-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CF96jwxZYC5e676rge26PNRR49Ga/yTD4N+KKfcYPh3/rhN5G5KTk6P2kR47HOj3 g5drBpOBKfa3TbwfN8jHSg== 0001108890-01-000103.txt : 20010409 0001108890-01-000103.hdr.sgml : 20010409 ACCESSION NUMBER: 0001108890-01-000103 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRUM ORGANIC PRODUCTS INC CENTRAL INDEX KEY: 0001034992 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FRUITS, VEG & PRESERVES, JAMS & JELLIES [2033] IRS NUMBER: 943076294 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-22231 FILM NUMBER: 1590986 BUSINESS ADDRESS: STREET 1: 133 COPELAND ST CITY: PETALUMA STATE: CA ZIP: 94952 BUSINESS PHONE: 7077788900 MAIL ADDRESS: STREET 1: 133 STREET 2: COPELAND STREET CITY: PETALUMA STATE: CA ZIP: 94952 FORMER COMPANY: FORMER CONFORMED NAME: ORGANIC FOOD PRODUCTS INC DATE OF NAME CHANGE: 19970304 10KSB 1 0001.txt 10KSB 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 For the fiscal year ended December 31, 2000 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to________________ Commission File No. 333-22997 Spectrum Organic Products, Inc. -------------------------------------------- (Name of Small Business Issuer in its Charter) California 94-3076294 ------------------------------ -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 133 Copeland Street Petaluma, California 94952 -------------------------------------- -------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (707) 778-8900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Without Par Value Common Stock -------------- (Title of Class) Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of March 26, 2001, 45,125,754 shares of the Registrant's common stock were outstanding. As of March 26, 2001, the market value of the Registrant's no par value common stock, excluding shares held by affiliates, was $2,359,800 based upon a closing bid price of $.375 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 by amendment to this Form 10-KSB. ([ ]) The Registrant's net sales for its year ended December 31, 2000 were $43,091,600. The following documents are incorporated by reference into Part III, Items 9 through 12 hereof: None PART I ITEM 1. DESCRIPTION OF THE BUSINESS - ----------------------------------- 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 Securities Litigation Reform Act of 1995. 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 three revenue producing areas: Food, Nutritional Supplements, and Industrial 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 common stock of the Company. Following the closing of the Merger on October 6, 1999, SNI, SCI and OI ceased to exist as separate legal entities, and the Company changed its name to Spectrum Organic Products, Inc. The Company sells its products through two sales organizations: Consumer Brands and Industrial Ingredients. History SNI was incorporated in 1980 to bring nutrition and quality into the vegetable oil category. In the beginning, natural oils were manufactured and distributed in bulk. Six years later the "Spectrum Naturals" brand was launched. Over time, SNI expanded its line to include condiments under the "Spectrum Naturals" brand and nutritional supplements under the "Spectrum Essentials" brand. The brands are positioned from the organic sourcing of raw ingredients and the chemical free extraction of vegetable oils. SNI has been a leading innovator in the development and marketing of expeller-pressed and certified organic vegetable oils. The Company has also been a leading proponent of testing and verifying the absence of genetically modified organisms in its culinary oils. "Spectrum Spread", a healthy alternative to butter or margarine was introduced in 1993. SNI has produced and marketed certified organic vinegar since 1989, canola mayonnaise since 1987, and ten fat-free or 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 method of fresh oil extraction without the use of chemicals, that eliminates the impact of oxygen, light and heat. The result is a true cold pressed nutritionally rich product. LOCET (or low oil content extraction technology), brought on line in 2000, enables the Company to extract oil from rare oil bearing nutraceuticals such as saw palmetto, evening primrose and DHA from algae. LOCET employs conventional and certified organic benign extraction methods to concentrate the lipid healing compounds in these increasingly popular nutritional supplements. In 1995, 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 vinegar to Page 2 manufacturers, co-packers, private label and food service accounts, both domestically and for export. Following the Merger, SCI became part of SPOP's Industrial Ingredients sales organization. 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, organic and all natural pasta sauces, salsas and condiments under the brand names "Garden Valley Naturals", "Garden Valley Organic", "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 name Organic Food Products, Inc. OI, operating under the name "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 Ingredients sales organization. Following the Merger, the Company, through its Consumer Brands and Industrial Ingredients selling organizations offers its products here in the U.S. as well as internationally to natural and mainstream retailers and manufacturers. Retail products are sold in, but not limited to, stores such as Safeway, A&P, Trader Joe's, Whole Foods, Raley's and Wild Oats. CONSUMER BRANDS PRODUCT LINES The Company introduces and discontinues products on a regular basis, consistent with customary practices of other firms in the processed food industry. The Company's current product lines, which include organic and Orthodox Union Certified products, include the following: Nutritional Supplements SPOP markets thirteen essential fatty acid supplements under the Spectrum Essentials brand. The supplements come in liquid, capsule and powder form. The essential fatty acid supplement oils include Borage, Evening Primrose, Flax, Hemp, Norwegian Fish and Wheat Germ oils in various mixtures and flavors. The Essentials brand also includes a fiber supplement for colon care. Culinary Oils SPOP carries non-GMO refined, unrefined, blended and organic cooking oils under the Spectrum Naturals brand. The nine 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. The organic category has eleven 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 also markets condiments under the Spectrum Naturals brand name. There is both a light and a regular canola mayonnaise from expeller pressed canola oil. The Company introduced the first organic mayonnaise during 2000. SPOP also markets a vinegar line that is third party certified organic which Page 3 includes: 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. SPOP markets two types of spreads: Spectrum Naturals Canola Spread, and Essential Omega Spread made with organic flax and soy oils. SPOP also introduced the first organic margarine during 2000. There is also an organic salad dressing line. In the fat-free category there are four dressings: Creamy Dill and Creamy Garlic, which contain dairy-based products, and Garlic and Onion and Toasted Sesame, which do not. In the low fat category there are six dressings: Bleu Cheese, Honey Dijon, Mango Madness, and Roasted Pepper which contain dairy products, and Southwestern Caesar and Zesty Italian, which do not. 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 their mass-market counterpart "Pam." The Spectrum Super Canola Skillet Spray is made from high oleic canola oil. The second spray, Spectrum 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 markets a non-hydrogenated organic palm shortening that is used for any type of cooking application where butter, margarine or shortening is used. The Spectrum Naturals shortening is a healthy alternative to hydrogenated shortening and partially hydrogenated oils. Organic Pasta Sauces and Pastas SPOP markets 20 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. The gourmet pasta sauce, Frutti Di Bosco, is another brand SPOP markets. 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: Puttenesca, Marinara with Garlic and Basil, Wild Chanterelle and Truffle-Porcini. SPOP also markets canned tomatoes and dry organic pastas including spaghetti, linguini, fettuccine, angel hair, rotini, penne and bowties. Organic Salsas SPOP markets a line of six organic salsas under the Parrot brand name. Varieties include chunky, black bean, tomatillo, roasted garlic, and roasted chipotle as well as an enchilada sauce. Children's Meals SPOP offers five canned organic children's meals under the label Grandma Millina's Kitchen Kids' Meals. The product line includes: 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. IQF Whole Frozen Fruits and Vegetables There are seven IQF whole frozen fruits offered by the Company: raspberries, strawberries, peaches, mango, papaya, blueberries and pineapple. IQF whole vegetables include peas and corn. Page 4 INDUSTRIAL INGREDIENT PRODUCT LINES The Company offers a wide variety of certified organic industrial product lines, which include the following categories and products: Citrus Products Included in this product line are single strength juices, concentrates, and citrus by-products including oils, pulps and essences. All citrus products are made from orange, lemon, grapefruit, lime and tangerine fruits. Fruit Juices and Juice Concentrates This product line includes apple, pineapple, orange, lemon, lime grapefruit, blackberry, cranberry, pear, peach, raspberry, strawberry and white grape juices and concentrates. Fruit Puree and Concentrates This product line includes various fruits in puree and concentrate form. Among these are apple, apricot, blackberry, kiwifruit, mango, nectarine, peach, pear, strawberry and raspberry. Vegetable Juices and Concentrates This product line includes beet, bell pepper, carrot, celery, lettuce, parsley, spinach, watercress, tomato, cabbage, cucumber, broccoli, garlic and cauliflower. Vegetable Purees The Company also markets vegetable purees, including butternut squash, cabbage, carrot, celery, eggplant, garlic, onion and spinach. These purees can be used in various products, the most popular being baby food. Essences The Company also offers apples, blackberries, peaches, raspberries and strawberries in their essence forms. Fresh Bulk Fruit This product line includes fresh apricots (including machine-pitted apricots), apples, blackberries, grapes, pears, kiwifruit, peaches, raspberries, strawberries, nectarines and limes. Fresh Bulk Vegetables and Prepared Vegetables Included in this product line are beets, bell peppers, carrots, celery, lettuce, parsley, spinach, butternut squash, watercress, garlic, tomato paste and diced tomatoes. The Industrial Ingredients sales organization also offers private label programs for organic food retailers. These programs include frozen juice concentrates, bottled single-strength juices, applesauce and apple-blended sauces, various fruit juices and IQF fruits and vegetables. In addition, the organization 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, retail chains and independent grocery stores. Currently SPOP products are offered in over 6,000 health food stores nationwide and 2,000 grocery stores located throughout the U.S. and in the Far East, Canada, and Europe. In order to increase its distribution and sales, SPOP offers special Page 5 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. In 2000, United Natural Foods, Inc. accounted for approximately 29% of the Company's net sales. In 1999, United Natural Foods, Inc. accounted for approximately 19% of net sales. The loss of this customer would have a material adverse effect on SPOP's operations. Generally, this customer's percentage of total revenues increased in 2000 compared to 1999 due to the additional revenues from the companies combined with the Merger. The Industrial Ingredients sales organization 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 manufacturers 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. 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 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 variations, images and messages. SPOP promotes all its brands to natural food and health food stores and the specialty or gourmet departments of grocery stores. SPOP 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. The Company primarily uses outside resources in developing its new products. Research and development expenses for 2000 and 1999 were $99,800 and $215,200, respectively. Manufacturing Facilities and Suppliers SPOP manufactures and bottles the Spectrum Essentials product line and bottles the Company's culinary oils in a leased facility located at 133 Copeland Street, Petaluma, California. The Company's corporate headquarters is a leased facility located at 1304 South Point Boulevard, Suite 280, Petaluma, which contains the sales, marketing and executive offices. The Company's finance, human resource, administration, and operations personnel are housed in the Copeland Street facility. The Industrial Ingredients sales organization of SPOP is headquartered in Aptos, California. The research and development center is located in a separate leased facility in Aptos. Production of the Company's pasta sauces and salsas at the leased Morgan Hill production facility ceased in July 2000, and was transferred to a third-party co-packer. The facility remains under lease while the Company completes the removal of its equipment and returns the facility to its condition on the date it was leased. Management is cooperating with the owner of the facility to secure new tenants and anticipates completely vacating the facility by June 30, 2001. Page 6 SPOP also uses co-packers to process and package its vinegars, condiments, dressings, Kids' Meals, mayonnaise, shortening, pastas, spreads, and encapsulated products. In July 2000, SPOP consolidated its warehousing and distribution of all branded consumer products at a third party facility in Tracy, CA. Warehousing and distribution of industrial oils continues to be handled at the Copeland Street facility. The Company's industrial products are produced in co-pack arrangements under a contract with the processor or under a 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 9% of the cost of goods sold in 2000 and 10% in 1999. While a 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. 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 one vendor that supplied approximately 9% of SPOP's raw material purchases in 2000 and 15% in 1999. Generally, this vendor's percentage of raw material purchases decreased in 2000 compared to 1999 due to the additional raw material purchases for the Companies combined in the Merger. The Company believes that other suppliers are available who could provide products at similar prices and terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which could adversely affect operating results. Competition The natural food and health food industries in general and the 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. 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. SPOP competes with numerous brands in the non-organic mainstream food category. Some of those competitors are Puritan and Wesson. In the natural foods 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 markets a line of pastas. In organic pasta sauce, SPOP's competitors include Muir Glen, Amy's Kitchen and Enricos. In the organic salsa market, SPOP's 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. In the organic culinary oil category, competitors include Colavita, Hain and Dal Raccolto. The nutritional supplement category's competitors include Health From The Sun and Barleans. Competitive factors in the specialty foods industry include price, quality, brand image and flavor. SPOP positions its product lines to be slightly more expensive than their non-organic food counterparts but consistent with prices charged by other organic food marketers. Management believes its products compete favorably against other organic foods with respect to quality and flavor. Trade Names and Trademarks The Company has federal registration for its Millina's Finest, Parrot Brand, Spectrum Naturals, Spectrum Essentials, Spectrum Spread and Veg Omega-3 trademarks. There can be no assurance that any trademark or trade name registrations will not be copied or challenged by others. Page 7 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 manufacture, 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. Employees As of March 26, 2001, SPOP had 75 full-time employees including its executive officers, sales and marketing, accounting, food production, research and development, warehousing, 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 - ------------------------------- The Company leases two facilities in Petaluma, California to house manufacturing, warehousing, administrative offices and the corporate headquarters. The Petaluma facilities occupy a total of 47,300 square feet at a monthly rate of $27,800. The Company also leases 1,600 square feet at a cost of $2,900 per month in Aptos, California to house the Organic Ingredients Division headquarters. An additional 1,600 square foot space in Aptos is leased at a monthly cost of $1,600 to house the Company's research and development center. The Company continues to lease approximately 24,000 square feet for a manufacturing and warehouse facility in Morgan Hill, California from a non-affiliate on a seven-year lease expiring April 30, 2003, at a current monthly rental of $7,100 subject to future rental escalations of 3% per year. Effective July 21, 2000, the Company ceased manufacturing operations at Morgan Hill. The facility is currently serving as storage space while the Company removes the remainder of its equipment and restores the space to its condition at the time it was leased. Management is cooperating with the landlord to secure new tenants for this facility at current market rates in exchange for early termination of the lease without penalty. Management expects to vacate the facility and be released from its obligations under the lease prior to June 30, 2001. Management believes that these facilities, excluding the Morgan Hill site, are suitable and adequate for the Company's needs. ITEM 3. LEGAL PROCEEDINGS - ------------------------- In November 1998, Global Natural Brands, Ltd.("Global") and its four principals filed a lawsuit against OFPI (the former Registrant) and its four principals, alleging unpaid wages and seeking money damages and injunctive relief. Global Page 8 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 claims, among other causes of action. In May 1999, OFPI and its principals cross-complained against Global and its principals, seeking damage for breach of contract, breach of fiduciary duty, fraud, negligence and a declaratory relief for indemnity and contribution, plus punitive damages. SPOP assumed the litigation in connection with the Merger and reached a settlement and release with Global in April 2000, and the case has been dismissed. Under the terms of the settlement and release, SPOP will pay Global a total cash consideration of $145,000, payable $25,000 upon execution of the agreement by Global plus twelve equal monthly payments of $10,000, and the issuance of 400,000 shares of SPOP stock, which were valued at the closing market price of SPOP stock on the date of settlement. In addition, SPOP will issue to Global options to purchase 225,000 common shares at $2.25 per share over an option term that expires on October 31, 2002. As of December 31, 2000, $40,000 of the cash consideration remains to be paid. The options have not been issued due to ongoing discussions with Global concerning language to be included in the stock option agreement regarding any potential subsequent sale or merger of the Company. In anticipation of issuing the options, the Company has accrued the estimated fair value of $27,400 at December 31, 2000. The issuance of shares and the adjustment of the liability for the cash consideration were recorded in the year ended December 31, 2000 as a net charge to Goodwill of $187,600, since the litigation preceded the Merger. In February 1998, OFPI acquired the natural fruit juice and water bottling operations of Sunny Farms Corporation for cash and common stock. A portion of the common stock consideration was held in escrow, contingent upon earn-out factors for the year following the acquisition. Sunny Farms sought voluntary relief pursuant to chapter 7 of the U.S. Bankruptcy Code in November 1998. A Trustee was duly appointed shortly thereafter to protect the chapter 7 estate of Sunny Farms. In October 2000, attorneys for the Trustee filed a complaint against the Company in the U.S. Bankruptcy Court for the Northern District of California, challenging the Company's earn-out calculations and requesting that a portion of the common stock held in escrow be released. An estimated accrual of $100,000 for common shares to be released is included in accrued expenses at December 31, 2000, which represents Management's best estimate of the outcome. The shares have not been released, however, due to a dispute with the Trustee regarding the earn-out calculations. Management is currently in negotiation with the Trustee and believes that the outcome will not have a material effect upon the Company's financial position, results of operations or cash flows upon settlement. In October 2000, the Company was notified by counsel for GFA Brands, Inc. that nutritional claims pertaining to Spectrum Naturals Organic Margarine were infringing upon two patents issued in the United States that pertain to particular fat compositions suitable for human ingestion. The patent holder exclusively licensed each of these patents to GFA Brands. Management believes that its product does not infringe upon either patent, and further, that the patents are unenforceable in any case. Management has engaged legal counsel that specialize in this area and received an opinion letter in February 2001 confirming that, in the opinion of counsel, the manufacture or sale of Spectrum Naturals Organic Margarine does not infringe upon the GFA patents, either literally or under the doctrine of equivalents. Management believes it has meritorious defenses, therefore, no provision for loss has been recorded at December 31, 2000. Management intends to continue to vigorously defend its position, and believes that the final outcome will not have a significant effect upon the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- None Page 9 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ---------------------------------------------------------------- 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 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 ------------- By Quarter Ended: High Low - ----------------- ---- --- March 31, 1999 ...................................... $1.69 $0.56 June 30, 1999 ....................................... 1.50 0.53 September 30,1999 ................................... 1.06 0.63 December 31, 1999 ................................... 1.00 0.38 March 31, 2000 ...................................... 1.00 0.28 June 30, 2000 ....................................... 0.88 0.30 September 30, 2000 .................................. 0.75 0.31 December 31, 2000 ................................... 0.63 0.28 March 31, 2001....................................... 0.50 0.25 As of March 15, 2001, the Company had approximately 725 record and beneficial stockholders. Dividend Policy The Company has not in the past nor does it intend to pay cash dividends on its common stock in the 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 (see Legal Proceedings), 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, 2000 cannot be precisely determined until the dispute over the earn-out calculations is settled. Management has the option of paying the coupon rate earned in cash or additional shares of common stock valued at the average closing price as quoted for the five trading days immediately prior to August 11, 1998. Shares Issued During the Year During the year ended December 31, 2000, the Company issued unregistered no par value restricted shares of its common stock as follows for the reasons indicated: Page 10 Date Shares Issued Issued ------ ------ Shares issued to Global Natural Brands, Ltd. in connection with the settlement of litigation (see Legal Proceedings) April 2000 400,000 Original common stock purchase warrants exercised by the note holders under the private placement completed in October 1999 Various 159,300 Default common stock purchase warrants exercised by the note holders under the private placement completed in October 1999 Various 22,300 ------- Total Unregistered Restricted Common Shares Issued 581,600 ======= The Shares were issued under Regulation D of the Securities Act of 1933 (the "Act"), with resale of such shares permitted only pursuant to Rule 144 of the Act. All certificates representing the unregistered shares were endorsed with restrictive legends identifying them as unregistered under the Act. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - ------------- The following discussion should be read in conjunction with the financial statements and related notes and other information included in this report. The financial results reported herein 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 acquisition, with SNI as accounting acquirer and OFPI and OI as accounting acquirees. Accordingly, operating results for fiscal year 1999 reflect SNI and SCI only from January 1, 1999 through October 5, 1999 and the newly merged entity from October 6, 1999 through December 31, 1999. Upon the effective date of the Merger, SNI, SCI and OI ceased to exist, the Registrant became the surviving corporation and the Company changed its name to "Spectrum Organic Products, Inc." The Company's operating results could vary from period to period as a result of a number of factors. These factors include, but are not limited to, the purchasing patterns of significant customers, the timing of new product introductions by the Company and its competitors, the amount of slotting fees, new product development and advertising expenses incurred by the Company, variations in sales by distribution channel, fluctuations in market prices of raw materials, competitive pricing policies, and situations that the Company cannot foresee. These factors could cause the Company's performance to differ from investor expectations, resulting in volatility in the price of the common stock. Page 11 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. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Revenues SPOP's net sales for the year ended December 31, 2000 ("2000") were $43,091,600 compared to $29,619,600 for the year ended December 31, 1999 ("1999"), an increase of $13,472,000, or 45.5% compared to a 33.5% increase in 1999. The increase in sales in 2000 primarily reflects the revenues of the newly acquired product lines of OFPI and OI. Excluding those revenues, SNI's comparable sales in 2000 increased 6% from 1999 reflecting growth in nutritional supplements, which grew 31% from the prior year, mayonnaise, salad dressing and Spectrum Spread. These increases were partially offset by declines in institutional and ingredient oil sales. During 2000, net sales by source were as follows: Consumer Brands - Culinary Products $ 18,263,400 Consumer Brands - Nutritional Supplements 7,347,200 Industrial Ingredients 15,066,800 Private Label 2,414,200 ------------ $ 43,091,600 ============ Foreign sales comprised 10% of the Company's net sales during 2000. The largest foreign markets were Canada and Japan, which comprised 8% and 1%, respectively, of net sales in 2000. Cost of Goods Sold SPOP's cost of goods sold for 2000 was $31,819,400 or 73.8% of net sales, versus $20,960,000 or 70.8% of sales for 1999. The increase in cost-of-goods sold as a percentage of sales was due primarily to the increased proportion of lower-margin ingredient sales and higher fixed manufacturing costs at the Morgan Hill facility for products acquired from OFPI. Management has recently implemented organizational changes to reduce manufacturing costs associated with certain OFPI products acquired under the Merger. On July 21, 2000, SPOP ceased manufacturing the pasta sauce and salsa product lines at its leased Morgan Hill, California facility. The products are now produced by a third-party co-packer, which has enabled the Company to cease production at the Morgan Hill facility. Included in cost of sales for the twelve month period ended December 31, 2000 was $53,100 for severance and shutdown costs associated with closing the facility. As of December 31, 2000, the facility was still under lease while the Company completes the removal of its equipment and returns the facility to its condition on the date it was leased. Management is cooperating with the owner of the facility to secure new tenants at current market rates in exchange for early termination of the lease without penalty, and anticipates vacating the facility completely by June 2001. As a result of these changes, Management believes that operations will become more efficient and per unit production costs will decrease further during fiscal year 2001, generating reductions in cost of goods sold as a percent of sales. Sales and Marketing Expenses SPOP's sales and marketing expenses for 2000 were $6,455,900, or 15.0% of net sales, versus $4,376,800 or 14.8% of net sales for 1999. The increase in sales and marketing expenses as a percentage of net sales reflected the increase in personnel required to build a sales organization capable of supporting the larger organization after the Merger. Page 12 General and Administrative Expenses SPOP's general and administrative expenses for 2000 were $4,157,900, or 9.7% of net sales, versus $3,303,000 or 11.2% of net sales for 1999. The decrease in 2000 as a percentage of net sales reflected increased efficiencies and economies of scale associated with the larger organization and higher sales base. The incease in general and administrative expenses from 1999 to 2000 of $854,900 was primarily the result of a full year of the consolidated operations of the combined Company during 2000 versus only three months in 1999. Loss on Disposal of Property and Equipment Included in operating expenses for the year ended December 31, 2000 was $436,500 of expenses associated with the Morgan Hill plant closure (see Note 2). Of that amount, $250,000 represented non-cash losses on the sale of the surplus bottling line formerly used for the Company's tomato-based culinary products and $138,400 represented non-cash writedowns recorded as a result of the abandonment of leasehold improvements at the leased Morgan Hill facility. The remaining $48,100 represented leasehold and other expenses associated with closing the facility. Amortization of Goodwill The Company recorded goodwill of $10,848,200 in connection with the Merger. Amortization expense for the twelve months ended December 31, 2000 was $909,600, based on a twelve-year amortization schedule, versus $217,600 of amortization expense for the period October 6, 1999 to December 31, 1999. Net Interest Expense SPOP's interest expense for 2000 was $1,381,500 versus $749,300 for 1999. The increase in interest expense resulted primarily from interest associated with the default under the private placement notes (see Note 10). Since the notes were not repaid by March 31, 2000, the accrued interest through March 31 of $20,000 was added to the principal, the interest rate increased from 10% to 15%, and an additional 240,000 common stock warrants to purchase SPOP stock at $.01 per share were granted. The resulting $118,700 value of the warrants was included in interest expense for the year ended December 31, 2000. Also included in interest expense for that period is $47,300 of interest paid to the private placement note holders at the default interest rate of 15% for the period April 1, through December 31, 2000. (See Liquidity and Capital Resources). Further contributing to the increased interest expense in 2000 was 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 and fund certain Merger costs. Gain (Loss) on Disposal of Trademarks and Labels During 2000, the Company realized a $50,000 gain on the sale of the Sunny Farms and Pacific Rim trademarks. During 1999, the Company determined that certain labels had become obsolete due to label revisions. Accordingly, the Company wrote-off label development costs, net of accumulated amortization, of $95,000. 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 has been recorded against the deferred tax assets for all periods presented. Liquidity and Capital Resources The Company's bank overdraft at the end of 2000 was $539,000 compared to $229,300 in 1999. During 2000, the Company generated $526,700 in cash from operating activities, compared to using $171,900 in cash in 1999. The additional cash provided resulted primarily from collections on accounts receivable during 2000 and the non-recurrence of the substantial inventory buildup during 1999. Cash used in investing activities was $147,700 in 2000 compared to $1,529,700 in 1999, reflecting the sale of surplus bottling equipment during 2000 and higher purchases of fixed assets and Merger transaction costs in 1999. Cash used in Page 13 financing activities was $379,200 in 2000 compared to cash provided of $1,702,200 in 1999. The increase in funds used from financing primarily reflected higher payments against notes payable during 2000, and lower proceeds from long-term debt. In connection with the Merger, the Company paid down the existing debt and lines of credit of SNI, OFPI and OI with a new loan facility totaling $11,717,000 with Wells Fargo Business Credit ("WFBC"). The new facility, consisting of term debt and a revolving line of credit, is secured by substantially all assets of the Company, and bears interest at prime plus 1% to 1+1/4%. The balance of the initial proceeds was used for working capital purposes, to purchase raw materials and equipment, to pay certain Merger related commitments, and to provide marketing funds to introduce new products and to introduce existing products into new markets. Advances under the new revolving line of credit are limited to a borrowing base consisting of certain accounts receivable and/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 $276,100 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. As a result of the default, WFBC began assessing an additional 100 basis points to the interest rates charged for the revolving line of credit and the three term notes as of July 17, 2000. Management is currently in negotiations to reset the financial covenants to more accurately match the Company's financial condition and future projections. Also in connection with the Merger, the Company completed a private placement of 16 Units to twelve individual investors in October 1999. Each Unit consisted of a $25,000 unsecured and subordinated promissory note bearing interest at 10%, plus warrants to purchase 10,000 shares of common stock at $.01 per share expiring at September 30, 2000. Net proceeds of approximately $370,000 were received, after offering expenses of approximately $30,000. As of April 1, 2000, the Company was in default on the repayment of the promissory notes. As a condition of the default the accrued interest through March 31, 2000 of $20,000 was added to the principal, the interest rate increased to 15% and the note holders were granted 2,500 additional warrants per unit for each month the principal remains unpaid, up to a maximum of six months. The warrants granted due to the default are also priced at $0.01 per share and expire on March 31, 2001. As of December 31, 2000 all of the initial 160,000 common stock purchase warrants had been exercised by the note holders, and 22,500 of the 240,000 default warrants issued had been exercised by the note holders. In February 2001, the Company attempted to clear the default by offering the private placement note holders the option of converting their notes to equity at a discounted price to the market value of SPOP stock, or a three year payment schedule calling for interest only during 2001, with principal and interest thereafter, plus common stock purchase warrants, retroactive to October 1, 2000, equal to 10% of the outstanding principle, at the closing bid price of SPOP stock at each quarter-end until the note is retired. As of March 26, 2001, two note holders representing $52,500 of the outstanding principal had elected the conversion to equity, three note holders representing $65,600 of the outstanding principal had elected the payment schedule with common stock purchase warrants, and seven had not yet made a choice. For those note holders who select the converson to common stock, non-cash interest expense will be recorded for the beneficial pricing effect upon conversion. For those note holders who select the payment schedule with commmon stock purchase warrants, additional non-cash interest expense will be recorded for the value of the warrants. The Company is highly leveraged and is currently seeking additional capital from various sources such as the sale of certain product lines and the issuance of common stock. During February 2001, the Company completed a three-year business plan to be included with a private placement for a new round of equity investment. Management believes that the 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 foreseeable future. There can be no assurances that all of the anticipated savings can be attained or that additional capital will be available on acceptable terms. However, the majority shareholder has indicated that he has the intent and ability to support the operations of the Company with additional funding for the next fiscal year, if needed. Page 14 The Company's future results of operations and the other forward-looking statements contained in this document, in particular the statements concerning plant efficiencies, capital spending, research and development, competition, marketing and manufacturing operations and other information provided herein involve a number of risks and uncertainties. In addition to the factors discussed above, other factors that could cause actual results to differ materially are general business conditions and the general economy; competitors' pricing and marketing efforts; availability of third-party materials at reasonable prices; risk of nonpayment of accounts receivable; risks of inventory obsolescence due to shifts in market demand; timing of product introductions; and litigation involving product liabilities and consumer issues. New Applicable Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities 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 the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings' effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 as amended is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of this new standard on January 1, 2001 to affect its financial statements or results of operations. In December 1999, the SEC staff released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides interpretive guidance on the recognition, presentation and disclosure of revenue in the financial statements. The guidance in SAB 101, as amended by SAB 101B, is required to be followed starting with the fourth quarter of the current fiscal year. The Company has adopted the guidance contained in SAB 101, which has not had a material effect on the Company's financial position, results of operations or cash flows. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB Opinion No. 25, for (a) the definition of employee for the purpose of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 2, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The Company has complied with the application of FIN 44, which did not have a material effect on the Company's financial position or results of operations. Page 15 ITEM 7. FINANCIAL STATEMENTS - ---------------------------- Spectrum Organic Products, Inc. Financial Statements Years Ended December 31, 2000 and 1999 Report of Independent Certified Public Accountants Financial Statements: Balance Sheets Statements of Operations Statements of Stockholders' Equity Statements of Cash Flows Summary of Accounting Policies Notes to Financial Statements ================================================================================ Page 16 Report of Independent Certified Public Accountants To The Stockholders and Board of Directors of Spectrum Organic Products, Inc. We have audited the accompanying balance sheets of Spectrum Organic Products, Inc. as of December 31, 2000 and 1999 and the related statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2000. 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Spectrum Organic Products, Inc. as of December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Seidman, LLP - ----------------------------- BDO Seidman, LLP San Francisco, California March 21, 2001 Page 17
Spectrum Organic Products, Inc. Balance Sheets ============================================================================================================== As of December 31, 2000 1999 - -------------------------------------------------------------------------------------------------------------- Assets (Notes 8 and 10) Current Assets: Cash $ 900 $ 1,100 Accounts receivable, net (Note 3) 2,971,700 3,644,500 Inventories, net (Note 4) 6,676,400 6,585,800 Income tax refunds receivable (Note 12) -- 31,100 Prepaid expenses and other current assets 84,600 188,000 ------------ ------------ Total current assets 9,733,600 10,450,500 Property and equipment, net (Notes 2, 5 and 10) 3,254,900 4,048,500 ------------ ------------ Other Assets: Goodwill, net (Note 1) 9,721,100 10,225,600 Other intangible assets, net (Note 6) 67,700 94,500 Other assets 64,100 155,000 ------------ ------------ Total Other Assets 9,852,900 10,475,100 ------------ ------------ Total Assets $ 22,841,400 $ 24,974,100 ============ ============ Liabilities and Stockholders' Equity Current Liabilities: Bank overdrafts $ 539,000 $ 229,300 Lines of credit (Note 8) 5,432,200 4,938,000 Accounts payable, trade (Note 4) 6,057,600 6,144,400 Accrued expenses (Note 16) 715,400 1,059,500 Income taxes payable (Note 12) -- 13,300 Current maturities of notes payable, former stockholder (Note 9) 375,000 381,200 Current maturities of notes payable & capital lease obligations (Notes 10 and 15) 1,312,900 1,622,400 Current maturities of notes payable, stockholders (Note 11) 110,800 288,600 ------------ ------------ Total Current Liabilities 14,542,900 14,676,700 Notes payable, former stockholder, less current maturities (Note 9) 961,400 1,305,900 Notes payable & capital lease obligations, less current maturities (Note 10) 149,900 154,700 Notes payable, stockholders, less current maturities (Note 11) 337,200 423,400 ------------ ------------ Total Liabilities 15,991,400 16,560,700 ------------ ------------ Commitments and Contingencies (Notes 13 and 16) Stockholders' Equity (Notes 1, 9, 14 and 15): Preferred stock, 5,000,000 shares authorized, no shares issued or outstanding -- -- Common stock, without par value, 60,000,000 shares authorized, 44,495,828 and 43,914,186 issued and outstanding at December 31, 2000 and 1999 8,616,200 8,296,000 Additional paid-in capital 304,200 185,500 Accumulated deficit (2,070,400) (68,100) ------------ ------------ Total Stockholders' Equity 6,850,000 8,413,400 ------------ ------------ Total Liabilities And Stockholders' Equity $ 22,841,400 $ 24,974,100 ============ ============ See accompanying summary of accounting policies and notes to financial statements. Page 18
Spectrum Organic Products, Inc. Statements of Operations ================================================================================ For the years ended December 31, 2000 1999 ------------ ------------ Gross Sales (Note 3) $ 45,582,400 $ 31,417,800 Discounts And Allowances 2,490,800 1,798,200 ------------ ------------ Net Sales 43,091,600 29,619,600 Cost Of Goods Sold (Notes 2 and 4) 31,819,400 20,960,000 ------------ ------------ Gross Profit 11,272,200 8,659,600 ------------ ------------ Operating Expenses: Sales And Marketing 6,455,900 4,376,800 General And Administrative 4,157,900 3,303,000 Loss On Disposal Of Property And Equipment (Note 2) 436,500 -- Amortization Of Goodwill (Note 1) 909,600 217,600 ------------ ------------ Total Operating Expenses 11,959,900 7,897,400 ------------ ------------ Income (Loss) From Operations (687,700) 762,200 Other Income (Expense): Interest Expense, Net (1,381,500) (749,300) Gain (Loss) On Disposal Of Trademarks And Labels (Note 6) 50,000 (95,000) Other Income 20,800 65,100 ------------ ------------ Total Other Expense, Net (1,310,700) (779,200) ------------ ------------ Loss Before Taxes (1,998,400) (17,000) Provision For Income Tax Expense (Note 12) (3,900) (96,300) ------------ ------------ Net Loss $ (2,002,300) $ (113,300) ------------ ------------ Basic And Fully Diluted Loss Per Share (Note 14) $ (.05) $ (0.00) ============ ============ Weighted Average Shares Outstanding 44,234,378 35,095,155 ============ ============ See accompanying summary of accounting policies and notes to financial statements. Page 19
Spectrum Organic Products, Inc. Statements of Stockholders' Equity For the years ended December 31, 1999 and 2000 ======================================================================================================================= Retained Total Additional Earnings Stockholders' Common Stock Paid-In (Accumulated Equity Shares Amount Capital Deficit) (Deficit) - ----------------------------------------------------------------------------------------------------------------------- Balances, January 1, 1999 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 15) -- -- 110,500 -- 110,500 Net loss for the year -- -- -- (113,300) (113,300) - ---------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1999 43,914,186 $ 8,296,000 $ 185,500 $ (68,100) $ 8,413,400 Restricted common shares issued to Global in connection with the settlement of litigation (Note 16) 400,000 318,800 -- -- 318,800 Exercise of common stock purchase warrants issued in connection with the private placement notes (Notes 10 and 15) 181,642 1,400 -- -- 1,400 Warrants issued in connection with the private placement notes (Notes 10 and 15) -- -- 118,700 -- 118,700 Net loss for the year -- -- -- (2,002,300) (2,002,300) - ---------------------------------------------------------------------------------------------------------------------- Balances, December 31, 2000 44,495,828 $ 8,616,200 $ 304,200 $(2,070,400) $ 6,850,000 ====================================================================================================================== See accompanying summary of accounting policies and notes to financial statements. Page 20
Spectrum Organic Products, Inc. Statements of Cash Flows ========================================================================================================== For the years ended December 31, 2000 1999 - ---------------------------------------------------------------------------------------------------------- Net Loss $ (2,002,300) $ (113,300) Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities: Provision for allowances against receivables 143,000 44,300 Provision for reserves for inventory obsolescence 105,500 86,300 Depreciation and amortization 531,000 436,700 Amortization of goodwill 909,600 217,600 Deferred income taxes -- (57,900) Loss on disposal of property and equipment 436,500 -- (Gain) Loss on disposal of trademarks and labels (50,000) 102,900 Imputed interest on notes payable 50,600 47,400 Imputed interest on common stock warrants issued 118,700 -- Amortization of original issue discount on unsecured subordinated notes 55,200 55,200 Professional fees paid via issuance of note payable 75,000 -- Changes in Assets and Liabilities: Accounts receivable 436,700 (679,000) Inventories (195,000) (1,641,300) Income tax refunds receivable 31,100 58,900 Prepaid expenses and other current assets 103,400 198,600 Other assets 90,900 (36,900) Accounts payable 24,000 816,500 Accrued expenses (436,300) 11,100 Income taxes payable (13,300) (19,000) ------------ ------------ Net Cash Provided by (Used in) Operating Activities 414,300 (171,900) ------------ ------------ Cash Flows From Investing Activities: Purchase of property and equipment (363,300) (1,026,400) Proceeds from sale of assets 383,000 -- Proceeds from sale of trademarks 50,000 -- Cash acquired in reverse acquisition -- 90,900 Merger and related transaction costs (105,000) (594,200) ------------ ------------ Net Cash Used in Investing Activities (35,300) (1,529,700) ------------ ------------ Cash Flows From Financing Activities: Increase in checks drawn against future deposits 309,700 42,300 Proceeds from lines of credit 44,317,300 21,879,700 Proceeds from long-term debt 276,100 -- Repayment of lines of credit (43,823,100) (20,890,500) Repayment of notes payable, former stockholder (381,300) (246,700) Repayment of notes payable to stockholders (264,000) (126,400) Proceeds of notes payable -- 1,400,000 Repayment of notes payable (754,300) (304,500) Repayment of capitalized lease obligations (61,000) (51,700) Warrants exercised 1,400 -- ------------ ------------ Net Cash Provided by (Used in) Financing Activities (379,200) 1,702,200 ------------ ------------ Net Increase (Decrease) In Cash (200) 600 Cash, beginning of the year 1,100 500 ------------ ------------ Cash, end of the year $ 900 $ 1,100 ============ ============ Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes $ 15,700 $ 120,700 Cash paid for interest $ 1,031,500 $ 786,700 ============ ============ See accompanying summary of accounting policies and notes to financial statements. Page 21
