OFPI as of
October 6, 1999, with OFPI as the surviving taxable entity for the Company.
Subsequently, the tax year of the combined entity was changed from June 30 to
December 31.
13. 401(k) Plan
- ---------------
The Company provides a defined contribution plan covering substantially all
employees meeting certain age and service requirements. Plan contributions are
made at the discretion of the Board of Directors, and totaled $13,900 and
$26,100, for 1999 and 1998.
14. Stock Options and Warrants
- ------------------------------
Options
- -------
Prior to the merger as discussed in Note 1, SNI had a "1998 Equity Incentive
Plan", under which options were granted to an officer in 1998. These options
vest monthly over a three-year period, are exercisable for ten years from the
date of grant, and were granted at the estimated market value of SNI stock at
the grant date. As a result of the merger, the Company assumed the options
outstanding under OFPI's "1995 Stock Option Plan". Because OFPI is the legal
acquirer, SNI's existing options were taken into the 1995 Stock Option Plan and
restated at their equivalent number of shares and strike price using the merger
conversion ratio (see Note 1), and the old SNI plan was discontinued. Under the
continuing plan, option price shall not be less than the fair market value on
the date of grant, and options generally will expire ten years after grant.
Options generally vest ratably over four or five years for employees, and two
years for directors (the existing SNI options retained their three-year vesting
period). At December 31, 1999, there were 4,500,000 shares reserved for options
to be granted under the plan.
1999 1998
------------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- --------------------------------------------------------------------------------
Outstanding, beginning of year 840,515 $ 0.32 -- $ --
Granted-employees and directors -- -- 840,515 0.32
OFPI options assumed due to merger 625,000 1.19 -- --
Canceled or expired (85,000) 2.39 -- --
- --------------------------------------------------------------------------------
F-27
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
1999 1998
------------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- --------------------------------------------------------------------------------
Outstanding, end of year 1,380,515 $ 0.59 840,515 $ 0.32
================================================================================
Options exercisable at year end 433,317 $ 0.86 70,043 $ 0.32
================================================================================
Weighted average fair value of
options granted during the year -- $ -- -- $ 0.14
================================================================================
The following table shows information for options outstanding or exercisable as
of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ----------------------------------
Weighted Weighted
Average Weighted Average Weighted
Number Remaining Average Number Remaining Average
Range of Outstanding at Contractual Exercise Exercisable Contractual Exercise
Exercise Price 12/31/99 Life (Years) Price at 12/31/99 Life (Years) Price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$0-$2.00 1,358,515 8.4 $ 0.56 414,817 7.0 $ 0.79
$2-$2.50 22,000 8.2 2.5 18,500 8.4 2.5
- -----------------------------------------------------------------------------------------
$0-$2.50 1,380,515 8.3 $ 0.59 433,317 7.1 $ 0.86
- -----------------------------------------------------------------------------------------
</TABLE>
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant. In
accordance with accounting for such options utilizing the intrinsic value
method, there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value of the grant dates consistent with the method
of SFAS 123, the Company's net income (loss) and earnings (loss) per share for
the years ended December 30, 1999 and 1998, would have been adjusted to the pro
forma amounts presented below, which includes the continuing effect of
unamortized pro-forma compensation associated with options assumed as a results
of merger (see Note 1):
F-28
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
Years ended December 31, 1999 1998
- --------------------------------------------------------------------------------
Net income (loss)
As reported $(113,300) $ 403,200
Pro-forma (182,300) 398,700
Basic and diluted earnings (loss) per share
As reported $ -- $ 0.01
Pro-forma $ -- $ 0.01
================================================================================
The fair value of option grants for 1998 was estimated on the date of grant
utilizing the Black-Scholes option-pricing model, with the following
assumptions: expected life of ten years, risk-free interest rate of 5.04%, and
no dividend yield. There were no options granted in 1999. The incremental value
of outstanding OFPI options assumed as a result of the merger was included in
purchase consideration (see Note 1).