Spectrum Organic Products, Inc. Summary of Accounting Policies ================================================================================ Business Combination and Basis of Presentation - ---------------------------------------------- As a result of the reverse acquisition described in Note 1, the financial statements include the historical results of Spectrum Naturals, Inc. ("SNI"), the accounting acquirer, for the 1999 period prior to the Merger date of October 6, 1999. 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 "SPOP". Nature of Operations - -------------------- The Company manufactures, packages, and sells nutritional supplements and organic and natural food products, including cooking and nutritional oils, condiments, dressings and spreads on a wholesale basis to distributors and grocery and club store chains throughout the United States, Canada, Europe and the Far East and to other manufacturers as industrial organic ingredients. Company headquarters and principal manufacturing facilities are located in Petaluma, California and warehousing operations for the Company's branded product lines have been consolidated at a third-party facility in Tracy, California. The Company's industrial ingredients sales organization and the research and development center are located in Aptos, California. Business Segments - ----------------- The Company does not presently manage its operations by business segment, and does not prepare internal financial statements by business segment for use by Management. Accordingly, the Company's results of operations and financial position have not been disaggregated and reported by business segment since the information is presently unavailable to the Company's chief operating decision maker. 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. Accounts Receivable and Allowances - ---------------------------------- The Company provides allowances for estimated credit losses, product returns, spoilage, and other customer adjustments (for advertising allowances, etc.) at a level deemed appropriate to adequately provide for known and inherent risks related to such amounts. Page 22 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 are 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. Betterment or renewals are capitalized when incurred. Goodwill and Intangible Assets - ------------------------------ The excess of purchase consideration including transaction costs over the 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. Long-lived assets to be retained that are 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. 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 financial statement 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 revenue through sales of products primarily to distributors, grocery stores and natural food and speciality food 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 are provided for in the accounts receivable allowances. Page 23 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 is based on current market prices available to the Company. Net Loss per Share - ------------------ Basic loss per share is computed by dividing net loss attributable to common shares, by the weighted average number of common shares outstanding during each period. Diluted loss per share is similar to basic loss per share, except that the weighted average number of common shares outstanding is increased to reflect the dilutive effect of potential common shares, such as those issuable upon the exercise of stock options or warrants as if they had been issued. For the fical years 2000 and 1999, there is no difference between basic and diluted loss per common share, as the effects of the exercise of common stock options and warrants are anti-dilutive, given the net loss recorded in each year presented. For 2000 and 1999, the following were excluded from the computation of diluted loss per share since their effect would be anti-dilutive: Number of Shares Convertible ---------------------------- 2000 1999 ---- ---- Stock Options 2,010,115 1,380,515 Stock Warrants 608,156 550,656 --------- --------- Total Convertible Shares 2,618,271 1,931,171 ========= ========= New Applicable Accounting Pronouncements - ---------------------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires companies to recognize all derivative contracts as either assets or Page 24 liabilities on the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 as amended is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of this new standard on January 1, 2001 to affect its financial statements or results of operations. In December 1999, the SEC staff released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides interpretive guidance on the recognition, presentation and disclosure of revenue in the financial statements. The guidance in SAB 101, as amended by SAB 101B, is required to be followed starting with the fourth quarter of the current fiscal year. The Company has adopted the guidance contained in SAB 101, which has not had a material effect on the Company's financial position, results of operations or cash flows. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB No. 25 for (a) the definition of employee for the purpose of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 2, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The Company has complied with the application of FIN 44, which did not have a material effect on the Company's financial position or results of operations. 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. Page 25 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 "SPOP". 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, the transaction was accounted for as a reverse acquisition, with SNI as accounting acquirer and OFPI and OI as accounting acquirees. Accordingly, the financial statements present the historical results of SNI, the accounting acquirer, for the period January 1, 1999 through October 5, 1999. Results of operations for OFPI and OI are included with SNI from the October 6, 1999 Merger date forward. Number of shares outstanding 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 price, plus transaction costs of $918,700 (including $75,000 related to outstanding OFPI options), was recorded as follows: Total OFPI OI - -------------------------------------------------------------------------------- Receivables $ 1,636,800 $ 541,700 $ 1,095,100 Inventories 2,310,000 977,200 1,332,800 Prepaid 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 accrued liabilities (4,270,600) (3,012,500) (1,258,100) Related party notes (838,400) (497,200) (341,200) Goodwill 10,848,200 7,866,000 2,982,200 - -------------------------------------------------------------------------------- Total purchase, less $90,900 cash acquired $ 9,183,800 $ 6,198,400 $ 2,985,400 ================================================================================ Goodwill amortization charged to operations for 2000 and the post-merger period in 1999 was $909,600 and $217,600, respectively, 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, 1999. The pro-forma information gives effect to certain adjustments, including the amortization of goodwill. This pro-forma summary does not necessarily reflect Page 26 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. Year ended December 31, 1999 - -------------------------------------------------------------------------------- Net sales $ 42,905,000 Net loss (3,038,000) Weighted average shares outstanding 43,914,186 Basic and diluted loss per share (0.07) ============ 2. Plant Closure - ---------------- In May 2000, the Company committed to a plan to close its leased facility in Morgan Hill, California and transfer the production of the OFPI brands to a third-party co-packer. Production at the Morgan Hill facility ceased on July 21, 2000, however, the facility remains under lease while the Company completes the removal of its equipment and returns the facility to its condition on the date it was leased. Included in cost of sales for the year ended December 31, 2000 was a provision of $53,100 for severance and shutdown expenses associated with the closing of the facility. In addition, a loss of the disposal of property and equipment of $436,500 was recorded for losses incurred on the sale of equipment and the abandonment of leasehold improvements at the Morgan Hill facility. Depreciation of the Morgan Hill assets ceased as of July 31, 2000. 3. Accounts Receivable - ---------------------- Accounts receivable consisted of the following: December 31, 2000 1999 - -------------------------------------------------------------------------------- Trade $ 3,501,500 $ 4,038,000 Stockholder 20,000 13,700 Other 19,200 18,800 ----------- ----------- 3,540,700 4,070,500 Less allowance for doubtful accounts and customer adjustments 569,000 426,000 ----------- ----------- Net Accounts Receivable $ 2,971,700 $ 3,644,500 =========== =========== For 2000, the Company had one customer that accounted for approximately 29% of total net sales and approximately 22% of net trade accounts receivable at December 31, 2000. For 1999, the same customer accounted for approximately 19% of total net sales and approximately 17% of net trade accounts receivable at December 31, 1999. The loss of this customer would have a material adverse effect on the Company's operations and cash flows. During 2000, foreign sales comprised 10% of total sales volume, and approximately 2% of accounts receivable at December 31, 2000. Page 27 4. Inventories - -------------- Inventories consisted of the following: December 31, 2000 1999 - -------------------------------------------------------------------------------- Raw materials $ 1,130,300 $ 1,116,300 Finished goods 6,111,600 5,929,500 ------------ ----------- 7,241,900 7,045,800 Less: Provision for obsolete inventory 565,500 460,000 ------------ ----------- Net Inventories $ 6,676,400 $ 6,585,800 ============ =========== For 2000 and 1999, the Company had one supplier of raw materials that accounted for approximately 9% and 15%, respectively, of total purchases of raw materials and one supplier of processing (co-packer) that accounted for approximately 9% and 10%, respectively, of total cost of sales. At December 31, 2000 and 1999, approximately $542,000 and $472,000 of accounts payable was owed to these suppliers. 5. Property and Equipment - ------------------------- Property and equipment consisted of the following: December 31, 2000 1999 - -------------------------------------------------------------------------------- Machinery and equipment $ 3,995,600 $ 4,560,800 Furniture and fixtures 760,600 700,100 Leasehold improvements 215,000 400,500 Vehicles 146,200 146,200 ----------- ----------- 5,117,400 5,807,600 Less accumulated depreciation 1,862,500 1,759,100 ----------- ----------- Net Property and Equipment $ 3,254,900 $ 4,048,500 =========== =========== Depreciation expense was $504,200 and $372,800 for 2000 and 1999, respectively. As described in Note 2, the Company disposed of surplus bottling equipment at the closed Morgan Hill facility in November 2000. At the time of the disposal, the bottling equipment was included in machinery and equipment at a cost of $925,000, with accumulated depreciation of $286,500. In addition, leasehold improvements with a cost of $176,100 and accumulated depreciation of $97,500 at December 31, 2000 were abandoned and written-off. 6. Other Intangible Assets - -------------------------- Other intangible assets consisted of the following: December 31, 2000 1999 - -------------------------------------------------------------------------------- Trademarks $ 74,100 $ 74,100 Label development 80,800 80,800 Covenant-not-to-compete 76,500 76,500 -------- -------- 231,400 231,400 Less accumulated amortization 163,700 136,900 -------- -------- Net Other Intangible Assets $ 67,700 $ 94,500 ======== ======== Amortization expense was $26,800 and $63,900 for the years ending December 31, 2000 and 1999, respectively. Page 28
During 1999, the Company determined that certain labels had become obsolete due to label revisions. Accordingly, the Company wrote-off label development costs, net of accumulated amortization, of $95,000. 7. Research and Development - --------------------------- Research and development costs, which are included in general and administrative expenses, are expensed as incurred and totaled $99,800 and $215,200 for the years ended December 31, 2000 and 1999, respectively. 8. Line of Credit - ----------------- The Company has available a $9,000,000 revolving line of credit, subject to a borrowing base limitation based upon a percentage of eligible accounts receivable and inventory, bearing interest at prime plus 2% (11.5% at December 31, 2000), 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 $5,432,200 at December 31, 2000, and $4,938,000 at December 31, 1999. The credit line is secured 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, 2000 and 1999. The loan agreement requires compliance with certain financial covenants, which the Company was not in compliance with as of December 31, 2000 and as of the date of this report. 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 outstanding term loans due to WFBC totaling $798,800 at December 31, 2000 and $1,217,000 at December 31, 1999 have been classified as current liabilities on the balance sheet. 9. Notes Payable, Former Stockholder - ------------------------------------- Notes payable, former stockholder consisted of the following: December 31, 2000 1999 - ----------------------------------------------------------------------------------- Note payable with interest due monthly at an escalating rate ranging from 7.8% to 12% (currently at 12%). Principal is due in monthly installments of $25,000 through May 2000, $37,500 from June 2000 through November 2000, and $31,250 thereafter until paid in full. This note is secured by a collateral assignment of a life insurance policy on the majority stockholder and unissued shares of common stock in an amount equivalent to the unpaid principal and interest due under the note. This note is subordinated to the line of credit and all notes payable to the bank. $ 1,093,700 $ 1,475,000 Non-interest bearing, unsecured note due in one installment of $513,300 five years after the last principal payment on the above note payable, expected to be December 2007. Interest has been imputed at an effective annual interest rate of 10.75%. 242,700 212,100 ----------- ----------- Total Notes Payable - Former Stockholder 1,336,400 1,687,100 Less current maturities 375,000 381,200 ----------- ----------- Long-term Portion of Notes Payable - Former Stockholder $ 961,400 $ 1,305,900 =========== =========== Page 29
Maturities or payments required on principal under notes payable-former stockholder for each of the succeeding years are as follows: Year ending December 31, - -------------------------------------------------------------------------------- 2001 $ 375,000 2002 375,000 2003 343,700 2004 -- 2005 -- Thereafter 242,700 ----------- Total Notes Payable - Former Stockholder $ 1,336,400 =========== 10. Notes Payable and Capital Lease Obligations - ----------------------------------------------- Notes payable and capital lease obligations consisted of the following: December 31, 2000 1999 - -------------------------------------------------------------------------------- Senior Notes: Notes payable to bank, due in monthly principal installments of $22,400 plus interest at prime plus 2.25% (11.75% at December 31, 2000). These notes are secured by substantially all assets of the Company (a) $ 798,800 $ 1,217,000 Subordinated Notes: Private placement notes, unsecured, principal was originally due March 31, 2000, plus interest at the default rate of 15%, net of unamortized original issue discount at December 31, 1999 of $55,200 (b) 420,000 344,800 Capital lease obligations secured by property and equipment (c) 244,000 215,300 ----------- ----------- Total Notes Payable and Capital Lease Obligations 1,462,800 1,777,100 Less current maturities 1,312,900 1,622,400 ----------- ----------- Long-term Portion of Notes Payable and Capital Lease Obligations $ 149,900 $ 154,700 =========== =========== (a) On October 6, 1999, the Company entered into a $11,717,000 credit facility with WFBC which provided (1) two term loans for $150,000 and $1,067,000 with payment terms of 18 months and 60 months respectively; (2) a revolving line of credit of up to $9,000,000 (see Note 8); and (3) a capital expenditure credit line of up to $1,500,000. Only $276,100 of the capital expenditure line was utilized and was being paid via monthly principal payments of $4,600 plus interest over 60 months, beginning August, 2000. A portion of the proceeds from the term loan was used to pay previously existing notes with the Company's former lender. Because the Company was not in compliance with certain loan covenants (Note 8), the entire balance has been classified as a current liability. In November 2000, the Company completed the sale of surplus bottling equipment to the third-party co-packer of its pasta sauce and salsa product lines for cash consideration of $380,000 plus future credits against production costs. Since a portion of the original term loans from WFBC of $1,217,000 were secured by the bottling equipment, the Company paid down the term loans by $318,600. Page 30 (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 private placement included a $25,000 note plus warrants to purchase 10,000 shares of SPOP 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 was amortized to interest expense over the six month base term of the notes (October 1, 1999 - March 31, 2000). 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 net amount of $1,000,000 or more. As provided for in the private placement, since the notes were not repaid by March 31, 2000, the accrued interest at that date of $20,000 has been added to the principal, the interest rate has increased to 15%, and an additional 240,000 common stock warrants to purchase SPOP stock at $.01 per share from October 1, 2000 to March 31, 2001 were granted. The resulting $118,700 value of the warrants was included in interest expense for the twelve months ended December 31, 2000. Also included in interest expense for that period is $47,300 of interest paid to the private placement note holders at the default interest rate for the period April 1, 2000 through December 31, 2000. In February 2001, the Company attempted to clear the default by offering the private placement note holders the option of converting their notes to equity at a discounted price to the market value of SPOP stock, or a three year payment schedule calling for interest only during 2001, with principal and interest thereafter, plus common stock purchase warrants, retroactive to October 1, 2000, equal to 10% of the outstanding principal, at the closing bid price of SPOP stock at each quarter-end until the note is retired. As of March 26, 2001, two note holders representing $52,500 of the outstanding principal had elected the conversion to equity, three note holders representing $65,600 of the outstanding principal had elected the payment schedule with common stock purchase warrants, and seven had not yet made a choice. For those note holders who select the conversion to common stock, non-cash interest expense will be recorded for the beneficial pricing effect upon conversion. For those note holders who select the payment schedule with common stock purchase warrants, additional non-cash interest expense will be recorded for the value of the warrants. (c) The cost of assets securing the capital lease obligations was $386,500 and $356,800 at December 31, 2000 and 1999, respectively, with accumulated amortization of $127,500 and $116,300 at December 31, 2000 and 1999, respectively. Future minimum lease payments for equipment under capital lease agreements are as follows: Year ending December 31, - -------------------------------------------------------------------------------- 2001 $116,400 2002 78,200 2003 49,800 2004 33,200 2005 and thereafter 15,500 -------- Total Future minimum lease payments 293,100 Less amounts representing interest at rates from 7% to 13.5% 49,100 -------- Present value of minimum lease payments 244,000 Less current maturities 94,100 -------- Long-term portion of present value of minimum lease payments $149,900 ======== Page 31 11. Notes Payable to Stockholders - --------------------------------- Notes payable to stockholders consisted of the following: December 31, 2000 1999 - -------------------------------------------------------------------------------- Unsecured notes, payable $8,600 monthly, including principal and interest at 10% per annum (a) $276,100 $427,800 Unsecured notes, payable $8,500 monthly including principal and interest at 10% per annum 171,900 204,200 Unsecured note, assumed in conjunction with the Merger, payable $7,100 monthly including principal and interest at 10% per annum -- 80,000 -------- -------- Total Notes Payable to Stockholders 448,000 712,000 Less current maturities 110,800 288,600 -------- -------- Long-term Portion of Notes Payable-Stockholders $337,200 $423,400 ======== ======== (a) During January 2001, these stockholders agreed to revised payment schedules in connection with their notes, in an effort to assist the Company with its working capital and liquidity issues. The stockholders agreed to reduce the monthly payments of principal and interest due under the notes by approximately one-half. Accordingly, monthly principal and interest payments were reduced from $17,400 to $8,600 effective January 2001. Aggregate maturities or principal payments required on notes payable to stockholders, including the revisions referred to above, are as follows: Year ending December 31, - -------------------------------------------------------------------------------- 2001 $110,800 2002 121,200 2003 87,700 2004 87,600 2005 40,700 -------- Total Notes Payable to Stockholders $448,000 ======== 12. Income Taxes and Deferred Income Taxes - ------------------------------------------ Income tax expense consisted of the following: Years ended December 31, 2000 1999 - -------------------------------------------------------------------------------- Current: Federal $ (1,400) $ 130,600 State 5,300 23,600 --------- --------- Subtotal Current 3,900 154,200 --------- --------- Deferred: Federal -- (45,100) State -- (12,800) --------- --------- Subtotal Deferred -- (57,900) --------- --------- Total Income Tax Expense $ 3,900 $ 96,300 ========= ========= Page 32 A reconciliation of the federal statutory rate to the tax provision of the corresponding years follows: Years ending December 31, 2000 1999 - -------------------------------------------------------------------------------- Tax benefit at effective federal statutory rate $ (679,500) $ (5,800) Goodwill amortization 309,300 77,300 Other non-deductible expense 21,200 18,600 State income tax expense, net of effect on federal 22,200 7,100 Valuation allowance 324,100 -- Other 6,600 (900) ----------- --------- Total Income Tax Expense $ 3,900 $ 96,300 =========== ========= Deferred tax assets and liabilities consisted of the following: December 31, 2000 1999 - -------------------------------------------------------------------------------- Deferred Tax Assets: Federal net operating loss carryovers $ 2,372,600 $ 2,230,800 Goodwill amortization and write-down 809,700 904,200 Inventory allowances 231,300 169,800 Accounts receivable allowances 193,500 144,800 Accrued compensation 57,600 104,300 State income taxes 363,800 330,500 Other 112,600 33,300 ----------- ----------- Gross Deferred Tax Assets 4,141,100 3,917,700 Deferred Tax Liabilities: Depreciation and fixed asset write-down (171,800) (221,900) ----------- ----------- Net deferred tax assets 3,969,300 3,695,800 Valuation allowance (3,969,300) (3,695,800) ----------- ----------- Net deferred tax assets $ -- $ -- =========== =========== As a result of the reverse acquisition, OI, SNI and SCI 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. OI, SNI and SCI all filed final federal and state income tax returns for the period ended October 5, 1999. As of December 31, 2000, the Company has federal net operating loss carryforwards (NOLS) totaling approximately $6,900,000 that expire at various times through 2020. For state purposes, the Company has net operating loss carryforwards totaling approximately $1,800,000, which expire at various times through 2010. In addition, the Company has approximately $77,000 of state manufacturing investment tax credit carryforwards that expire in varying amounts through 2015. 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 is placed upon the Company's ability to realize the benefit of the pre-merger NOLS. In part because of this limitation, 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 was recorded in 1999 and maintained for 2000. The amount of the valuation allowance has increased from 1999 to 2000 by $273,500 primarily due to an increase in the net deferred tax assets, resulting primarily from increases in federal NOLS. Approximately $3,300,000 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. Page 33