Warrants
- --------
In conjunction with the merger, the Company assumed outstanding warrants of OFPI
totaling 590,656. At December 31, 1999 there were 390,656 of these warrants
still outstanding. In addition, in connection with a private placement of
unsecured subordinated notes (see Note 10), the Company issued 160,000 warrants
with an exercise price of $.01 per share. The following details the outstanding
warrants at December 31, 1999:
Number Exercise Expiration
Outstanding Price Date
- --------------------------------------------------------------------------------
Warrants acquired from OFPI 200,000 $ 2.00 12/31/2002
Warrants acquired from OFPI 60,656 2.625 2/11/2003
Warrants acquired from OFPI 130,000 4.00 8/11/2002
- --------------------------------------------------------------------------------
390,656
- --------------------------------------------------------------------------------
Warrants issued in connection with
private placement (Note 10) 160,000 $ 0.01 9/30/2000
- --------------------------------------------------------------------------------
550,656
================================================================================
F-29
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
15. Commitments and Contingencies
- ---------------------------------
The Company rents office, production and warehouse facilities under various
non-cancelable operating leases, which expire at various times through 2003 and
generally contain renewal provisions and base rent increases tied to changes in
the consumer price index, and month-to-month leases. Total monthly rental
payments for these leases approximates $44,900. The Company also rents office
equipment under operating leases which expire at various times through 2004 with
monthly lease payments approximating $2,200.
Rental expense for 1999 and 1998 totaled $303,500 and $237,300, respectively.
Future minimum lease payments under non-cancelable operating leases with terms
greater than one year from the balance sheet date are as follows:
Year ending December 31,
- --------------------------------------------------------------------------------
2000 $ 421,900
2001 380,400
2002 94,500
2003 32,100
2004 700
- --------------------------------------------------------------------------------
$ 969,600
================================================================================
Bonus Arrangements
- ------------------
The Company has entered into a bonus agreement with the family of a deceased
employee, whereby the family will be paid $75,000 in the event the Company is
sold.
Royalty Agreements
- ------------------
The Company has entered into royalty agreements with various unrelated
companies, which provide for a percentage royalty to be paid on sales of certain
products. The Company has accrued royalties of $49,400 and $38,200 as of
December 31, 1999 and 1998, respectively related to these agreements. Royalty
expense under these agreements for the years ended December 31, 1999 and 1998
was $199,800 and $141,325, respectively.
F-30
<PAGE>
Spectrum Organic Products, Inc.
Notes to Financial Statements
================================================================================
Litigation and Settlements
- --------------------------
In 1998, a company that had provided management consulting services for OFPI
filed suit alleging unpaid wages and seeking money damages and injunctive
relief. Mediation efforts with this company, who is also a stockholder, have
been in process since that time. Management intends to vigorously defend this
action, and believes that the outcome is imminent, and will not have a
significant effect upon the Company's financial position, results of operations
or cash flows upon settlement
In 1998, OFPI acquired certain natural fruit juice and water bottling operations
for cash and common stock. Portions of the common stock consideration were
contingent upon earnout factors for the year following the purchase. An
estimated accrual of $156,900 for common shares to be released is included in
accrued liabilities at December 31, 1999. The shares have not been released,
however, as negotiations with the seller regarding the number of shares to be
issued are ongoing. 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.
Inventory Purchase Commitments
- ------------------------------
In the ordinary course of business, the Company enters into commitments to
purchase raw materials over a period of time, generally six months to a year, at
contracted prices. At December 31, 1999, these future commitments, which are at
prices not in excess of those currently obtainable nor in quantities in excess
of normal requirements, aggregated approximately $9,700,000.
Liquidity
- ---------
At December 31, 1999, the Company has negative working capital and, as discussed
in Note 8, is in technical default of certain loan covenants. Although no
assurances can be given, management is currently in negotiations with the bank
to formulate new financial covenants and believes that upon completion of those
negotiations, the Company will be back in compliance. In addition, 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, as
and if necessary.
F-31
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -----------------------------------------------------------------------
As noted in Item 1, the Merger was accounted for as a reverse acquisition
and SNI is the accounting acquirer. On October 6, 1999, the Board of Directors
of the Company voted to change the Company's fiscal year from a year ending June
30, and adopt the December 31 year-end of SNI. The Company filed a report on
Form 10Q for the quarterly period ending September 30, 1999 for the SPOP (the
new Registrant), excluding OFPI (the former Registrant) and OI, as the Merger
was not yet effective at that date. The Company has filed this Form 10K
reporting the results of operations for SNI as accounting acquirer for the 12
months ending December 31, 1999. Results of operations for SPOP, beginning
October 6, 1999 will include SNI, OFPI and OI, the merged companies.
Following the Merger, the Company appointed BDO Seidman, LLP (Registrant's
former independent auditor), to continue as its independent auditor. The Company
did not consult with BDO with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit report that might be rendered on the Company's financial statements,
nor did the Company consult with BDO regarding the subject of any disagreement
with its former independent public accountants or with respect to any events
required to be reported.
Moss Adams, LLP, was SNI's independent auditors prior to the Merger. The
reports of Moss Adams for the last two years did not contain an adverse opinion
or disclaimer of opinion, nor were they modified as to uncertainty, audit scope
or accounting principles.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------------
Directors and Executive Officers
The name, age, position, and term of office of each of the Company's
executive officers and directors are set forth below:
Held
Name Age Position Since
---- --- -------- -----
Jethren Phillips 49 Chief Executive Officer (1)(2) 10/6/99
Richard Bacigalupi 51 Chief Financial Officer 10/6/99
Neil Blomquist 48 President - Consumer Brands Division 10/6/99
Joseph Stern 47 President - Industrial Division 10/6/99
John Battendieri 53 Vice President - Business 10/6/99
Development and Director
Pete Holcombe 56 Vice President - Operations 11/29/99
Phillip Moore 50 Director (1)(2) 10/6/99
Charles A. Lynch 71 Director (1)(2) 4/1/00
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
<PAGE>
Directors hold office for a period of one year from their election at the
annual meeting of shareholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of the Board of Directors.
Background
The following is a summary of the business experience of each executive
officer and director of the Company for at least the last five years:
Jethren Phillips founded SNI in 1981 and has served as its Chief Executive
Officer and Chairman of the Board of Directors since its inception. Prior to
founding SNI, he was principal of Spectrum Brokerage, a natural foods brokerage
and product development company from 1978- 1981. In 1995, he founded SCI, an
organic and natural food ingredients affiliate. Mr. Phillips has been involved
in the natural product industry since 1972. He attended California State
University at Los Angeles and Humbolt.
Neil Blomquist has served as SNI's President and Chief Operating Officer
since January 1994, and served as its director of sales and marketing from 1989
to 1994. Mr. Blomquist has served on the board of directors of the California
Olive Oil Council since 1996. Mr. Blomquist holds a bachelor's degree in
business management and economics from the University of South Dakota. He has
been in the natural products industry since 1976.
John Battendieri founded OFPI in 1988 and has served as its President and
as a director since 1988 and as its chief executive officer since October 1998.
In 1987, he founded Santa Cruz Naturals, an organic fruit juice company, which
he sold to Smuckers Corporation in 1992. Mr. Battendieri has grown, developed
and marketed a wide variety of natural food products for more than 25 years. He
attended Southern Illinois University.
Richard R. Bacigalupi has served as OFPI's Chief Financial Officer since
January 1999. Prior to joining OFPI, he served as the Chief Financial Officer
for PowerBar, Inc., a branded consumer product company, from February 1995 to
May 1998. From October 1991 to April 1994, Mr. Bacigalupi served as Corporate
Controller for Spreckels Industries, Inc., a sugar processing and equipment
manufacturing company. Mr. Bacigalupi is a Certified Public Accountant and holds
a Bachelor of Science degree in business administration from California State
University, Fresno.
Joseph Stern, co-founder of OI, has served as OI's President since 1996.
Previously he founded Creative Team Consulting, which he operated from 1992 to
1996. From 1985 to 1991, Mr. Stern was President of United News, the fourth
largest publication distributor in the U.S. Mr. Stern founded Earthly Organics,
a natural and organic food distributor, and served as its President from 1975 to
1985, when it was sold to Cornucopia (now United Natural Foods). Mr. Stern
received a Bachelor of Science Degree from the college of Business
Administration at Penn State University.