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 Management, and totaled $40,400 and $13,900, for 2000 and 1999, respectively. 14. Stock Options - ----------------- Prior to the Merger discussed in Note 1, SNI had an Equity Incentive Plan, under which options were granted to one officer in 1998. Those options 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 (the "1995 Plan"). Because OFPI is the surviving legal entity, SNI's existing options were absorbed into the 1995 Plan and restated at their equivalent number of shares and strike price using the Merger conversion ratio (see Note 1), and the SNI Equity Incentive Plan was discontinued. In August 2000, the Company amended the 1995 Plan by filing an S-8 Registration Statement with the SEC which amended the 1995 Plan name to Spectrum Organic Products, Inc. and increased the aggregate number of shares of common stock which could be issued under the 1995 Plan from 625,000 shares to 4,500,000 shares. Under the amended 1995 Plan, the 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 years for employees and directors (the existing SNI options retained their three-year vesting period). The following summarizes the activity under the 1995 Plan for the years ended December 31, 2000 and 1999: 2000 1999 -------------------- -------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - ----------------------------------------------------------------------------------------- Outstanding, beginning of year 1,380,515 $ 0.59 840,515 $ 0.32 Granted-employees and directors 1,157,200 0.44 -- -- OFPI options assumed in the Merger -- -- 625,000 1.19 Canceled or expired (527,600) 0.93 (85,000) 2.39 --------- ------ --------- ------ Outstanding, end of year 2,010,115 $ 0.41 1,380,515 $ 0.59 ========= ====== ========= ====== Options exercisable at year end 627,289 $ 0.39 433,317 $ 0.86 ========= ====== ========= ====== Weighted average fair value of options granted during the year $ 0.43 -- ====== ====== The following table discloses exercise prices and remaining lives of options outstanding or exercisable as of December 31, 2000: Page 34
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 12/31/00 Life (Years) Price at 12/31/00 Life (Years) Price - ----------------------------------------------------------------------------------------- $0-$0.50 1,988,115 9.0 $ 0.39 607,039 7.8 $ 0.32 $0.50-$2.50 22,000 7.2 2.50 20,250 7.2 2.50 - ----------------------------------------------------------------------------------------- $0-$2.50 2,010,115 9.0 $ 0.41 627,289 7.8 $ 0.39 - ----------------------------------------------------------------------------------------- All stock options issued to employees have an exercise price not less than the fair market value of the Company's common stock on the date of grant. In accordance with the accounting for such options utilizing the intrinsic value method, there is no related compensation expense recorded in the Company's financial statements. Had compensation cost for stock-based compensation been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net loss and loss per share for the years ended December 31, 2000 and 1999, 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 result of the Merger (see Note 1): Years ended December 31, 2000 1999 - -------------------------------------------------------------------------------- Net loss: As reported $ 2,002,300 $ 113,300 Pro-forma $ 2,082,100 $ 182,300 Basic and diluted loss per share: As reported $ 0.05 $ 0.00 Pro-forma $ 0.05 $ 0.00 =========== ========== The fair value of option grants for 2000 was estimated on the date of grant utilizing the Black-Scholes option-pricing model, with the following assumptions: expected life of five years, risk-free interest rate of 5.0%, no dividend yield and volatility of 214%. There were no options granted in 1999. The incremental value of outstanding OFPI options assumed as a result of the Merger was included in the purchase consideration (see Note 1). 15. Stock Warrants - ------------------ In conjunction with the Merger, the Company assumed outstanding warrants of OFPI totaling 590,656. At December 31, 2000 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 common stock purchase warrants with an exercise price of $.01 per share plus an additional 240,000 warrants at the same exercise price as a result of the default under the notes. The following details the outstanding warrants at December 31, 2000: Page 35
Number Exercise Expiration Outstanding Price Date - -------------------------------------------------------------------------------- Warrants assumed from OFPI 200,000 $ 2.00 12/31/2002 Warrants assumed from OFPI 60,656 2.63 2/11/2003 Warrants assumed from OFPI 130,000 4.00 8/11/2002 - -------------------------------------------------------------------------------- 390,656 Warrants issued in connection with the private placement (Note 10) 217,500 $ 0.01 3/31/2001 - -------------------------------------------------------------------------------- Total Warrants Outstanding 608,156 ================================================================================ As of March 21, 2001, all of the warrants issued in connection with the private placement had been exercised except 15,000 warrants outstanding with one note holder. 16. 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. Total monthly rental payments for these leases approximate $39,400. The Company also rents office equipment under operating leases that expire at various times through 2005 with monthly lease payments approximating $3,300. Rental expense for 2000 and 1999 totaled $578,800 and $303,500, 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, - -------------------------------------------------------------------------------- 2001 $ 446,700 2002 133,000 2003 43,100 2004 11,700 2005 9,900 --------- $ 644,400 ========= 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. Included in accrued expenses were royalties of $66,800 and $49,400 as of December 31, 2000 and 1999, respectively related to these agreements. Royalty expense included in cost of sales under these agreements for the years ended December 31, 2000 and 1999 was $176,200 and $199,800, respectively. Page 36 Litigation and Settlements - -------------------------- In 1998, Global Natural Brands, Ltd. ("Global"), a firm that had provided management consulting services for OFPI, filed suit alleging unpaid wages and seeking money damages and injunctive relief. In April 2000, a settlement was reached with this firm (which is also a stockholder), and in August 2000, as a result of the settlement, the case was dismissed. Under the terms of the settlement and release, SPOP will pay Global a total cash consideration of $145,000 (payable $25,000 upon execution of the agreement by Global plus twelve equal monthly payments of $10,000), and issue 400,000 shares of SPOP stock, which were valued at the closing market price of SPOP stock on the date of settlement. In addition, SPOP will issue to Global stock options to purchase 225,000 common shares at $2.25 per share over an option term that expires on October 31, 2002. The options have not been issued due to ongoing discussions with Global concerning language to be included in the stock option agreement regarding the subsequent sale or merger of the Company. In anticipation of issuing the options, the Company has accrued the estimated fair value of $27,400 at December 31, 2000. The issuance of shares and the adjustment of the liability for the cash consideration were recorded in 2000 as a net charge to goodwill of $187,600, since the litigation preceded the Merger. As of December 31, 2000, $105,000 of the cash consideration had been paid to Global. In February 1998, OFPI acquired the natural fruit juice and water bottling operations of Sunny Farms Corporation for cash and common stock. A portion of the common stock consideration was held in escrow, contingent upon earn-out calculations for the year following the acquisition. Sunny Farms sought voluntary relief pursuant to chapter 7 of the U.S. Bankruptcy Code in November, 1998. A Trustee was duly appointed shortly thereafter to protect the chapter 7 estate of Sunny Farms. In October 2000, attorneys for the Trustee filed a complaint against the Company in the U.S. Bankruptcy Court for the Northern District of California requesting that a portion of the common stock held in escrow be released. An estimated accrual of $100,000 for common shares to be released is included in accrued expenses at December 31, 2000, which represents Management's best estimate of the outcome. The shares have not been released, however, due to a dispute with the Trustee regarding the earn-out calculations. Management is currently in negotiation with the Trustee and believes that the outcome will not have a material effect upon the Company's financial position, results of operations or cash flows upon settlement. In October 2000, the Company was notified by counsel for GFA Brands, Inc. that nutritional claims pertaining to Spectrum Naturals Organic Margarine were infringing upon two patents issued in the United States that pertain to particular fat compositions suitable for human ingestion. Each of these patents was exclusively licensed to GFA Brands by the patent holder. Management believes that its product does not infringe upon either patent, and further, that the patents are unenforceable in any case. Management has engaged legal counsel that specialize in this area and received an opinion letter in February 2001 confirming that, in the opinion of counsel, the manufacture or sale of Spectrum Naturals Organic Margarine does not infringe upon the GFA patents, either literally or under the doctrine of equivalents. Management believes it has meritorious defenses, therefore, no provision for loss has been recorded at December 31, 2000. Management intends to continue to vigorously defend its position, and believes that the final outcome will not have a significant effect upon the Company's financial position, results of operations or cash flows. 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, 2000, these future commitments, which are at prices not in excess of those currently obtainable or in quantities in excess of normal requirements, aggregated approximately $5,100,000. Page 37 In addition to the commitments above in the ordinary course of its business, the Company had one contract for quantities of sunflower oil which exceeds the Company's needs. The supplier is in the process of liquidating the Company's unfulfilled purchase commitment at current market prices for sunflower oil, which are lower than the contract purchase price. Accordingly, the Company has accrued a reserve for anticipated losses under the contract of $70,000 at December 31, 2000. Liquidity - --------- At December 31, 2000, the Company had negative working capital and was in technical default of certain financial loan covenants with its primary lender, Wells Fargo Business Credit ("WFBC"). As a result of the default, WFBC has assessed an additional 100 basis points to the interest rates charged under the revolving line of credit and the term debt effective July 17, 2000. Management is currently in negotiations with WFBC to establish new financial covenants and believes that upon completion of those negotiations, the Company will be back in compliance. Furthermore, as of April 1, 2000 the Company is in default under the subordinated promissory notes issued under a private placement to close the Merger. As a result of the default, the interest rate under the notes was increased from 10% to 15%, and 240,000 additional common stock warrants to purchase SPOP common stock at $0.01 per share were granted. The resulting $118,700 value of the warrants was included in interest expense during 2000. In February 2001, the Company attempted to clear the default by offering the private placement note holders the option of converting their notes to equity at a discounted price to the market value of SPOP stock, or a three year payment schedule calling for interest only during 2001, with principal and interest thereafter, plus common stock purchase warrants, retroactive to October 1, 2000, equal to 10% of the outstanding principle, at the closing bid price of SPOP stock at each quarter-end until the note is retired. As of March 26, 2001, two note holders representing $52,500 of the outstanding principal had elected the conversion to equity, three note holders representing $65,600 of the outstanding principal had elected the payment schedule with common stock purchase warrants, and seven had not yet made a choice. For those note holders who select the conversion to common stock, non-cash interest expense will be recorded for the beneficial pricing effect upon conversion. For those note holders who select the payment schedule with common stock purchase warrants, additional non-cash interest expense will be recorded for the value of the warrants. The Company is highly leveraged and is currently seeking additional working capital from various sources such as the sale of certain product lines and the issuance of common stock. Management believes that the proceeds from the new sources of working capital, if obtained, should provide adequate funds to meet the Company's estimated cash requirements for the foreseeable future. However, there can be no assurances that new sources of working capital will be available on acceptable terms. The majority shareholder, who holds approximately 70% of the outstanding common stock of the Company, has represented that he has the intent and ability to support the operations of the Company with additional funding for the next fiscal year, if necessary. 17. Related Party Transactions - ------------------------------- The Company paid interest at 10% under notes payable to two stockholders of $33,500 and $7,500 during the years ended December 31, 2000 and 1999, respectively. Additionally, the Company paid interest at 10% under notes payable to two stockholders who are also executives of the Company of $23,600 and $8,100 during the years ended December 31, 2000 and 1999, respectively. The Company paid consulting fees of $45,000 and $30,000 during the years ended December 31, 2000 and 1999, respectively, for management advisory services rendered by Moore Consulting, a firm owned and operated by Phillip Moore, a non-executive director of the Company. Page 38 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING - -------------------------------------------------------------------------------- AND FINANCIAL DISCLOSURE - ------------------------ As noted in Item 1, the Merger was accounted for as a reverse acquisition with SNI as the accounting acquirer and OFPI (the former Registrant) as the surviving legal entity. Following the Merger, the Company appointed BDO Seidman, LLP (OFPI'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 auditor or with respect to any events required to be reported. Moss Adams, LLP, was SNI's independent auditor 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 P. Phillips 50 Chief Executive Officer & Chairman 10/6/99 of the Board (2) Neil G. Blomquist 49 President - Consumer Brands Division 10/6/99 Joseph J. Stern 48 President - Industrial Division 10/6/99 John A. Battendieri 54 Vice President - Business 10/6/99 Development, Director Hubert H. Holcombe 57 Vice President - Operations 11/29/99 Robert B. Fowles 45 Chief Financial Officer 6/26/00 Phillip L. Moore 51 Director (1)(2) 10/6/99 Charles A. Lynch 73 Director (1)(2) 4/1/00 Thomas B. Simone 59 Director (1)(2) 12/15/00 (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Page 39 Directors hold office for a period of one year from their election at the annual meeting of shareholders or until their successors are duly elected and qualified. Officers of the Company are elected by, and serve at the discretion of, the Board of Directors. Background The following is a brief summary of the business experience of each executive officer and director of the Company for at least the last five years: Jethren 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 to 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 worked in the natural products industry since 1976. 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. 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. Hubert Holcombe is Vice President/Operations for Spectrum Organic Products, Inc. Mr. Holcombe joined Spectrum in November, 1999, bringing over thirty years of experience in food manufacturing. Prior to joining Spectrum, Mr. Holcombe was Chief Operations Officer for Amy's Kitchen from April 1999 to November 1999. From September 1998 to March 1999, Mr. Holcombe served as Executive Vice President and General Manager of Arrowhead Mills, Inc. and as Vice President, Manufacturing and Distribution for twelve years prior to that. He received his Bachelor of Science degree in Industrial Engineering from the University of Arkansas. Robert Fowles joined Spectrum as Chief Financial Officer in June 2000 and brings over twenty years of financial expertise in packaged consumer products. From June 1999 until June 2000, Mr. Fowles was CFO of Cedco Publishing Company, a privately held publisher of books, calendars and CD ROMS. Prior to that, Mr. Fowles served for 19 years in various capacities within the food and beverage businesses of Diageo, PLC, the last seven of which as CFO of Heublein Wines Group. Mr. Fowles is a Certified Public Accountant and received a Bachelor of Science degree in Business Administration from the University of Connecticut. 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 of experience 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 40
Charles Lynch became a Director on April 1, 2000 and is Chairman of Marketing Partners Company, a management and advisory source for existing and emerging businesses. He has had executive management responsibility for 70-plus companies, primarily in consumer related businesses, and has been a director of over 20 major corporations. Mr. Lynch received his Bachelor of Science Degree from Yale University and an Honorary Degree of Doctors of Law from Golden Gate University. Thomas Simone has been a Director of the Company since December 2000, and is the principal of Simone & Associates, a management and advisory firm that invests in and consults with healthcare and natural products companies. Mr. Simone also serves as Chairman of the Board of United Natural Foods, Inc., the largest distributor of natural products in the industry. Prior to forming Simone & Associates, Mr. Simone was President of McKesson Drug Company, America's largest pharmaceutical wholesaler. During his twenty-year career with McKesson, Mr. Simone also served as Vice President of Finance for McKesson Corporation, Executive Vice President of PCS Health Systems, and Vice President & Controller. Mr. Simone holds Bachelor of Science and Master of Business Administration degrees from DePaul University. 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, 2000, with four exceptions: The initial reports on Form 3 for Mr. Holcombe, Mr. Lynch and Mr. Fowles were filed late, however, had they been filed on time, they would merely have indicated that there was no beneficial ownership of securities or derivative securities of the Company. Additionally, the final Form 4 for Mr. Bacigalupi, the Company's former CFO, indicating that he is no longer subject to Section 16 filing obligations, was also filed late. ITEM 10. EXECUTIVE COMPENSATION - -------------------------------- The following table sets forth the annual compensation awarded or paid by SPOP during the fiscal years ended December 31, 2000 and 1999 for the Company's Chief Executive Officer and the five other most highly compensated officers whose annual salary and bonus exceeded $100,000 in fiscal 2000 and 1999 (hereinafter, the "Named Executive Officers"). Summary Compensation Table Annual Compensation ------------------------------------------------------ Other Securities Fiscal Compen- Underlying Principal Position Year Salary($) Bonus($) sation($) Options - ------------------ ---- --------- -------- --------- ------- Jethren Phillips (1) 2000 $ 240,000 $ -- $ 11,500 -- Chief Executive Officer 1999 $ 237,500 $ 57,800 $ 11,000 -- Neil Blomquist (2) President,Consumer 2000 $ 150,000 $ -- $ 5,000 50,000 Brands 1999 $ 149,100 $ 27,300 $ 5,100 -- Joseph Stern (3) President, 2000 $ 150,000 $ -- $ 11,400(4) 50,000 Industrial Ingredients 1999 $ 107,500 $ 67,300 $ 46,400(4) -- John Battendieri (5) Vice President, 2000 $ 127,000 $ -- $ 19,700(4) 50,000 Business Development 1999 $ 109,300 $ -- $ 45,600(4) -- Pete Holcombe (6) 2000 $ 120,000 $ -- $ -- 250,000 Vice President, 1999 $ 5,900 $ -- $ -- -- Operations Page 41
(1) Mr. Phillips was Chief Executive Officer of SNI and President of SCI during 1999 until October 6, 1999, when he became Chief Executive Officer of SPOP. (2) Mr. Blomquist was President and Chief Operating Officer of SNI during 1999 until October 6, 1999, when he became President of SPOP's Brand Division. (3) Mr. Stern was President of OI during fiscal 1999 until October 6, 1999, when he became President of SPOP's Industrial Division. (4) Includes interest income from shareholder's note. (5) Mr. Battendieri was President of OFPI during fiscal 1999 until October 6, 1999, when he became Vice President, Business Development for SPOP. (6) Mr. Holcombe was appointed Vice President - Operations on November 29, 1999. Under new arrangements which began January 1, 2001, the Company's non-executive directors have the choice of annual cash compensation of $10,000 and 25,000 stock options at the market price on the date of grant with a four year vesting schedule, or 100,000 stock options at the market price on the date of grant, with one-third vested immediately and the remainder vesting ratably over two years. Under either choice, non-executive directors will be reimbursed for out-of-pocket expenses incurred in attending Board meetings. During February 2001, Mr. Lynch and Mr. Moore elected to receive the Board fees for 2000 due to them of $10,000 each in restricted shares of SPOP common stock in a transaction approved by the Company's disinterested Board members. The shares were issued at $.3125 per share, the closing price of the Company's common stock as quoted on the NASDAQ OTC Bulletin Board system on the date the Board approved the transaction. 1995 Stock Option Plan In November 1995, OFPI adopted a stock option plan (the "1995 Plan") which provides for the grant of stock options intended to qualify as "incentive stock options" or "nonqualified stock options" within the meaning of Section 422 of the United States Internal Revenue Code of 1986. Incentive stock options are issuable only to eligible officers, and key employees of the Company. The 1995 Plan is administered by the Board of Directors. As a result of the Merger, the 1995 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. 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 1998 Equity Incentive 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 Page 42 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 or 90 days after employment termination, whichever is longer. 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 90 days after an optionee ceases 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, 2000, 2,010,115 stock options were outstanding under the 1995 Plan for officers, directors and employees (1,540,515 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 officers named below for the year ended December 31, 2000. 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 2000 Price Date ------- ------- ----- ---- John Battendieri 50,000 4.6% $0.4375 November 21, 2010 Neil Blomquist 50,000 4.6% $0.4375 November 21, 2010 Joseph Stern 50,000 4.6% $0.4375 November 21, 2010 Pete Holcombe 250,000 23.1% $0.4375 November 21, 2010 All options vest ratably over a four-year period beginning November 21, 2000. The following table sets forth the number of shares underlying outstanding options at December 31, 2000 and their related value: Number of Securities Value of Unexercised Underlying Unexercised In-the-money Options at December 31, 2000 Options at December 31, 2000 ---------------------------- ---------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Neil Blomquist 607,039 283,476 $198,800 $ 92,800 John Battendieri -- 50,000 -- -- Joseph Stern -- 50,000 -- -- Pete Holcombe -- 250,000 -- -- 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 December 31, 2000, 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 Page 43 group. All shares are owned beneficially and of record. The address of all persons 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 70.9% John Battendieri (2) 4,077,499 9.2 Joseph Stern (2) 1,975,000 4.4 Neil Blomquist (3) 817,168 1.8 Phillip Moore (4) 224,013 * ----------- ----- All officers and directors as a group (9 persons) 38,613,008 86.8% =========== ===== * 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 817,168 shares issued in connection with the Merger. (4) Includes 176,013 shares paid to Moore Consulting upon completion of the Merger. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- In connection 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 $138,100, of which $58,000 was paid. The two assumed notes were then replaced with a new $80,100 note payable equally over 12 months beginning January 15, 2000, plus interest at 10%. As of December 31, 2000, the new note was fully paid. Additionally, Mr. Battendieri held a promissory note for a capital loan made to Organic Ingredients, which had a balance due as of October 6, 1999 of $102,000. As a result of the Merger, the Company also assumed this note. The note is being amortized over 60 months, with interest at 10%. During 2000, the Company made payments of $23,900 to Mr. Battendieri representing principal and interest payments under the note. Also in connection with the Merger, the Company assumed a promissory note held by Mr. Stern for the advance of funds to Organic Ingredients. At October 6, 1999 the outstanding balance due including principal and interest was $110,400. The note is being amortized over 60 months, with interest at 10%. During 2000, the Company made payments of $25,800 to Mr. Stern representing principal and interest payments under the note. 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 in October 1999. Each Unit consisted of a $25,000 unsecured and subordinated promissory note bearing interest at 10%, plus warrants to purchase 10,000 shares of common stock at $.01 per share from January 1, 2000 to September 30, 2000. Net proceeds of approximately $370,000 were received, after offering expenses of approximately $30,000. Several of the investors in the Units were already share/warrant holders of the Company. The Company has retained Moore Consulting Company for consulting and management advisory services. Moore Consulting is operated as a sole proprietorship by Phillip Moore, a non-executive Director of the Company. During 2000, the Company made payments of $45,000 to Moore Consulting Company for management advisory services. Page 44 In February 2001 Thomas Simone, a non-executive Director of the Company, purchased 160,000 shares of SPOP restricted common stock in a transaction approved by the Company's Board of Directors. The shares were purchased at $.3125 per share, the closing price of the Company's common stock as quoted on the NASDAQ Over the Counter Bulletin Board system on the date the Board approved the transaction. In addition to the shares purchased, the Company issued common stock purchase warrants to Mr. Simone for an additional 160,000 shares at the same price, which expire five years from the date issued. The Company 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 Representatives' Warrant (1) 1.02 Form of Amended Representatives' Warrant (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 Form of Amended and Restated Articles of Incorporation of Spectrum Organic Products, Inc. (4) 3.02 Bylaws of the Registrant (1) 10.01 Office and Warehouse Lease (Morgan Hill, California) (1) 10.02 Employment Agreement with Mr. Battendieri (1) 10.03 Merger Agreement between the Registrant (Garden Valley Naturals, Inc.) and Organic Food Products, Inc. (1) 10.04 Loan Agreement with Mr. Steel (1) 10.05 Stock Redemption Agreement with Messrs. Nicholson and Reedy (1) 10.06 Settlement Agreement with Mr. Nicholson (1) 10.07 First Amendment to Stock Redemption Agreement (1) 10.08 Amendment to Promissory Notes issued to Messrs. Nicholson and Reedy (1) 10.09 Form of Subscription Agreement, Promissory Note and Warrant for Bridge Loan (1) 10.10 1995 Stock Option Plan (3) 10.11 Incentive Stock Option Agreement (3) 10.12 Non-qualified Stock Option Agreement (3) 10.13 Agreement and Plan of Merger and Reorganization dated May 14, 1999 by and between Organic Food Products, Inc and Organic Ingredients, Inc. (4) 10.14 Agreement and Plan of Merger and Reorganization dated May 14, 1999 by and between Organic Food Products, Inc. and Spectrum Naturals, Inc. (4) 10.15 Form of Organic Food Products, Inc. Employment Agreement (4) 10.16 Form of Organic Food Products, Inc. Shareholder Lock-up Agreement (4) 10.17 Form of Voting Agreement dated May 14, 1999 between Spectrum Naturals, Inc. and certain shareholders of Organic Food Products, Inc. (4) 10.18 October 6, 1999 Credit and Security Agreement by and between Organic Food Products, Inc., Organic Ingredients, Inc., Spectrum Naturals, Inc. and Spectrum Commodities, Inc. and Wells Fargo Business Credit, Inc. (5) 10.19 September 23, 1999 Private Placement Memorandum by Organic Food Products, Inc. (5) Page 45 10.20 Settlement Agreement and Mutual Release dated November 12, 1999 by and between Spectrum Organic Products, Inc. and Global Natural Brands, Ltd. 10.21 Subordination Agreement dated October 6, 1999 by and between Debora Bainbridge Phillips and Wells Fargo Business Credit, Inc. 10.22 Fifth Amendment to Redemption Agreement dated October 6, 1999 by and between Spectrum Naturals, Inc., Organic Food Products, Inc., Jethren Phillips and Debora Bainbridge Phillips. 10.23 Fourth Amendment to Redemption Agreement dated July 12, 1999 by and between Spectrum Naturals, Inc., Jethren Phillips and Debora Bainbridge Phillips. 10.24 Third Amendment to Redemption Agreement dated July 9, 1999 by and between Spectrum Naturals, Inc., Jethren Phillips and Debora Bainbridge Phillips. 10.25 Second Amendment to Redemption Agreement dated July 2, 1999 by and between Spectrum Naturals, Inc., Jethren Phillips and Debora Bainbridge Phillips. 10.26 First Amendment to Redemption Agreement dated September 11, 1998 by and between Spectrum Naturals, Inc., and Debora Bainbridge Phillips. 10.27 Redemption Agreement dated November 1, 1996 by and between Spectrum Naturals, Inc. and Debora Bainbridge Phillips. 10.28 Guaranty Agreement dated June 6, 1997 by and between Spectrum Naturals, Inc., Debora Bainbridge Phillips and Jethren Phillips. 10.29 Pledge Agreement dated June 6, 1997 by and between Spectrum Naturals, Inc., Debora Bainbridge Phillips and Richard W. Abbey, Attorney at Law. 10.30 Promissory Note dated June 6, 1997 by and between Spectrum Naturals, Inc. and Debora Bainbridge Phillips. 10.31 Settlement Agreement and Release dated March 28, 1999 by and between Spectrum Naturals, Inc. and Nimbus Publications, Inc. 10.32 Assignment of Food Processing and Packing Credit Agreement dated November 27, 2000 by and between Triple H Food Processors, Inc. and Tri H Investors to Spectrum Organic Products, Inc. 10.33 Agreement for Purchase and Sale of Fixtures dated November 27, 2000 by and between Spectrum Organic Products, Inc. and Tri H Investors. 10.34 Letter dated February 16, 2001 from Spectrum Organic Products, Inc. to the note holders under the private placement completed on October 6, 1999, offering them the option of converting their notes, which are in default, to equity or a new note with a three year payment schedule with interest at 10% and common stock purchase warrants. (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 8-K on February 25, 1998. (3) Incorporated by reference to exhibits filed with the Registrant's Form S-8 on August 30, 2000. (4) Incorporated by reference to annexes filed with the Registrant's Joint Proxy Registration Statement on Form S-4, File No. 333-83675, declared effective July 30, 1999. (5) Incorporated by reference to exhibits filed with the Registrant's Form 10-KSB on October 13, 1999. (b) Reports on Form 8-K during the quarter ended December 31, 2000: None. Page 46 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 Petaluma, California, on March 30, 2001. Spectrum Organic Products, Inc. By: /s/ Robert B. Fowles --------------------------------------- Robert B. Fowles Chief Financial Officer In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Jethren P. Phillips Chief Executive Officer and 3-30-01 - ----------------------------- Chairman of the Board JETHREN P. PHILLIPS /s/ Robert B. Fowles Chief Financial Officer 3-30-01 - ----------------------------- ROBERT B. FOWLES /s/ Larry D. Lawton Controller (Principal Accounting 3-30-01 - ----------------------------- Officer) LARRY D. LAWTON /s/ John R. Battendieri Director 3-30-01 - ----------------------------- JOHN R. BATTENDIERI /s/ Charles A. Lynch Director 3-30-01 - ----------------------------- CHARLES A. LYNCH /s/ Phillip L. Moore Director 3-30-01 - ----------------------------- PHILLIP L. MOORE /s/ Thomas B. Simone Director 3-30-01 - ----------------------------- THOMAS B. SIMONE Page 47 EX-10.20 2 0002.txt SETTLEMENT AGREEMENT AND MUTUAL RELEASE Exhibit 10.20 SETTLEMENT AGREEMENT AND MUTUAL RELEASE --------------------------------------- This Agreement is made and entered into effective November 12, 1999, by and between Spectrum Organic Products, Inc., a California corporation, John Battendieri, Charles Bonner, Charles Dyer and Ken Steel (collectively "SOPI") and Global Natural Brands, Ltd., an Illinois corporation, James, F. Swallow, David O'Gorrnan, J. Bradley Barbeau and Ronald Baisbaugh (collectively "Global") (SOPI and Global will be collectively "the parties"). RECITALS -------- This Agreement is entered into with reference to the following facts: A. On October 26, 1998, Global filed a complaint against SOPFs predecessor-in-interest. Organic Food Products, Inc., in Santa Clara County Superior Court, entitled Global Natural Brands, Ltd., et al. v. Organic Food Products, Inc., et al., and assigned civil case No. CV-777541, alleging breach of contract, among other causes of action, in connection with the May 8, 1998 Management Services Agreement (the "MSA"). Global amended the complaint on January 4, 1999. On May 18, 1999, SOPI filed a cross-complaint against Global alleging breach of fiduciary duty, among other causes of action (the "Lawsuit"). B. The parties now desire to settle the Lawsuit in its entirety. In accordance with this desire and in consideration of the mutual promises made in this Agreement, the parties agree as follows. OBLIGATION OF SOPI ------------------ 1. SOPI shall pay Global Natural Brands, Ltd. a total consideration of $145,000 as follows: a. a cash payment of $25,000 upon execution by Global and delivery of two originals of this Agreement to SOPI (the "Delivery Date"); REVISED April 6, 2000 b. twelve equal monthly installment payments of $10,000, commencing on the first of the month following the Delivery Date and each subsequent month; and 2. SOPI shall pay James F. Swallow, David O'Gorman, J. Bradley Barbeau and Ronald Balsbaugh $400,000 payable on the Delivery Date through a transfer of 400,000 shares of SOPI stock (the "Stock"), valued at $1.00 per share to be issued as follows: Ronald B. Baisbaugh 30,694 shares J.Bradley Barbeau 52,451 shares David O'Gorman 13,536 shares James F. Swallow 303,319 shares The stock will be issued under a Regulation D private placement with resale of such stock permitted only pursuant to Rule 144 of the Securities Act of 1933, as amended (the "Act"). All certificates representing the Stock shall have endorsed on the Stock legends in substantially the following forms (in addition to any other legend. which may be required by other agreements between the parties): (i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. (ii) Any legend required by appropriate blue sky officials. 3. SOPI shall issue James F. Swallow options to purchase an additional 180,000 shares of SOPI stock at S2.25 per share and shall issue to 3. Bradley Barbeau options to purchase an additional 45,000 shares of SOPI stock at S2.25 per share in connection with paragraph 4.4 (a) of the MSA to the extent not inconsistent with the terms and conditions of this Agreement. 4. The parties acknowledge and agree that SOPI shall have the first right of refusal to repurchase or identify a private placement of all shares of SOPI which Global has or will receive under this Agreement, which shall be exercised within 30 days of notice of the terms of the offer. 2 REVISED April 6, 2000 OBLIGATIONS OF GLOBAL --------------------- 5. Concurrently with full execution of this Agreement, Global shall notify the Court that the Lawsuit has been settled and request to vacate the mandatory settlement conference and the trial, which are scheduled for April 19, 2000 and April 24, 2000, respectively. 6. Within ten days of receipt of two copies of this Agreement executed by SOPI, Global shall prepare and execute a form request for dismissal of the Lawsuit with prejudice (subject to reinstatement under Paragraph 8) and forward the request for dismissal to SOPI's counsel. Within ten days of receipt of the executed copy of the request for dismissal or ten days after the Delivery Date, whichever is later, SOPI's counsel shall complete the customary form for dismissal and file it with the Court. 7. Concurrently with the issuance of Stock set forth in sections 2 and 3 above, Global, James, F. Swallow, David O'Gorman, J. Bradley Barbeau and Ronald Baisbaugh shall complete, execute and deliver to SOPI the Regulation D Investor Qualification Questionnaire attached as Exhibit I affirming each of their respective status as an accredited investor under Regulation D. Global represents the following in connection with its purchase of the Stock (the provisions of this section applying to each Global party r&ceiving Stock hereunder): a. Global is aware of SOPI's business affairs and financial condition and has acquired sufficient information about SOPI to reach an informed and knowledgeable decision to acquire the Stock. Global is purchasing the Stock for investment for Global's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Act. b. Global understands that the Stock has not been registered under the Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Global's investment intent as expressed herein. 3 REVISED April 6, 2000 c. Global furtier acknowledges and understands that the Stock may not be sold or otherwise transferred unless the Stock is subsequently registered under the Act or an exemption from such registration is available. Global further acknowledges and understands that SOPI is under no obligation to register the Stock. Global understands that the certificate evidencing the Stock will be imprinted with a legend which prohibits the transfer of the Stock unless the Stock is registered or such registration is not required in the opinion of counsel for SOPI. Global is familiar with the provisions of Rule 144, under the Act, as in effect from time to time, which. in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions. The Stock may be resold by Global in certain limited circumstances subject to the provisions of Rule 144, which requires, among other things: (i) the availability of certain public information about SOPI and (ii) the resale occurring following the required holding period under Rule 144 after Global has purchased, and made full payment of (within the meaning of Rule 144), the securities to be sold. d. Global further understands that at the time Global wishes to sell the Stock there may be no public market upon which to make such a sale, and that, even if such a public market then exists, SOPI may not be satisfying the current public information requirements of Rule 144, and that, in such event, Global would be precluded from selling the Stock under Rule 144 even if the minimum holding period requirement had been satisfied. e. Global further warrants and represents that Global has either (i) preexisting personal or business relationships with SOPI or any of its officers, directors or controlling persons, or (ii) the capacity to protect its own 4 REVISED April 6, 2000 interests in connection with the purchase of the Stock by virtue of the business or financial expertise of itself or of professional advisors to Global who are unaffiliated with and who are not compensated by SOPI or any of its affiliates, directly or indirectly. MUTUAL GENERAL RELEASE ---------------------- 8. The obligations set forth above shall constitute consideration for the release of claims set forth in this section. 9. Except with respect to the obligations set forth in this Agreement, SOPI and Global, for themselves and their respective shareholders, directors, officers, employees, agents, affiliates, attome\s. legal successors and assigns release and forever discharge each other and their respective shareholders, directors, officers, employees, agents, affiliates, attorneys, legal successors and assigns of and from any and all claims, demands, damages, debts, liabilities, accounts, reckonings. obligations, costs, expenses, liens, actions and causes of action of every kind and nature whether now known or unknown, suspected or unsuspected, which either now has, owns or holds or at any time before ever owned or held or could, shall or may in the future have, own or hold against the other based upon or arising out of any matter, cause, fact, thing, act or omission occurring or existing at any time up to and including the effective date of this Agreement including, without limitation, the Lawsuit and any and all provisions of services by Global to SOPI under the MSA (the "Released Matter"). 10. It is the intention of the parties in executing this Agreement and in paying and receiving the consideration set forth in this Agreement that this Agreement shall b~ effective as a full and final accord and satisfaction and mutual general release of and from the Released Matter. 11. In furtherance of the intentions set forth in this Agreement each of the parties acknowledges that it is familiar with California Civil Code section 1542 which provides as follows: 5 REVISED April 6, 2000 A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST TN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Each of the parties waives and relinquishes any rights or benefits which it has or may have under section 1542 or any similar provision of the law of any other jurisdiction to the hill extent that it may lawfully waive its rights and benefits pertaining to the Released Matter. In connection with this waiver and relinquishment, each of the parties acknowledges that it is aware that it or its attorneys or accountants may later discover claims or facts in addition to or different from those which it now knows or believes to exist with respect to the subject matter of this Agreement or the other parties to this Agreement but that it is its intention hereby fully, finally and forever to settle and release the Released Matter. In furtherance of this intention, the releases given in this Agreement shall be and remain in effect as full and complete mutual releases as to the Released Matter despite the discovery or existence of any such additional or different claims or facts. 12. SOPI and Global each warrant and represent to the other that they are the sole and lawful owners of all rights, title and interest in and to the respective Released Matter and that they have not voluntarily, by operation of law or otherwise assigned or transferred or purported to assign or transfer to any person any portion of any Released Matter or any claim, demand, or right against the other parties. SOPI and Global shall indemni~ and hold harmless the other parties from and against any claim, Jemand, damage, debt, liability, account, reckoning, obligation, cost, expense, lien, action or cause of action (including payment of attorneys' fees and costs actually incurred whether or not litigation is commenced) based on or in connection with or arising out of any assignment or transfer or purported assignment or transfer. 6 REVISED April 6, 2000 CONFIDENTIALITY AGREEMENT ------------------------- 13. The parties to this Agreement agree that as a further inducement for this Agreement that the terms and provisions of this Agreement are to remain strictly confidential and that they will not disclose the terms of this Agreement or any of the negotiations or transactions associated with the Lawsuit and this Agreement to any person outside of the parties to this Lawsuit without obtaining the express wri:ten permission of the other party except as required by law. The parties understand that as a publicly-held corporation SOPI is required to report the terms of this agreement and agree that SOPI may disclose the terms of the agreement appropriate under its reporting and disclosure obligations. In the event a party is required to disclose any information about the Lawsuit or this Agreement in response to a subpoena or other legal process, the party shall give the other party 15 days' written notice calculated under section 17 before disclosing the information to enable the other party to obtain a restraining order if necessary. NON-DISPARAGEMENT ----------------- 14. The parties shall not make any statement to anyone disparaging or impugning in any manner the reputation, honesty, ethics, competence, credit worthiness or business practices of any other party. MEDIATION --------- 15. In the event a dispute arises under this Agreement, the parties agree to mediate the dispute within forty-five days using a mutually agreeable mediator or a mediator appointed by JAMS. BENEFICIARIES ------------- 16. This Agreement is not for the benefit of any person who is not a signatory to this Agreement or specifically named a beneficiary in this paragraph. The provisions of this Agreement and the release contained in this 7 REVISED April 6, 2000 Agreement shall extend to and inure to the benefit of and be binding upon, in addition to the parties, just as if they had executed this Agreement, the respective legal predecessors and successors and assigns of each of the parties; each and every entity which now is or ever was a division, parent or subsidiary, and their respective legal successors and assigns; the respective past and present shareholders, officers, directors, agents, employees and attorneys of the parties or their legal predecessors and successors, and each of them. NOTICES ------- 17. All notices under this Agreement must be given by addressing the notice to the other parties at the addresses set forth below (or at any other addresses designated by written notice given in the manner described in this section) by personal delivery, by depositing the notices with first class prepaid postage in the United States Mail, by delivering them by express mail or overnight delivery, or by delivering them toll prepaid to a telegraph or cable company. The notice shall be deemed to have been given upon receipt by the other parties or, when sent by express mail, overnight delivery service or telegraph or cable company, on the first business day following the date of delivery to the service. The addresses of the parties are as follows: SOPI GLOBAL ---- ------ Spectrum Organic Products, Inc Global Natural Brands, Ltd. 133 Copeland Street 104 Wilmot Road, Suite 300 Petaluma, CA 94952 Deerfield, IL 60015 Attention: Mr. Jethren Phillips, CEO Attention: Mr. James F. Swallow 8 REVISED April 6, 2000 With a copy to: With a copy to: W. George Wailes, Esq. Nehad S. Othman, Esq. CARR, McCLELLAN, INGERSOLL, FOLEY & LARDNER THOMPSON & HORN Suite 3300, One IBM Plaza Professional Corporation 330 N. Wabash Avenue 216 Park Road Chicago, IL 6061 1-3608 Burlingame, CA 94010 Facsimile: (312) 755-1925 Facsimile:(650) 342-7685 ATTORNEY'S FEES --------------- 18. Each party shall bear its own costs and attorneys' fees in the Lawsuit. 19. In the event a dispute arises out of this Agreement, the prevailing party shall be entitled to recover its attorneys' fees and costs including expert witness fees and pre-litigation fees and costs incurred in prosecuting or defending the lawsuit or action. GENERAL ------- 20. Each signatory acknowledges to the other parties that it has been represented by independent legal counsel of its own choice throughout all of the negotiations which preceded the execution of this Agreement and that it has executed this Agreement with the consent and on the advice of its independent legal counsel. Each party further acknowledges that it and its counsel have had adequate opportunity to make whatever investigation or inquiry they may deem necessary or desirable in connection with the subject matter of this Agreement prior to its execution and delivery and acceptance of the consideration specified in this Agreement. 21. This Agreement and any other documents referred to in this Agreement shall be interpreted, enforced and governed under the laws of California. Counsel for all parties have read and approved the language of this Agreement. The language of this Agreement shall be construed as a whole according to its fair meaning, and not strictly for or against any of the parties. 