Pete Holcombe is Vice President/Operations for Spectrum Organic Products,
Inc. Mr. Holcombe has thirty years experience in food manufacturing, including
the positions of COO for Amy's Kitchen and Executive VP and General Manager of
Arrowhead Mills, Inc. He received his bachelor of science degree in industrial
engineering from the University of Arkansas.
Phillip Moore has been a director of the Company since October 6, 1999 and
is owner of Moore Consulting, a management consulting business established in
1996 to provide advisory services to the food industry. Mr. Moore has 25 years
in the food industry and was President of Perimeter Sales and Merchandising
prior to founding Moore Consulting. He has a Bachelor of Science degree in
Accounting and Business from Guilford College of North Carolina.
<PAGE>
Mr. Lynch became a director on April 1, 2000 and is chairman of Marketing
Partners Company, a management and advisor source for existing and emerging
busniness. He has had executive management responsibility for 70-plus companies,
primarily in consumer related business, and has been director of over 20 major
corporations. Mr. Lynch received his Bachelor of Science Degree from Yale
University and an Honorary Degree of Doctors of Law from Golden Gate University.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
10% of a registered class of the Company's equity securities, to file with the
SEC initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of the Company. Officers, directors and
greater than 10% beneficial owners are required by SEC regulations to furnish
the Company with copies of all reports they file under Section 16(a). To the
Company's knowledge, based solely on its review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with during the
fiscal year ended December 31, 1999, with six exceptions: Mr. Jethren Phillips,
Chief Executive Officer and Director, Mr. Richard Bacigalupi, Chief Financial
Officer, Mr. Neil Blomquist, President Brand Division, Mr. Joseph Stern,
President Industrial Division, and Mr. Phillip Moore, Director, whose initial
reports on Form 3 following their appointments in connection the Merger were
filed late, and certain reports on Form 4/A for Mr. John Battentieri, Vice
President Business Development and Director, a former CEO, were filed late.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth the annualized compensation awarded or paid
by SPOP during the fiscal years ended December 31, 1999 and 1998 and the
Company's Chief Executive Officers and up to four other most highly compensated
officers whose annual salary and bonus exceeded $100,000 in fiscal 1999 and 1998
(hereinafter, the "Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards
---------------------------------------------------- ------
Other Securities
Fiscal Compen- Underlying
Prinipal Position (#) Year Salary($) Bonus($) sation($) Options
- --------------------- ---- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Jethren Phillips (1) 1999 $ 237,500 $ 57,800 $ 10,971 -- $ --
Chief Executive Officer 1998 $ 191,698 $ 60,000 $ 2,002 -- $ --
Neil Blomquist (2) 1999 $ 149,100 $ 17,500 $ 5,075 -- $ --
President,Brand
Division/Secretary 1998 $ 116,950 $ 20,000 $ 5,775 840,515 $ --
Joseph Stern (3) 1999 $ 107,500 $ -- $ 46,379(4) -- $ --
President,
Industrial Ingredients 1998 $ 93,333 $ -- $ 13,931(5) -- $ --
John Battendieri (6) 1999 $ 109,333 $ -- $ 45,628(7) -- $ --
Exec VP,
Business Development 1998 $ 104,000 $ -- $ 187,366(8) -- $ --
Richard Bacigalupi (9) 1999 $ 65,000 $ -- $ 102,728 418,000 $ --
Floyd R Hill (10) 1999 $ -- $ -- $ -- -- $ --
1998 $ 123,000 $ -- $ -- 200,000 $ --
James F Swallow (12) 1999 $ -- $ -- $ -- -- $ --
1998 $ -- $ -- $ -- 1,808,784(13) $ --
</TABLE>
<PAGE>
(1) Mr. Phillips was Chief Executive Officer of SNI and President of SCI during
fiscal 1998 and until October 6, 1999, when he became Chief Executive
Officer of SPOP.
(2) Mr. Blomquist was President and Chief Operating Officer of SNI during
fiscal 1998 and until October 6, 1999, when he became President of SPOP's
Brand Division.
(3) Mr. Stern was President of OI during fiscal 1998 and until October 6, 1999,
when he became President of SOPI's Industrial Division.
(4) Represents interest income from shareholder's note.
(5) Includes interest income from shareholder's note of $10,932.
(6) Mr. Battendieri was President of OFPI during fiscal 1998 and until October
6, 1999, when he became Vice President, Business Development for SOPI.
(7) Includes interest income from shareholder's note of $40,897.
(8) Includes interest income from shareholder note of $7,366, consulting fees
of $15,000, and forgiveness of debt of $168,000. See "Certain
Transactions".
(9) Mr. Bacigalupi was Chief Financial Officer of OFPI from June 1 through
October 6, 1999, when he became Chief Financial Officer of SOPI. Included
are consulting fees of $99,976 paid during 1999 prior to his employment.
(10) Mr. Hill was OFPI's Chief Executive Officer during fiscal 1998 from July 1,
1997 through May 8, 1998.
(11) Of these options, 100,000 were terminated by agreement upon Mr. Hill's
departure from OFPI in 1998.
(12) Mr. Swallow was OFPI's Chief Executive Officer during fiscal 1998 from May
9, 1998 through June 30, 1998. In fiscal 1998, OFPI paid consulting fees of
$62,000 to Global National Brands, of which Mr. Swallow is a principal and
he did not receive a salary from OFPI.
(13) Includes 1,808,784 shares issuable pursuant to options granted to Global
National Brands, Ltd., attributable to Mr. Swallow through his partial
ownership of Global. These options expired in October 1998 upon termination
of the management services agreement between OFPI and Global. See "Business
of OFPI - Legal Proceedings".
Under new arrangements which will begin in the year 2000, the Company's
non-salaried directors will receive annual cash compensation of $10,000 as
directors and will be reimbursed for out-of-pocket expenses in attending Board
of Directors' meetings. They will also be granted 20,000 stock options as a
director and an additional 5,000 shares when they serve as a committee chairman.
1995 Stock Option Plan
In November 1995, OFPI adopted a stock option plan (the "1995 Plan") which
provides for the grant of stock options intended to qualify as "incentive stock
options" or "nonqualified stock options" within the meaning of Section 422 of
the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock
options are issuable only to eligible officers, directors and key employees of
the Company.
<PAGE>
The Plan is administered by the Board of Directors. With the Merger, the
1999 plan was amended and restated to increase the aggregate number of shares of
common stock for issuance under the plan from 625,000 to 4,500,000 shares. Under
the Plan, the Board of Directors determines which individuals shall receive
stock options, the time period during which the options may be partially or
fully exercised, the number of shares of Common Stock that may be purchased
under each option and the option price. In connection with the Merger, the 1995
Plan assumed the outstanding options under SNI's plan.
For incentive stock options (i) the per share exercise price of the Common
Stock may not be less than the fair market value of the Common Stock on the date
the option is granted and (ii) no person who owns, directly or indirectly, at
the time of the granting of an incentive stock option, more than 10% of the
total combined voting power of all classes of stock of the Company is eligible
to receive stock options unless the option price is at least 110% of the fair
market value of the Common Stock subject to the option on the date of grant. No
stock options may be transferred by an optionee other than by will or the laws
of descent and distribution and, during the lifetime of an optionee, the option
may only be exercisable by the optionee. Stock options may be exercised only if
the option holder remains continuously associated with the Company from the date
of grant to the date of exercise. Stock options under the Plan must be granted
within ten years from the effective date of the Plan. The exercise date of a
stock option granted under the Plan cannot be later than ten years from the date
of grant. Any options that expire unexercised or that terminate upon an
optionee's ceasing to be employed by the Company become available once again for
issuance. Shares issued upon exercise of an option will rank equally with other
shares then outstanding.
As of December 31, 1999, 1,380,515 stock options were outstanding under the
plan for officers, directors and employees (1,258,515 for current and past
executive officers and directors) at exercise prices of $0.32 to $2.50 per
share.
Option Grants in Last Fiscal Year:
The following table sets forth the options granted to the executive officer
named below for the year ended December 31, 1999. During the year, there were no
exercises of stock options by the executive officers named below:
INDIVIDUAL GRANTS
Number % of Total
Of Securities Options
Underlying Granted Exercise
Options to Employees or Base Expiration
Granted in 1999 Price Date
------- ------- ----- ----
Richard Bacigalupi 418,000 100.0% $0.69 June 2019
(1) Options vest monthly over a three-year period beginning June 1, 1999.