9 REViSED April 6, 2000 Charles Bonner, individually 22. The titles of the various articles of this Agreement are used for convenience of reference only and are not intended to and shall not in any way enlarge or diminish the rights or obligations of the parties or affect the meaning or construction of this Agreement. 23. This Agreement may be executed in counterparts via facsimile which, taken together, shall constitute one and the same agreement as though they had been executed together and shall be effective as of the date set forth on page 1. 24. This Agreement constitutes the entire agreement between the parties with respect to its subject matter and supersedes all prior negotiations and agreements, whether written or oral. This Agreement may not be altered or amended except in a writing signed by all of the parties to this Agreement. Neither this Agreement nor any of the obligations created under this Agreement shall be construed as an admission of any party to this Agreement of any liability of any kind to the other parties. Each party expressly denies that it is in any way liable or indebted to the other parties except as set forth in this Agreement. IN WITNESS WHEREOF, the parties have executed this Settlement Agreement and Mutual Release. SPECTRUM ORGANIC PRODUCTS, INC., a California corporation By: /s/ Jethren Phillips By: /s/ Neil Blomquist --------------------------- ------------------------------ Jethren Phillips Neil Blomquist CEO Secretary Dated: April 4 ,2000 Dated: April 4 ,2000 - ---------------------------- Dated: ,2000 John Battendieri, individually - ----------------------------- Dated: ,2000 Charles Bonner, individually 10 REVISED April 6, 2000 - ----------------------------- Dated: ,2000 Chales Dyer, individually - ----------------------------- Dated: ,2000 Ken Steel, individually GLOBAL NATURAL BRANDS, LTD. an Illinois corporation By: By: -------------------------- ------------------------------ Its: President Its: Secretary Dated: ,2000 Dated: ,2000 - ----------------------------- Dated: ,2000 James F. Swallow, individually - ----------------------------- Dated: ,2000 David O'Gorman, individually - ----------------------------- Dated: ,2000 Bradley Barbeau, individually - ----------------------------- Dated: ,2000 Ronald Balsbaugh, individually APPROVED AS TO FORM: CARR, McCLELLAN, INGERSOLL, FOLEY & LARDNER THOMPSOM & HORN Professional Corporation By: By: -------------------------- ------------------------------ W. George Wailes Nehad S. Othman Dated: , 2000 Dated: , 2000 11 REVISED April 6, 2000 EX-10.21 3 0003.txt SUBORDINATION AGREEMENT DATED OCTOBER 6, 1999 Exhibit 10.21 SUBORDINATION AGREEMENT This Agreement, dated as of October 6, 1999, is made by Debora Bainbridge Phillips (the "Subordinated Creditor"), for the benefit of Wells Fargo Business Credit, Inc., a Minnesota corporation (the "Lender"). The Lender and Organic Food Products, Inc., a California corporation, Organic Ingredients, Inc., a California corporation, Spectrum Commodities, Inc., a California corporation, and Spectrum Naturals Inc., a California corporation (collectively, the "Borrower"), are parties to a Credit and Security Agreement of even date herewith pursuant to which the Lender may make advances and extend other financial accommodations to the Borrower. Organic Food Products, Inc. has entered into merger agreements with Organic Ingredients, Inc. and Spectrum Naturals, Inc. whereby Organic Ingredients, Inc. and Spectrum Naturals, Inc. will merge with and into Organic Food Products, Inc. and Organic Food Products, Inc. will be the surviving corporation. Spectrum Commodities, Inc. will merge with and into Spectrum Naturals, Inc. as a condition prcccdcnt to the merger betwccn Organic Food Products, Inc. and Spectrum Naturals, Inc. Upon consummation of its mergers, Organic Food Products, Inc. will change its name to Spectrum Organic Products, Inc. The Subordinated Creditor has made or may make loans or grant other financial's accommodations to the Borrower or its predecessors. As a condition to making any loan or extension of credit to the Borrower, the Lender has rcquired that the Subordinated Creditor subordinate the payment of the Subordinated Creditor's loans and other financial accommodations to the payment of any and all indebtedness of the Borrower to the Lender. Assisting the Borrower in obtaining credit accommodations from the Lender and subordinating her interests pursuant to the terms of this Agreement arc In the Subordinated Creditor's best interest. ACCORDINGLY, in consideration of the loans and other financial accommodations that have been made and may hereafter be made by the Lender for the benefit of the Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Subordinated Creditor hereby agrees as follows: Definitions. As used herein, the following terms have the meanings set forth below; "Borrower Default" means a Default or Event of Default as defined in any agreement or instrument evidencing, governing, or issued in connection with Lender Indebtedness, including, but not limited to, the Credit and Security Agreement dated as of October , 1999, by and between the Borrower and the Lender as the same may hereafter be amended, supplemented or restated from time to time, or any default under or breach of any such agreement or instrument. "Lender Indebtednes" means each and every debt, liability and obligation of every type and description which the Borrower may now orat any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafler created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several, all interest thereon, all renewals, extensions and modifications thereof and any notes issued in whole or partial substitution therefor. "Subordinated Indebtedness" means all obligations arising under the Subordinated Note and each and every other debt, liability arid obligation of every type and description which the Borrower may now or at any time hereafter owe to the Subordinated Creditor, whether such debt, liability or obligation now exists or is hereafter created or incurred, arid whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unuiquidated, or joint, several or joint and several. "Subordinated Note" means the Borrower's Promissory Note, dated as of July 2, 1999, payable to the order of the Subordinated Creditor in the original principal amount of $1,621,716, together with all renewals, extensions and modifications thereof and any note or notes issued in substitution therefor. Subordination. The payment of all or any of the Subordinated Indebtedness (other than Permitted Payments, as defined below) is hereby expressly subordinated to the cxtcnt and in the manner hereinafter set forth to the payment in full of the Lender Indebtedness; and regardless of any priority otherwise available to the Subordinated Creditor by law or by agreement, the Lender shall hold a first security interest in all collateral securing payment of the Lender Indebtedness (the "Collateral"), and any security interest claimed therein (including any proceeds thereof) by the Subordinated Creditor shall be and remain fully subordinate for all purposes to the security interest of the Leiider therein for all purposes whatsoever. Payments. Until all of the Lender Indebtedness has been paid in fill, the Subordinated Creditor shall not, without the Lender's prior written consent, demand, receive or accept any payment (other than a Permitted Payment pursuant to Section 4) from the Borrower in respect of the Subordinated Indebtedness, or exercise any right of or permit any setoff in respect of the Subordinated Indebtedness. Permitted Payments. The Borrower may make regularly scheduled payments of principal and interest due under the Subordinated Note ("Permitted Payments"). Receipt of Prohibited Payments. If the Subordinated Creditor receives any payment on the Subordinated indebtedness that the Subordinated Creditor is not entitled to receive under the provisions of this Agreement, the Subordinated Creditor will hold the amount so received in trust for the Lender and will forthwith turn over such payment to the Lender in the form received (except for the endorsement of the Subordinated Creditor where necessary) for application to then-existing Lender Indebtedness (whether or not due), in such manner of application as the Lender may deem appropriate. If the Subordinated Creditor exercises arty iight of setoff which the Subordinated Creditor is not permitted to exercise under the provisions of this Agreement, the Subordinated Creditor will promptly pay over to the Lender, in immediately available funds, an amount equal to the amount of the claims or obligations offset. If the Subordinated Creditor fails to make any endorsement required under this Agreement, the -2- Lender, or any of its officers or employees or agents on behalf of the Lender, is hereby irrevocably appointed as the attorney-in-fact (which appointment is coupled with an interest) for the Subordinated Creditor to make such endorsement in the Subordinated Creditor's name. Action on Subordinated Debt. The Subordinated Creditor will not commence any action or proceeding against the Borrower to recover all or any part of the Subordinated Indebtedness, or join with any creditor (unless the Lender shall so join) in bringing any proceeding against the Borrower under any bankruptcy, reorganization, readjustment of debt, arrangement of debt receivership, liquidation or insolvency law or statute of the federal or any state government, or take possession of, sell, or dispose of any Collateral, or exercise or enforce any right or remedy available to the Subordinated Creditor with respect to any such Collateral, unless and until the Lender Indebtedness has bben paid in full. Action Concerning Collateral. 8. Notwithstanding any security interest now held or hereafter acquired by the Subordinated Creditor, the Lender may take possession of, sell, dispose of, and otherwise deal with all or any part of the Collateral, and may enforce any right or remedy available to it with respect to the Collateral, all without notice to or consent of the Subordinated Creditor except as specifically required by applicable law. 9. In addition, and without limiting the generality of the foregoing, if a Borrower Default has occurred and is continuing and the Borrower intends to sell any Collateral to an unrelated third party outside the ordinary course of business, the Subordinated Creditor shall, upon the Lender's request, execute and deliver to such purchaser such instruments as may reasonably be necessary to terminate and release any security interest or lien the Subordinated Creditor has in the Collateral to be sold. 10. The Lender shall have no duty to preserve, protect, care for, insure, take possession of, collect, dispose of, or otherwise realize upon any of the Collateral, and in no event shall the Lender be deemed the Subordinated Creditor's agent with respect to the Collateral. All proceeds received by the Lender with respect to any Collateral may be applied, first, to pay or reimburse the Lender for all costs and expenses (including reasonable attorneys' fees) incurred by the Lender in connection with the collection of such proceeds, and, second, to any indebtedness secured by the Lender's security interest in that Collateral in any order that it may choose, Bankruptcy and Insolvency. In the event of any receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization or arrangement with creditors, whether or not pursuant to bankruptcy law, the sale of all or substantially all of the assets of the Borrower, dissolution, liquidation or any other marshalling of the assets or liabilities of the Borrower, the Subordinated Creditor will file all claims, proofs of claim or other instruments of similar character necessary to enforce the obligations of the Borrower in respect of the Subordinated Indebtedness and will hold in trust for the Lender and promptly pay over to the Lender in the form received (except for the endorsement of the Subordinated Creditor where necessary) for application to the then-existing Lender Indebtedness, any and all moneys, dividends or other assets received in any such proceedings on account of the Subordinated Indebtedness, unless and until the Lender Indebtedness has been -3- paid in thu. If the Subordinated Creditor shall fail to take any such action, the Lender, as attorney-in-fact for the Subordinated Creditor, may take such action on the Subordinated Creditor's behalf. The Subordinated Creditor hereby irrevocably appoints the Lender, or any of its officers or employees on behaff of thc Lender, as the attorney-in-fact for the Subordinated Creditor (which appointment is coupled with an interest) with the power but not the duty to demand, sue for, collect and receive any and all such rnoneys, dividends or other assets and give acquittance therefor and to file any claim, proof of claim or other instrument of similar character, to vote claims comprising Subordinated Indebtedness to accept or reject any plan of partial or complete liquidation, reorganization,. arrangement, composition or extension and to take such other action in the Lender's own name or in the name of the Subordinated Creditor as the Lender may deem necessary or advisable for the enforcement of the agreements contained herein; and the Subordinated Creditor will execute and deliver to the Lender such other and further powers-of-attorney or instruments as the Lender may request in order to accomplish the foregoing. Restrictive Legend: Transfer of Subordinated Indebtedness. The Subordinated Creditor will cause the Subordinated Note and all other notes, bonds, debentures or other instruments evidencing the Subordinated Indebtedness or any part thereof to contain a specific statement thereon to the effect that the indebtedness thereby evidenced is subject to the provisions of this Agreement, and the Subordinated Creditor will mark its books conspicuously to evidence the subordination effected hereby. Attached hereto is a true and correct copy of the Subordinated Note bearing such legend. At the request of the Lender, the Subordinated Creditor shall deposit with the Lender the Subordinated Note and all of the other notes, bonds, debentures or other instruments evidencing the Subordinated Indebtedness, which notes, bonds, debentures or other instruments may be held by the Lender so long as any Lender Indebtedness remains outstanding. The Subordinated Creditor is the lawful holder of the Subordinated Note and has not transferred any interest therein to any other person. Without the prior written consent of the Lender, the Subordinated Creditor will not assign, transfer or pledge to any other person any of the Subordinated Indebtedness or agree to a discharge or forgiveness of the same so long as there rema ins outstanding any of the Lender Indebtedness. Continuing Effect. This Agreement shall constitute a continuing agreement of subordination, and the Lender may, without notice to or consent by the Subordinated Creditor, modify any term of the Lender Indebtedness in reliance upon this Agreement. Without limiting the generality of the foregoing, the Lender may, at any time and from time to time, either before or after receipt of any such notice o revocation, without the consent of or notice to the Subordinated Creditor and without incurring responsibility to the Subordinated Creditor or impairing or releasing any of the Lender's rights or any of the Subordinated Creditor's obligations hereunder; 14. change the interest rate or change the amount of payment or extend the time for payment or renew or otherwise alter the terms of any Lender Indebtedness or any instrument evidencing the same in any manner; 15. sell, exchange, release or otherwise deal with any property at any lime securing payment of the Lender Indebtedness or any part thereof, -4- 16. release anyone liable in any manner for the payment or collection of the Lender Indebtedness or any part thereof; 17. exercise or refrain from exercising any right against the Borrower or any other person (including the Subordinated Creditor); and 18. apply any sums received by the Lender, by whomsoever paid and however realized, to the Lender Indebtedness in such manner as the Lender shall deem appropriate. No Commitment. None of the provisions of this Agreement shall be deemed or construed to constitute or imply any commitment or obligation on the part of the Lender to make any future loans or other extensions of credit or financial accommodations to the Borrower, Notice. All notices and other communications hereunder shall be in writing and shall be (i) personally delivered, (ii) transmitted by registered mail, postage prcpaid, or (iii) transmitted by lelecopy, in each case addressed to the party to whom notice is being given' at its address as set forth below: If to the Lender: Wells Fargo Business Credit, Inc. 245 South Los Robles Avenue, Suite 600 Pasadena, California 91101 Attention: ------------------------------- Telecopier:(626) 844-9063 If to the Subordinated Creditor: Ms. Debora Bainbridge Phillips ----------------------------------------- ----------------------------------------- Telecopier: ( ) - or at such other address as may hereafter be designated in writing by that party. All such notices or other communications shall be deemed to have been given on (i) the date received if delivered personally, (ii) the date of posting if delivered by mail, or (iii) the date of transmission if delivered by telecopy. Conflict in Agreements. If the subordination provisions of any instrument evidencing, Subordinated Indebtedness conflict with the terms of this Agreement, the terms of this Agreement shall govern the relationship between the Lender and the Subordinated Creditor. No Waiver, No waiver shall be deemed to be made by the Lender of any of its rights hereunder unless the same shall be in writing signed on behalf of the Lender, and each such waiver, if any, shall be a waiver only with respect to the specific matter or matters to which the waiver relates and shall in no way impair the rights of the Lender or the obligations of the Subordinated Creditor to the Lender in any other respect at any time. -5- Binding Effect: Aeceptance. This Agreement shall be binding upon the Subordinated Creditor and the Subordinated Creditor's heirs, legal representatives, successors and assigns and shall inure to the benefit of the Lender and its participants, successors and assigns irrespective of whether this or any similar agreement is executed by any other Subordinated Creditor of the Borrower. Notice of acceptance by the Lender of this Agreement or of reliance by the Lender upon this Agreement is hereby waived by the Subordinated Creditor. Miscellaneous. The paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. Governing Law: Consent to Jurisdiction and Venue: Waiver of Jury Trial. This Agreement shall be governed byand construed in accordance with the substantive laws (other than conflict laws) of the State of California. Each party consents to the personal jurisdiction of the state and federal courts located in the State of California in connection with any controversy related to this Agreement, waives any argument that venue in any such forum is not convenient, and agrees that any litigation initiated by any of them in connection with this Agreement shall be vcnued in either the District Court of Los Angeles County, California, or the United States District Court, Central District, Los Angeles Division. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS ACKNOWLEDGMENT. IN WITNESS WHEREOF, the Subordinated Creditor has executed this Agreement as of the date and year first above-written. By: /s/ Debora Bainbridge Phillips --------------------------------- Debora Bainbridge Phillips -6- Acknowledgment by Borrower -------------------------- The undersigned, being the Borrower referred to in the foregoing Agreement, hereby (i) acknowledges receipt of a copy thereof, (ii) agrees to all of the terms and provisions thereof, (iii) agrees to and with the Lender that it shall make no payment on the Subordinated Indebtedness that the Subordinated Creditor would not be entitled to receive under the provisions of the Agreement, (iv) agrees that any such payment will constitute a default under the Lender Indebtedness, and (v) agrees to mark its books conspicuously to evidence the subordination of the Subordinated Indebtedness effected hereby. ORGANIC FOOD PRODUCTS, iNC. By: /s/ -------------------------------- John R. Battendieri President ORGANIC INGREDIENTS, INC. By: /s/ -------------------------------- Joseph J. Stern President SPECTRUM COMMODITIES, INC. By: /s/ -------------------------------- Jethren Phillips Chief Executive Officer SPECTRUM NATURALS, INC. By: /s/ -------------------------------- Jethren Phillips Chief Executive Officer -7- EXHIBIT A attach copy of Subordinated Note with following legend THIS INSTRUMENT iS SUBJECT TO THE TERMS OF A SUBORDINATION AGREEMENT BY DEBORA BAINBRIDGE PHILLIPS IN FAVOR OF WELLS FARGO BUSINESS CREDIT, INC. DATED AS OF OCTOBER 6 , 1999. -8- EX-10.22 4 0004.txt FIFTH AMENDMENT TO REDEMPTION AGREEMENT Exhibit 10.22 FIFTH AMENDMENT TO REDEMPTION AGREEMENT This Fifth Amendment to Redemption Agreement is entered into as of the 6th day of October, 1999, by and between Debora Bainbridge Phillips (the "Seller"), SPECTRUM NATURALS, INC. a California corporation (the "Corporation"), ORGANIC FOOD PRODUCTS, INC., a California corporation (the "Successor Corporation") and Jethren Phillips. WHEREAS, the Seller and the Corporation entered into that cerram Redemption Agreement (the "Redernption Agreement") dated November 1, 1996, as amended by the first Amendment to Redemption Agreement, the Second Amendment to Redemption Agreement, the Third Amendment to Redemption Agreement, and the Fourth Amendment to Redemption Agreement between the parties, and a related Promissory Note in the principal amount of $1,621,716; and WHEREAS, as of the date hereof, as contemplated by the Second Amendment to Redemption Agreement, the Corporation arid the Successor Corporation have closed the Agreement and Plan of Merger and Reorganization that provides, among other things, for the merger of the Corporation with and into the Successor Corporation (the "Merger") and have submitted an Agreement of Merger for filing with the California Secretary of State to effect such Merger and AND WHEREAS, the Seller and the Corporation and the Successor Corporation desire to amend the Redemption Agreement and the related Promissory Note and Guaranty Agreement, to provide for a revised payment schedule as set forth herein and to provide for subordination of the payments under the Promissory Note to certain indebtedness of the Corporation and the Successor Corporation to Well Fargo Business Credit, Inc. NOW THEREFORE, the Redemption Agreement, the Promissory Note arid the Guaranty Agreement are amended as follows: 1. The third sentence of Section 2 of the Redemption Agreement and the fourth sentence of the Promissory Note shall be amended to reflect the following principal payment schedule: $121,716 on November 5, 1999; monthly instailnients of $25,000 on the 5th day of each month commencing December 5, 1999 through May 5, 2000; monthly installments of $37,500 on the 5th day of each month commencing June 5, 2000 through November 2000; thereafter, monthly installments of $31,250 on the 5th day of each month commencing December 5, 2000 until all principal is paid in full. 2. The Successor Corporation hereby expressly assumes all unpaid obligations of the Corporation under the Promissory Note and the Redemption Agreement effective upon the Merger. 3. Concurrent with the execution of this Amendment, Seller has delivered to Wells Fargo Business Credit, Inc. a duly executed copy of the Subordination Agreement attached hereto as Exhibit A. 2. 4. A copy of this Amendment shall be affixed to the original R.edempticx Agreement, the Promissory Note and the Guaranty Agreement. 