<PAGE>
Aggregated option exercises in last fiscal year and fiscal year end option
values:
Number of Securities Value of Unexercised
Underlying Unexercised In-the-money
Options at December 31, 1999 Options at December 31, 1999
---------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Neil Blomquist 332,740 507,811 $166,352 $507,811
Richard Bacigalupi 69,667 348,333 -- --
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The following table sets forth information concerning the holdings of
Common Stock by each person who, as of the date December 31, 1999, holds of
record or is known by the Company to hold beneficially or of record, more than
5% of the Company's Common Stock, by each director, and by all directors and
executive officers as a group. All shares are owned beneficially and of record.
The address of all persons (unless otherwise noted in the footnotes below) is in
care of the Company at 133 Copeland Street, Petaluma, California.
Name Amount of Ownership Percent of Class
---- ------------------- ----------------
Jethren Phillips (1) 31,519,328 71.0%
John Battendieri (2) 4,077,499 9.2
Joseph Stern (2) 1,977,000 4.5
Neil Blomquist (3) 1,657,683 3.7
Richard R. Bacigalupi(4) 418,000 *
Phillip Moore (5) 300,576 *
All officers and directors
as a group (7 persons)
(1)(2)(3)(4)(5) 39,151,996 90.0
---------- ------
* Less than 1%
(1) Includes 31,519,328 shares issued in connection with the Merger.
(2) Includes 1,975,000 shares issued in connection with the Merger.
(3) Includes 817,117 shares issued and 840,515 shares issuable upon the early
exercise of options vesting through October 2001, 332,704 of which will be
fully vested and no longer subject to forfeiture within 60 days of the
filing, each issued in connection with the Merger. The 840,515 options are
exercisable at an exercise price of approximately $0.32 per share.
(4) Includes 418,000 shares issuable upon exercise of options, 127,722 of will
be fully vested within 60 days of the filing, each exercisable at an
exercise price of approximately $0.63 per share.
(5) Includes 252,576 shares paid to Moore Consulting upon completion of the
Merger.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
With the Merger, the Company assumed two promissory notes held by Mr.
Battendieri for the advance of funds to OI. In December 1999, the two notes and
accrued interest totaled $138,080, of which $58,007 was paid. The two assumed
notes were replaced with a new $80,073 note payable equally over 12 months
beginning January 15, 2000, plus interest at 10%.
In expectation of and for the purpose of funding cash requirements with
respect to the Merger, the Company completed a Private Placement of 16 Units.
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. The buyers of the Units were current share/warrant holders of the
Company.
The Company believes that the terms and conditions of the above
transactions were fair, reasonable and consistent with terms the Company could
have obtained from unaffiliated third parties. Any future transactions with the
Company's executive officers or directors will be entered into on terms that are
no less favorable to the Company than those that are available from unaffiliated
third parties, and all such transactions will be approved by a majority of the
Company's disinterested directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit No. Title
- ----------- -----
1.01 Form of Underwriting Agreement (1)
1.02 Form of Selected Dealer Agreement (1)
1.03 Form of Representatives' Warrant (1)
1.04 Form of Amended Underwriting Agreement (1)
1.05 Form of Amended Selected Dealer Agreement (1)
1.06 Form of Amended Representatives' Warrant (1)
1.07 Form of Lock-Up Agreement (1)
2.01 January 21, 1998 Agreement of Purchase and Sale of Assets
between the Registrant and Sunny Farms Corporation (2)
2.02 February 10, 1998 Amendment to Agreement of Purchase and Sale
of Assets between the Registrant and Sunny Farms Corporation(2)
3.01 Articles of Incorporation of the Registrant, as amended (1)
3.02 Bylaws of the Registrant (1)
10.01 1995 Employee Stock Option Plan (1)