5. The Guarantor under the Guaranty Agreement con+/-lrms that th Promissory Note, as amended by this amendment, remains subject to the Guaranty Agreement. SELLER CORPORATION SPECTRUM NATURALS, INC. By: /s/ Debora Bainbridge Phillips By: /s/ Jethren Phillips --------------------------------- -------------------------------- Debora Bainbridge Phillips Jethren Phillips CEO, Chairman By: /s/ Jethren Phillips - ------------------------------------ SUCCESSOR CORPORATION Jethren Phillips ORGANIC FOOD PRODUCTS, INC. By: /s/ John Battendieri -------------------------------- John Battendieri Acknowledged and agreed to: WELLS FARGO BUSINESS CREDIT, INC. By: /s/ Angelo Samperisi --------------------------------- Angelo Samperisi 3. EX-10.23 5 0005.txt FOURTH AMENDMENT TO REDEMPTION AGREEMENT Exhibit 10.23 FOURTH AMENDMENT TO REDEMPTION AGREEMENT This Fourth Amendment to Redemption Agreement is entered into this 12th day of July, 1999 by and between DEBORA BAINBRIDGE PHILLIPS (the "Seller"), SPECRTUM NATURAL, INC, a California corporation (the "Corporation") and herethren Phillips. WHEREAS, the Seller and the Corpporationm entered into that certain Redemption Agreement (the "Redemption Agreement") dated November 1, 1996, as amended by the First Amendment to Redemption Agreement, the Second Amendment to Redemption Agreement and the Third Amendment to Redemption Agreement between the parties, and a related Promissory Note in the principal amount of $1,621,716; and WHEREAS, the Seller and the Corporation wish to confirm for the benefit of the California Economic Development Lending Initiative (the "Lender") as the lender to the Corporation, that amounts due under the Promissory Note are subordinate to certain indebtedness of the Corporation to the Lender; NOW, THEREFORE, the Redemption Agreement is further amended to add the following statement: The Promissory Note and the Corporation's obligations to pay thereunder shall at all times be subject to and subordinate to, any terms and conditions of payment imposed by the Lender, but only as to the aggregate levels of indebtedness currently provided for (whether or not currently drawn down) under the lending greements between the Corporation and the Lender. SELLER CORPORATION Spectrum Natural, Inc. By: /s/ Debora Bainbridge Phillips By: - ------------------------------------ ------------------------------- Debora Bainbridge Phillips ------------------------------- Jothren Phillips EX-10.24 6 0006.txt THIRD AMENDMENT TO REDEMPTION AGREEMENT Exhibit 10.24 THIRD AMENDMENT TO REDEMPTION AGREEMENT This Third Amendment to Redemption Agreement is entered into this 9th day of July, 1999, by and between DEBORA BAINBRIDGE PHILLIPS (the "SeIler"), SPECTRUM NATURALS, INC., a California corporation (the "Corpocation") and Jethren Phillips. WHEREAS, the Se11er and the Corporation entered into that certain Redemption Agreement (the "Redemption Agreement") dated November 1, 1996, as amended by the First Amendment to Redemption Agreemmt and the Second Amendment to Redemption Agreement between the parties and a related Promissory Note in the principal amount of $1,621,716, and WHEREAS, the Seller and the Corporation wish to confirm for the benefit of the National Bank of the Redwoods (the "Bank") as the lender to the Corporation, that amounts due under the Promissory Note are subordinate to certain indebtedness of the Corporation to the Bank; NOW, THEREFORE, the Redemption Agreement is further amended to add the following statement: The Promissory Note and the Corporation's obligations to pay thereunder shall at all times be subject to and subordinate to, any terms and conditions of payment imposed by the Bank, but only as to the aggregate levels of indebtedness currently provided for (whether or not currently drawn down) under the lending agreements between the Corporation and the Bank. SELLER CORPORATION CORPORATION Spectrum Naturals, Inc. By: /s/ Debora Bainbridge Phillips By: ----------------------------------- -------------------------------- Debora Bainbridge Phillips By: /s/ Jethren Phillips -------------------------------- Jethren Phillips EX-10.25 7 0007.txt SECOND AMENDMENT TO REDEMPTION AGREEMENT Exhibit 10.25 SECOND AMENDMENT TO REDEMPTION AGREEMENT This Second Amendment to Redemption Agreement is entered into this 2nd day of July 1999, by and between DEBORA BAINBRIDGE PHILLIPS (the "Seller"), SPECTRUM NATURALS, INC., a California corporarion (the "Corporation"). and Jethren Phillips. WHEREAS, on or around November 1, 1996, the Seller and the Corporation entered into that certain Redemption Agreement (the "Redemption Agreement") providing for the redemption of all the Corporation's common stock owned by the Seller; AND WHEREAS, on May 14, 1999 the Corporation entered into an Agreement and Plan of Merger and Reorganization that provides, among other things, for the merger of the Corporation with and into Organic Food Products, Inc. (the "Merger"); AND WHEREAS, the Seller and the Corporation desire to amend the Redemption Agreement and the related Promissory Note, Pledge Agreement and Guaranty Agreement, to provide for a revised payment schedule and to accommodate the Merger as set forth herein; NOW, THEREFORE, the Redemption Agreement, the Promissory Note, the Pledge Agreement and the Guaranty Agreement are amended as follows: 1. The third sentence of Section 2 of the Redemption Agreement and the fourth sentence of the Promissory Note shall be amended to reflect the following principal payment schedule: $121,716 on November 5, 1999 $500,000 on November 5, 2000 $250,000 on May 5, 2001 $250,000 on November 5, 2001 $250,000 on July 5, 2002 $230,000 on July 5, 2003 2. The second sentence of Section 2 of the Redemption Agreement and the second sentence of the Promissory Note shall be amended to reflect that from the date of this Amenddment the outstaiiding principal balance under the Promissory Note shall bear interest at the rate of 12 percent per annum. 3. Effective upon the closing of the Merger the second and third paragraphs of Section 3 of the Redemption Agreement shall be eliminated and shall be replaced with the following: With respect to obligations existing on and alter the Merger, (a) the term "Corporation" under the Redemption Agreement shall refer to OFPI. (b) OFPI shall expressly assume the Corporation's obligations under the Promissory Note and the Redemption Agreement. (c) Seller and the Corporation shall direct that the cancelled share certificate representing 5,000 shares of the Corporation's common stock held by Belden, Abbeys Weirzenberg & Kelly, or their successor, shall be delivered to OFPI, as the successor to the Corporation. (d) OFPI shall reserve for future issuance a number of shares of OFPI common stock equal to (i) the unpaid principal and interest due under the Promissory Note from time to time, divided by (ii) 90% of the mean between the then cuirent bid and ask price for OFPI stack, as reported on the NASD Bulletin Board. (e) If OPPI defaults in the payment of any sums due under the Promissory Note and such default continues unremedied beyond any cure period provided in said Promissory Note, then at Seller's request and at Seller's option, a certificate issued in the name of Seller representing a number of shares of OFPI common stock equal to the amount due and payable under the Promissory Note divided by 90% of the mean between the bid and ask price for the 10 trading days preceding the default, as reported on the NASD Bulletin Board, shall be delivered by OFPI to Seller in payment of such defaulted amounts against delivery of (i) appropriate documentation reflecting the cancellation of the portion of the debt for which the shares were issued, and (ii) appropriate investment letters and other documentation necessary to comply as a private placement under federal and state securities laws for the issuance of the shares or, at Seller's request, OFPI shall file an application for permit under the California corporate securities laws arid request a fairness hearing pursuant to Section 25142 of the California Corporations Code to secure a federal exemption from the Securities Act of 1933 pursuant to Section 3(a)(l0). In the event of default, Seller shall have the right to pursue all rights under the Guaranty Agreement for amounts which are due and owing under the Promissory Note and for which Seller has not received payment in stock. (f) The Pledge Agreement shall be cancelled and all references to the Pledge Agreement in the Redemption Agreement, the Promissory Note and the Guaranty Agreement shall be eliminated. 4. Section 4, 5 and 6 of the Redemption Agreement shall be eliminated. 5. Effective upon the Merger all references to "Obligor" in the Guaranty Agreement with respect to matters on or after the Merger, shall be a reference to OFPI. 6. Concurrently with the execution of this Amendment, the Corporation shall pay to Seller $100,000 which amount shall be an advance payment on the Corporation's obligations under Sections 11 and 12 of the Redemption Agreement, as amended. 2. 7. The ob1igations of the Corporation and, upon the, Merger, OFPI under the Redemption Agreement as amended, and the Promissory Note, as amended by the First Amendment dated September 11, 1998 and as amended by this Second Amendment and reissued, shall continue to be guaranteed by Guarantor under the Guaranty Agreement The second sentence of Section 4 of the Guaranty Agreement is hereby amended to provide that upon payment by Guarantor on the guarantee the Guarantor shall have a tight of subrogation against the Obligor for the proportionate part of the Promissory Note satis&d by the Guarantor. 8. The Promissory Note shall be amended to include the following additional language: (a) This Promissory Note is a medium for investment and a "security" within the meaning of the California Commercial Code ss. 102 and is governed by Division 8 of the California Commercial Code. (b) This Promissory Note is divisible into a class or series of obligations at the request of the holder. (c) The transfer of this Promissory Note may be registered upon the books of the issuer. 9. A copy of this Amendment shall be affixed to the original Redemption Agreement, the Promissory Note, the Pledge Agreement and the Guaranty Agreement. 10. The Corporation hereby agrees to pay concurrently with the execution of this Amendment the reasonable attorneys fees of Seller incurred in the preparation of this Second Amendment to Redemption Agreement and matters incidental thereto. SELLER CORPORATION Spectrum Naturals, Inc. By: /s/ Debora Bainbridge Phillips By: /s/ Jethren Phillips --------------------------------- -------------------------------- Debora Bainbridge Phillips Jethren Phillips 3. PROMISSORY NOTE ---------------- July 2, 1999 Santa Rosa, California For the value received, receipt of which is hereby acknowledged, SPECTRUM NATURALS, INC., a California corporation (the "Corporation") hereby promises to pay to DEBORA BAINBRIDGE PHILLIPS , or order, at such place as designated by the holder hereunder, the principal sum of $1,621,716 together with interest thereon as hereinafter provided. The outstanding principal balance shall bear interest at the rate of 12 percent per annum from and after the date of this Note. Interest on the principal balance from time to time outstanding shall be paid in monthly installments of interest only on the fifth day of each month. In addition to said interest payments, principal shall be paid in installments as follows: $121,716 on Novcmbcr 5, 1999 $500,000 on November 5, 2000 $250,00 on May 5, 2001 $250,000 on November 5, 2001 $250,000 on July 5, 2002 all principal and accrued interest shall be due and payable in full on July 5, 2003 In the event that any payment of principal or interest shall not be made within five (5) days of its due daze, there shall also be due a late payment fee equal to one percent of the payment of principal or interest not made when due. This Promissory Note may by prepaid in whole or in part at any time without penalty. Presentment and demand for payment, notice of dishonor, protest and notice of protest are hereby waived. All payments shall be in lawful money of the United States. Any payment received shall be applied first to interest outstanding and then to reduction of principal. In the event that (i) any payment of principal or interest shall not be made when due and a period of ten (10) days shall have past from written notice of such nonpayment without cure, or (ii) the Corporation or the Guarantor shall fail to comply with any material non-monetary terms and conditions and a period of thirty (30) days shall have past from written notice of such failure without cure, then the holder of this Note may, without fiirth.er notice, declare the entire principal and interest due and payable. 1. In the event that any action is initiated to enforce or interpret the terms of this Note, and the prevailing parry of such litigation shall be entitled to recover, as an element of cost of such a 1itigation the reasonable attorneys' fees. On May 14, 1999 the Corporation entered into an Agreement and P1an of Merger and Reorganization that provides, among other things, for the merger (the "Merger") of the Corporation with and into Organic Food Products, Inc. ("OFPI"). Effective upon the closing of the Merger. (a) OFPI shall expressly assume the Corporation's obligations under this Note. (b) OFPI shall reserve for future issuance a number of shares of OFPI common stock equal to (i) the unpaid principal amid interest due under this Note from rime to time, divided by (ii) 90% of the mean between the then current bid and ask price of OFPI stock, as reported on the NASD Bulletin Board. (c) If OFPI defaults in the payment of any sums due under this Note and such default continues unremedied beyond any cure period provided in this Note, then at the request and option of the holder of this Note, a certificate issued in the name of the holder representing a number of shares of OFPI common stock equal to the amount due and payable under this Note divided by 90% of the mean between the bid and ask price of the OFPI common stock for the 10 trading days preceding the default, as reported on the NASD Bulletin Board, shall be delivered by OFPI to the holder in payment of such defaulted amounts against delivery of (1) appropriate documentation reflecting the cancellation of the portion of the debt for which the shares were issued, and (ii) appropriate investment letters and other documentation necessary to comply as a private placement under federal and state securities laws for the issuance of the shares or, at the request of the holder of this Note, OFPI shall file an application for permit under the California corporite securities laws and request a fairness hearing pursuant to Section 25142 of the California Corporations Code to seek a federal exemption from the Securities Act of 1933 pursuant to Section 3(a)(lO). in the event of default, Seller shall have the right to pursue all rights under the Guaranty Agreement for amounts which are due and owing under this Note and for which Seller has not received payment in stock. 2. Any default under the terms of the Redemption Agreetnent dated November 1, 1996, pursuant to which this Note is issued or the Guaranty Agreement of Jethren Phillips shall also constitute a default under this Note and a default hereunder shalL likewise, constitute a default under said agreements. Any notice to be given hereunder shall be deemed to be effective on the third day following deposit of such notice in the United States mail postage prepaid, first-class, return receipt requested and directed to parties at the addresses set forth below: SPECTRUM NATURALS, INC. 133 COPELAND STREET PETALUMA, CA 94952 DEBORA BAINBRIDGE PHILLIPS -------------------------- -------------------------- This Note is a medium for investment arid a "security" within the meaning of the California Commercial Code ss. 102 and is governed by Division 8 of the California Commercial Code. This Note is divisible into a class or series of obligations at the request of the holder. The transfer of this Note may be registered upon the books of the issuer. SPECTRUM NATURALS, INC. BY: /s/ Jethren Phillips -------------------------------- Jethren Phillips 3. EX-10.26 8 0008.txt FIRST AMENDMENT TO REDEMPTION AGREEMENT Exhibit 10.26 FIRST AMENDMENT TO REDEMPTION AGREEMENT This First Amendment to Redemption Agreement is entered into this 11th day of September, 1998, by and between DEBORA BAINBRIDGE PHILLIPS (the "Seller) and SPECTRUM NATURALS, INC., a California corporation (the "Corporation"). WHEREAS, in or around November 1996, the Seller and the Corporation entered into that certain Redemption Agreement (the "Redemption Agreement") providing for the redemption of all the Corporation's common stock owned by the Seller; AND WHEREAS, the Seller and the Corporation desire to amend the Redemption Agreement to provide for an additional bonus payment to the Seller on the terms and conditions set forth therein; NOW, THEREFORE, the Redemption Agreement is hereby amended as follows: The first sentence of Paragraph 12 ("Bonus Payment") of the Redemption Agreement is amended to replace the bonus payment amount of "$306,642.00" with the bonus payment amount of "$613,284.00." In all other respects, the Seller and the Corporation confirm the Redemption Agreement. IN WITNESS WHEREOF, the Seller and the Corporation have executed this First Amendment to Redemption Agreement on the date first above written. "SELLER" "Corporation" By: /s/ Debora Bainbridge Phillips Spectrum Naturals, Inc. --------------------------------- a California corporation Debora Bainbridge Phillips By: /s/ Jethren P. Phillips -------------------------------- Jethren P. Phillips EX-10.27 9 0009.txt REDEMPTION AGREEMENT Exhibit 10.27 REDEMPTION AGREEMENT This Agreement is made November 1, 1996 by and between DEBORA BAINBRIDGE PHILLIPS (the "Seller") and SPECTRUM NATURALS, INC., a California corporation (the "Corporation"). RECITALS: -------- WHEREAS Seller is the owner of a 50% interest in all of the outstanding shares of Corporation by virtue of her community property interest in said shares with the sole shareholder of record of the Corporation, JETHREN PHILLIPS; and WHEREAS FURTHER such 50% interest comprises 5,000 shares of the common stock of the Corporation: and WHEREAS FURTHER Seller desires to sell all of her shares in the Corporation and the Corporation desires to buy all of her shares in the Corporation and the Corporation desires to purchase upon the terms hereinafter set forth. The parties therefore agree as follows: 1. Purchase Price. The Seller hereby sells and delivers to the Corporation and the Corporation hereby purchases from Seller, 5,000 shares of common stock of the Corporation for the sum of $1,621,716.00, subject to adjustment as hereinafter provided in this Agreement. 2. Manner of Payment. Corporation shall pay the Seller for her shares by delivering to the Seller, at Closing, a Promissory Note made by the Corporation, and dated as of the Closing Date, in the form of Exhibit "A" attached hereto and by this reference incorporated herein. Without limiting the foregoing, said Promissory Note shall have a principal balance of $1,621,716.00 and shall bear interest at the rate of 7.8167% per annum for the first six months, 8% per annum for the next eighteen months, 10% for years 3 and 4, and 12% for years 5 and 6 and shall call for monthly payments of interest only on the principal balance from time to time outstanding. Principal shall be paid as follows: Two years from Closing Date - $621,716 Three years from Closing Date - S250,000.00 Four years from Closing Date - $250,000.00 Five years from Closing Date - $250,000.00 Six years from Closing Date - S250,000.00 at which time all sums are due. Said Note shall further contain a late penalty of 1% of any payment not made within 5 days of its due date. There shall be no pre-payment penalty. Said Promissory Note shall be personally guaranteed by Jethren Phillips in a form substantially similar to Exhibit "A-1" attached hereto. 3. Security for the Promissory Note. The Promissory Note shall be secured by a co1lateral assignment of a life insurance policy on the life of Jethren Phillips in an amount not less than 110 percent of the principal balance of the Promissory Note from time to time outstanding, which collateral assignment shall provide that the full proceeds thereof shall be applied, at the option of Payee, to satisfaction Of said Promissory Note. Any such policy shall provide for 30 days prior written notice to assignee before cancellation or material change in coverage. As further security for the payment of the Promissory Note referred to in paragraph 2 the corporation, at Closing shall deposit with Belden, Abbey, Weitzenberg & Kelly as agent for Seller, all of the shares of the Corporation purchased hereunder, duly endorsed in blank for transfer. Corporation, at Closing, shall execute a Security/Pledge Agreement in the form of Exhibit "B" attached hereto and by this reference incorporated herein, which shall provide, among other things, that if the Corporation defaults in the payment of any sums due under the Promissory Note and such default continues unremedied beyond any 2 cure provided for in said Promissory Note or Security Agreement, then the shares may, at Seller's request, be sold at public or private sale in accordance with the provisions of the California Commercial Code. The Security Agreement shall provide that so long as there is no default under the terms of the Promissory Note or Security Agreement. 1/3 of the pledged stock shall be released after the $250,000 payment due 4 years from date and 1/3 following the $250,000 payment due 5 years from date, with all shares released upon payment in full of the Promissory Note. So long as the Corporation is not in default under this Agreement or the promissory note, it shall exercise and enjoy all of the rights accruing from the ownership of the shares. Notwithstanding the foregoing, so long as any such Promissory Note is unpaid, the Corporation shall not issue any new or additional shares, except as provided for in this Agreement, incur any indebtedness, except in the regular course of business, or make any dividend or other distributions to its shareholders if the net worth of the Corporation after such distribution or dividend would be less than 90% of the net worth as shown on, the financial statements of the Corporation on the date of execution of this agreement. 4. Restrictions With Respect to Payment. If, at the time any payment is due on the Promissory Note, the Corporation does not have suffieient retained earnings, or cannot otherwise meet the tests prescribed by the California Corporations Code (Section 500, et seq.) with respect to such payment, the Corporation shall take all reasonable actions to enable the Corporation to make such payment under the terms of such applicable code sections. If, notwithstanding such efforts, such payment cannot be made in its entirety, then partial payment shall be made to the extent allowable by the California Corporations Code. If the payment not made is a principal payment, then such non-payment shall not constitute a default under the Promissory Note and payment of such principal balance shall be deferred until the earlier of the date that the applicable provisions of the California Corporations Code can be met with respect to said deferred payment or the date of the next regularly scheduled 3 principal payment. If the Corporation is unable to make both the regularly scheduled principal payment and the deferred principal payment when due, then such non-payment shall be deemed a default under the terms of the Promissory Note. 5. Approval. The Corporation shall obtain approval from Corporation's lenders for the redemption provided for herein. The Promissory Note and the Corporation's obligations to pay thereunder shall at all times be subject to, and subordinate to, any terms and conditions of payment imposed by said lenders. Provided, however, that no new and additional restrictions shall be imposed after the Closing Date, which restrictions are not first agreed to in writing by Seller. 6. Issuance of Additional Shares or Sale of Shares. A. If(a) the Corporation issues any additional shares, such that the remaining outstanding shares of Jethren Phillips, immediately after such new issuance, constitute 20% or less of the outstanding shares of the Corporation or (b) Jethren Phillips, the sole remaining shareholder of the Corporation, sells, transfers or otherwise disposes of 80% or more of his shares of the corporation, then in that event, all sums due under the Promissory Note and under the Guaranty issued by Jethren Phillips shall become immediately due and payable. B. In the event that Jethren Phillips and/or the Corporation sell, transfer or issue shares of the Corporation such that, after such transaction, Jethren Phillips' ownership of the outstanding shares of the Corporation (excluding those shares sold hereunder) constitutes 50% or less of the outstanding shares of the Corporation, then in that event, a sum equal to 50% of the net after tax proceeds of such transaction received by Jethren Phillips andlor the Corporation, shall be paid as against the sums due under the Promissory Note. Such payments shall be applied to the principal balance of the Note, but shall not otherwise alter the payment schedule thereunder except to 4 the extent that such principal application results in the principal obligation being paid off, in full, under the payment schedule at an earlier date. C. In the event that Jethren Phillips individually, sells shares of the Corporation prior to the first payment being made on the Promissory Note, then in that event a sum equal to 40% of the net after tax proceeds of such transaction received by Jethren Phillips shall be paid as against the sums due under the Promissory Note up to the full amount of the first payment due totaling $621,716. D. In the event that the Corporation issues additional shares prior to the time that the first principal payment is made under the Promissory Note, then in that event, the lesser of the amount of said first principal payment or 25% of the net proceeds of said issuance shall be immediately paid to Seller in satisfaction of the obligation for such first principal payment under the Promissory Note. E. In the event any other issuance of shares by the Corporation in circumstances other than as expressly provided for, in subsections A, B, C or D have there shall be a.principal pay down on the Promissory Note of a sum as follows: Number of new shares issued +/- total numbers of shares outstanding including shares pledged and newly issued shares x total consideration received for shares issued. Such principal payment shall be applied against, and be prepayment of, principal installments due under said Note. F. At least 15 days prior to the issuance of any additional shares pursuant to the terms of this paragraph 6, Corporation shall provide written notice to Seller of intent to issue such shares. Such notice shall include all documentation relating to the issuance of the additionaishares including, but not limited to, the total consideration to be received on account of such shares. Notice shall be given by personal delivery or by courier delivery (such as Federal Express) and shall be deemed completed 24 hours following the date of delivery to said courier service. 