10.02 Office and Warehouse Lease (Morgan Hill, California) (1)
10.03 Employment Agreement with Mr. Hill (1)
10.04 Employment Agreement with Mr. Battendieri (1)
10.05 Merger Agreement between the Registrant(Garden Valley
Naturals, Inc.) And Organic Food Products, Inc. (1)
10.06 Loan Agreement with Mr. Steel (1)
10.07 Stock Redemption Agreement with Messrs. Nicholson and Reedy (1)
10.08 Settlement Agreement with Mr. Nicholson (1)
10.09 First Amendment to Stock Redemption Agreement (1)
10.10 Amendment to Promissory Notes issued to Messrs. Nicholson and
Reedy (1)
<PAGE>
10.11 Form of Subscription Agreement, Promissory Note and Warrant for
Bridge Loan (1)
10.12 Management Services Agreement between the Registrant and Global
Natural Brands, Ltd., effective April 15, 1998 (3)
10.13 1995 Stock Option Plan (4)
10.14 Incentive Stock Option Agreement (4)
10.15 Non-qualified Stock Option Agreement (4)
10.16 Agreement and Plan of Merger and Reorganization
dated May 14, 1999 by and between
Organic Food Products, Inc and Organic Ingredients (5)
10.17 Agreement and Plan of Merger and Reorganization
dated May 14, 1999 by and between Organic Food Products and
Spectrum Naturals, Inc. (5)
10.18 Form of Amended and Restated Articles of Incorporation
of Organic Food Products, Inc. (5)
10.19 Form of Organic Food Products, Inc. Employment Agreement (5)
10.20 Form of Organic Food Products, Inc. Shareholder Lock-up
Agreement (5)
10.21 Form of Voting Agreement dated May 14, 1999 between Spectrum
Naturals, Inc. and certain shareholders of Organic Food Products,
Inc. (5)
10.22 October 6, 1999 Credit and Security Agreement by and between
Organic Food Products, Inc., Organic Ingredients, Inc., Spectrum
Naturals, Inc. and Spectrum Commodities, Inc. and Wells Fargo
Business Credit, Inc. (6)
10.23 September 23, 1999 Private Placement Memorandum by Organic Food
Products, Inc. (6)
27.01 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, File No. 333-22997, declared effective on August 11, 1997.
(2) Incorporated by reference to exhibits filed with the Registrant's Form 8K
on February 25, 1998.
(3) Incorporated by reference to exhibits filed with the Registrant's Form 8K
on May 19, 1998.
(4) Incorporated by reference to exhibits filed with the Registrant's Form S8
on August 26, 1998.
(5) Incorporated by reference to annexes filed with Registrant's Joint Proxy
Registration Statement on Form S-4, File No. 333-83675, declared effective
July 30, 1999.
(6) Incorporated by reference to exhibits filed with Registrant's Form 10K on
October 13, 1999.
(b) Reports on Form 8-K during the quarter ended December 31, 1999:
Form 8-K filed October 21, 1999 to report Registrant's change of control and
change in fiscal year from June 30 to December 31 in connection with Merger.
Form 8-K/A filed December 27, 1999 to report Registrant's name to "Spectrum
Organic Products, Inc." and file financial statements for the nine months ended
September 30, 1999 for Spectrum Naturals, Inc., the new Registrant following the
Merger.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Morgan Hill, California, on October 12, 1997.
Spectrum Organic Products, Inc.
By: /s/ Richard R. Bacigalupi
-----------------------------
Richard R. Bacigalupi
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed below by the following persons on the dates
indicated.
Signature Title Date
--------- ----- ----
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,100
<SECURITIES> 0
<RECEIVABLES> 4,070,500
<ALLOWANCES> 426,000
<INVENTORY> 6,585,800
<CURRENT-ASSETS> 10,450,500
<PP&E> 5,807,600
<DEPRECIATION> 1,759,100
<TOTAL-ASSETS> 24,974,100
<CURRENT-LIABILITIES> 14,676,700
<BONDS> 0
0
0
<COMMON> 8,296,000
<OTHER-SE> 117,400
<TOTAL-LIABILITY-AND-EQUITY> 24,974,100
<SALES> 31,417,800
<TOTAL-REVENUES> 31,417,800
<CGS> 20,960,000
<TOTAL-COSTS> 20,960,000
<OTHER-EXPENSES> 29,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 749,300
<INCOME-PRETAX> (17,000)
<INCOME-TAX> 96,300
<INCOME-CONTINUING> (113,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (113,300)
<EPS-BASIC> (.00)
<EPS-DILUTED> (.00)
</TABLE>