5 7. General Release - Resignation. At Closing, the Corporation shall deliver to Seller an unconditional general release and the Seller shall deliver to the Corporation a general release which excepts therefrom the Corporation's obligations hereunder. Seller shall also submit a resignation, if applicable, as an officer and director of the Corporation. 8. Representations of Seller. The Seller represents and warrants that she is the owner, free and clear of any encumbrances, of all of the shares in the Corporation sold and delivered by her hereunder. Seller is not aware of, nor has Seller incurred, any obligation in the name of the Corporation other than in the ordinary course of business and as disclosed on the financial books and records of the Corporation. 9. Representations of the Corporation. Corporation represents and warrants that the execution and delivery of this Agreement by it has been duly authorized by proper corporate action, that the Promissory Note delivered by it to the Seller constitutes a valid binding and enforceable obligation ofthe Corporation in accordance with its terms and that the Corporation presently complies with all provisions of the California Corporation's Code in conjunction with the redemption called for hereunder. 10. Closing. This agreement shall be in effect for a period of one year from its date of execution and shall be of no force and effect after such one year period unless, during such one year period, either Jethren Phillips or Debora Phillips shall file an action for dissolution of their marriage in a court of competentjurisdiction. If such action is filed then the terms and conditions of this agreement shall control all issues of value and disposition of the 5,000 shares covered by this agreement and the terms of this agreement shall be incorporated into any Marital Settlement Agreement or court order dealing with division of property. In the event such action for Dissolution of Marriage shall be dismissed, this agreement shall be of no further force and effect. 6 Nothing contained in this Agreement, nor any actions taken hereunder, shall in any way change the character of any property of the parties as between separate or community nor shall any payments made or actions taken affect in any way any marital property rights, including the right to support, that the parties may otherwise have. Closing shall be at the offices of Abbey, Weitzenberg, Kelly, Nadler, Hoffman & Emery, 1105 North Dutton Avenue, Santa Rosa, California, not later than 180 days from the filing date of such Dissolution of Marriage action ("Closing Date"). 11. Adjustments for Taxes. It is contemplated between the parties to this Agreement that this redemption shall not be a taxable event for federal or California state income tax purposes. If at any time it shall be determined that a liability exists on the part of Seller for the payment of state or federal income taxes due to payments received pursuant to this Redemption Agreement, then in addition to the amount to be paid under the Promissory Note, the Corporation shall pay to Seller, in cash, an amount equal to any such additional state and/or federal income tax imposed on the payments made hereunder. Said payment shall be made within 60 days of assessment by such taxing entity of such additional tax due upon Seller. In the event the Corporation desires to contest the validity of such assessment, Corporation may do so at its sole cost and expense, and Seller agrees to cooperate in all reasonable respects in pursuing such process. During any such contest or appeal, Corporation shall either arrange for a stay of enforcement of any tax assessed or pay such assessed tax but in the event of success on such appeal shall be entitled to a refund of any such tax paid. The sums to be paid pursuant to this provision shall include all interest and penalties, if any, imposed in such assessment. 12. Bonus Payment. After payment of all sums due under the Promissory Note, without the claim for taxes by any taxing agency occasioned thereby, Seller shall also be entitled, in addition to all other sums called for under the 7 Promissory Note or under this Agreement, to a bonus payment of S306,642.00. Such contingent payment without interest, shall be payable, in cash, and shall be due December 31 of the fourth calendar year following the year in which the State and Federal Income Tax returns which reflect the last payment made under the Promissory Note or under this Agreement. By way of example, if the last payment is made in 2002 and the tax return reflecting such payment, after extension, is filed October 15, 2003, then the payment will be due December 31, 2007. 13. Arbitration. Any controversy under this Agreement shall be settled by arbitration under the Commercial Rules of the American Arbitration Association to be administered through the San Francisco, California office. Any arbitration will be held in Sonoma County, California. 14. Modification. This Agreement may not be modified or terminated orally and no modification or termination, shall be valid unless in writing and signed by the party against whom the same is sought to be enforced. 15. Binding Effect. This Agreement shall be bind and inure to the benefit of the parties hereto, their personal representatives, successors and assigns. 16. Entire Agreement. This Agreement supersedes all prior agreements between the parties relating to this subject matter, provided, however, that this Agreement is entered into in conditioned upon dissolution of marriage proceedings between Jethren Phillips and Debora Phillips and it is further contemplated that this Agreement, either in this form or, in substance, will be incorporated into a Marital Settlement Agreement or other orders of the court in conjunction with said dissolution of marriage proceeding. 17. California Law. This Agreement shall be construed in accordance with the laws of the State of California. 8 18. Attorneys Fees. In the event of litigation or arbitration to interpret or enforce the terms of this Agreement, the prevailing party will be entitled to their reasonable attorneys' fees and costs. 19. Obligations of Corporation. (a) So long as the Promissory Note remains outstanding, Seller shall receive, at least quarterly, financial statements of Corporation. (b) Corporation shall indemnify, defend and hold Seller harmless from all debts, claims or liabilities arising from the transaction of business affairs by Corporation. (c) Seller shall be removed from all corporate obligations and guarantees of corporate obligations, except for S.B.A. guarantees if not possible, provided however that all efforts will be made to attempt such removal from the S.B.A. guarantee. Corporation agrees to indemnify, defend and hold Seller harmless (including attorneys' fees) from any claim arising from any corporate obligations and/or guarantees of corporate obligations. Executed this 1st day of November, l996, at Santa Rosa, California SPECTRUM NATURALS, INC., a California corporation By: /s/ Jethren Phillips -------------------------------- Jethren Phillips "Corporation" By: /s/ Debora Bainbridge Phillips --------------------------------- Debora Bainbridge Phillips "Seller" 9 EX-10.28 10 0010.txt GUARANTY AGREEMENT Exhibit 10.28 GUARANTY AGREEMENT 1. For valuable consideration, the undersigned, Jethren Phillips (hereinafter called "Guarantor") unconditionally guarantees to Debora B. Phillips (hereinafter called "Obligee") the following obligation(s) of Spectrum Naturals, Inc. (hereinafter called "Obligor"): a) The payment of any and all indebtedness and performance of all obligations of Obligor to Obligee under the Pledge Agreement and Promissory Note dated June 6, 1997, in the principal sum of $1,621,716; and b) due performance of all terms of the Redemption Agreement dated November 1, 1996. The word "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations, and liabilities of Obligor or any one or more of them, heretofore now, or hereafter made, incurred, or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Obligor may be liable individually or jointly with others, or whether recovery upon such obligation may be or hereafter become barred by any statute of limitations; or whether such obligation may be or hereafter become otherwise unenforceable. 2. The obligations hereunder are joint and several, and independent of the obligations of Obligor, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Obligor or whether Obligor has been joined in any such action or actions; and Guarantor waives the benefit of any statute of limitations affecting his liability hereunder or the enforcement thereof. 3. Guarantor authorizes Obligee, without notice or demand and without affecting their liability hereunder, from time to time to (a) renew, compromise, extend, accelerate, or otherwise change the time for performance of, or otherwise change the terms of the obligation or any part thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the performance of this guaranty or the obligation guaranteed, and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as Obligee in its discretion may determine; and (d) release or substitute any one or more of the endorsers or guarantors. Obligee may without notice assign this guaranty in whole or in part. 4. Guarantor waives any right to require Obligee to (a) proceed against Obligor; (b) proceed against or exhaust any security held from Obligor; or (c) pursue any other remedy in Obligee's power whatsoever. Guarantor waives any defense arising by reason of any disability or other defense of Obligor or by reason of the cessation from any cause whatsoever of the liability of Obligor. Until all obligations of Obligor to Obligee shall have been fully performed, even though the extent of such performance is in excess of Guarantor's liability hereunder, Guarantor shall have no right of subrogation, and waive any right to enforce any remedy which Obligee now has or may hereafter have against Obligor, and waive any benefit of, and any right to participate in, any security now or hereafter held by Obligee. Obligee may foreclose, either by judicial foreclosure or by exercise of power of sale, any deed of trust securing the indebtedness, and, even though the foreclosure may destroy or diminish Guarantor's rights against Obligor, Guarantor shall be liable to Obligee for any part of the indebtedness remaining unpaid after the foreclosure. Guarantor waives all presentments, demands for performance, notices ofnonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this guaranty and of the existence, creation, or incurring of new or additional obligations. Guarantor waives all rights and defenses arising out of an election of remedies by the Obligee, even though the election of remedies, such as a non-judicial foreclosure with respect to security for a guaranteed obligation, has destroyed the Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 5 80(d) of the Code of Civil Procedure or otherwise. 5. in addition to all liens upon, and rights of set-off against the moneys, securities, or other property of Guarantor has given to Obligee by law, Obligee shall have a lien upon and a right of set-off against all moneys, securities, andother property of Guarantor now or hereafter in the possession of Obligee, whether held in a general or special account, or for safekeeping or otherwise; and every such lien and right of set-off may be exercised without demand upon or notice to Guarantor. No lien or right of set-off shall be deemed to have been -2- waived by any act or conduct on the part of Obligee, or by any neglect to exercise such right of set-off or to enforce such lien, or by any delay in so doing; and every right of set-off and lien shall continue in full force and effect until such right of set-off or lien is specifically waived or released by an instrument in writing executed by Obligor. 6. Any indebtedness of Obligor now or hereafter held by Guarantor is hereby subordinated to any indebtedness of Obligor to Obligee, and such indebtedness of Obligor to Guarantor if Obligee so requests shall be collected, enforced, and received by Guarantor as trustees for Obligee and held as security for performance of the obligation of Obligor to Obligee but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this guaranty. 7. When any Obligor is a corporation or partnership, it is not necessary for Obligee to inquire into the powers of Obligor or the officers, directors, partners, or agents acting or purporting to act on their behalf, and any obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 8. Guarantor warrants and represents to Obligee, and acknowledges that in accepting this Guaranty Obligee is relying on such warranties and representations to be true, that this Guaranty is supported by full and sufficient consideration; that Guarantor's execution, delivery, and performance of this Guaranty have been duly authorized; that the provisions of this Guaranty constitute binding obligations of Guarantor enforceable in accordance with their respective terms; that Guarantor is a person or entity completely separate and distinct from Obligor; and that this Guaranty therefore is the totally separate and distinct guaranty of the obligations of Obligor by totally separate and distinct guarantors who are not in any respect or to any extent the Obligor under this Agreement. -3- 9. Guarantor agrees to pay reasonable attorney's fees and all other costs and expenses which may be incurred by Obligee in the enforcement of this guaranty. 10. This Guaranty shall be governed by and construed according to the laws of the State of California, to the jurisdiction of which the undersigned Guarantor submits. IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty on June 6, 1997. By: /s/ Jethren Phillips -------------------------------- Jethren Phillips -4- EX-10.29 11 0011.txt PLEDGE AGREEMENT Exhibit 10.29 PLEDGE AGREEMENT This Pledge Agreement is effective June 6, 1997, by and between SPECTRUM NATURALS, INC., a California corporatio~' (hereinafter referred to as "Pledgor"), DEBORA B. PHILLIPS (hereinafter referred to as "Pledgee") and RICHARD W. ABBEY, Attorney at Law (hereinafter referred to as "Escrow Holder") WHEREAS, Pledgor is indebted to Pledgee in the principal sum of One Million Six Hundred Twenty One Thousand Seven Hundred Sixteen ($1,621,716.00) pursuant to the terms of a Promissory Note of even date herewith (the "Obligation"); WHEREAS, Pledgor has agreed to secur&payment of the obligations as hereinbelow set forth; NOW, THEREFORE, IT IS AGREED as follows: 1. Escrow Holder. The parties do hereby appoint and designate Richard W. Abbey as the Escrow Holder for purposes of this Agreement as hereinafter set forth. By execution of this Agreement, Escrow Holder agrees to act in accordance with the terms of this Agreement. 2. Deposit of Stock. Concurrently with the execution of this Agreement, Pledgor shall deliver to Escrow Holder its certificates representing Five Thousand (5,000) shares of common stock of the Pledgor (the "stock"), attached to which certificate shall be a Stock Power endorsed by Pledgor. Thereafter, Escrow Holder shall hold said share certificate(s) and shall dispose of same in accordance with the terms and provisions of this Pledge Agreement. By execution of this Agreement, Pledgor hereby grants to Pledgee a security interest in the stock as security for payment in full of the Obligation. 3. Terms. Subject to release of shares as provided for in paragraph 7, Pledgor and Pledgee hereby mutuallyauthorize Escrow Holder to keep and preserve said certificates in the possession of Escrow Holder, pending payment in full of the Obligation. 4. Default. Time is of the essence of this Pledge Agreement. Any of the following events which are not cured within 10 days (or such longer cure period as specifically provided for in any subpart of this paragraph) after delivery of written notice by Pledgee to Pledgor, shall constitute events of default under this Agreement: A. Any failure to pay the full amount of any payment of principal, interest or other charges of the Obligation which are or may be secured hereby subject to the terms of the Promissory Note evidencing said payments. B. Any falsity of any representation by Pledgor herein or in any Agreement or document executed by the Pledgor. C. Pledgor's failure to comply with material non-monetary terms and conditions of the Obligation, said failure continuing for a period of thirty (30) days after delivery of written notice by Pledgee to Pledgor; and D. Pledgor's breach or default of the material terms of the Redemption Agreement between Pledgor and Pledgee dated November 1, 1996. B. Breach or default of the material terms of the Guaranty made by Jethren Phillips dated, June 6, 1997. Then and in any of such events of default, the entire principal and all accrued interest of the Obligation shall then or at any time thereafter, at the option of Pledgee, become immediately due and payable without notice or demand, and Pledgee shall have an immediate right to pursue all remedies provided by law and as set forth in this Pledge Agreement. 5. Remedies. When an event of default occurs, Pledgee, or the holders of the Obligation at the time of default, may, at her option, at any time, without further notice, elect to declare the entire principal balance of the Obligation, together with interest accrued thereon, if any immediately due and payable, and Pledgee (or holder) shall have the rights and remedies, not in conflict with this Pledge Agreement, provided for in the Uniform Commercial Code in existence in the state of California as of the date of this Pledge Agreement, and to have the certificates held by the Escrow Holder transferred to Pledgee (or Holder), and Pledgee (or Holder) shall be entitled to all of the rights, preferences, privileges and benefits conferred upon the owner of such shares. Upon written notification from Pledgee (or Holder) to Escrow Holder of the occurrence of any such default and the election of Pledgee (or Holder) to take title and possession of said shares of stock under this Pledge Agreement, Escrow Holder shall forthwith deliver to Pledgee (or Holder) the certificates referred to hereinabove. 6. Voting Rights and Dividends Prior to Default. So long as the certificates of stock are held by the Escrow Holder (and until the Pledgor's default in payment of any of the installments due under or default in the Obligation, or default in the terms of this Agreement), Pledgor shall retain full right to vote such stock for all purposes. So long as these certificates of stock continue to be held by the Escrow Holder, or until the Pledgor defaults in the Obligation, all dividends upon such stock payable in the form of additional stock of Pledgor, shall belong to Pledgor, but shall be delivered to the Escrow Holder as additional security for payment and performance of the Obligation. Pledgor shall be solely entitled to any cash dividends declared on such stock. -2- 7. Release of Shares. Upon written notification from Pledgee that the Obligation has been paid in ftill, the Escrow Holder shall deliver to Pledgor, together with all stock dividends received and held under this Agreement, the certificates evidencing the shares and all obligations between Pledgor, Pledgee and Escrow Holder under this Agreement shall thereupon cease. So long as there is no default under the terms of this Pledge Agreement or the Obligation which it secures, one thousand six hundred sixty-seven (1,667) shares held pursuant hereto shall be released and delivered to Pledgor after the satisfactory payment of the Two Hundred Fifty Thousand Dollar ($250,000.00) principal payment due four years from the date of the Obligation, an additional one thousand six hundred sixty-seven (1,667) shares of stock held hereunder shall be released and delivered to Pledgor upon the satisfactory payment of the Two Hundred Fifty Thousand Dollar ($250,000.00) principal obligation due five (5) years from the date of the Obligation. 8. No Obligation or Liability of Escrow Holder. It is agreed that the Escrow Holder has no obligation to collect, sue for or otherwise enforce collection of the Obligation. It is further agreed that the Escrow Holder shall in no case or event be liable for the failure of the conditions of this Pledge Agreement or damage caused by exercise of his discretion in any particular manner, or for any other reason, excepting only gross negligence or willful misconduct with reference to Escrow Holder's obligations under this Pledge Agreement. 9. Pledgor's Warranties. Pledgor warrants and represents with respect to said shares that: A. Pledgor is the absolute owner of the respective shares; B. Said shares are not subject to any prior assignment, claim, lien or security interest, and Pledgor will not make any further assignment thereo for create any further security interest therein, nor permit Pledgor's right therein to be breached by attachment, levy, garnishment or other judicial process; and C. Any and all information, financial or otherwise, now or hereafter supplied to Pledgee by Pledgor, is true and correct. 10. Further Assurances. Pledgor shall execute and deliver to Pledgee any additional agreements, assignments or documents that are necessary to effectuate the purpose of this Agreement. 11. Successors. This Pledge Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 12. Notices. All notices required to be given under this Agreement, or under provision of any applicable law of the state of California, shall be sent certified mail, return receipt requested, to the addresses set forth below the signature lines to this Pledge Agreement. -3- 13. Indemnification. Pledgor hereby agrees to indemnify, defend and hold Pledgee free and harmless from and against all damages, liabilities, costs or expenses (including reasonable attorneys' fees and court costs) arising from or relating to Pledgee's security interest in the stock. 14. Costs. Any costs for the services of the Escrow Holder shall be paid by Pledgor. IN WITNESS WHEREOF, the parties hereto have signed their names on the day and year indicated below. "Pledgee" Dated: June 6, 1997 By: /s/ Debora B. Phillips -------------------------------- Debora B Phillips -------------------- -------------------- "Pledgor" Dated: June 6, 1997 By: /s/ Jethren Phillips -------------------------------- Jethren Phillips, CEO -------------------- -------------------- "Escrow Holder" Dated: June 6, 1997 By: /s/ Richard W. Abbey -------------------------------- Richard W. Abbey P.O. Box 1566 Santa Rosa, CA 95402-1566 -4- EX-10.30 12 0012.txt PROMISSORY NOTE Exhibit 10.30 PROMISSORY NOTE June 6, 1997 Santa Rosa, California For value received, receipt of which is hereby acknowledged, Spectrum Naturals, Inc., a California corporation hereby promises to pay to Debora Bainbridge Phillips, or order, at such place as designated by the holder hereunder, the principal sum of $1,621,716 together with interest thereon as hereinafter provided and in installments as hereinafter provided. The outstanding principal balance shall bear interest at the rate of 7.8167% for the first six months; thereafter at the rate of 8% percent per annum for the next eighteen months; thereafter on the second anniversary of this note, the interest rate shall be adjusted and the then outstanding principal balance shall bear interest at the rate of 10 percent per annum for years three and four and thereafter shall be further adjusted on the fourth anniversary such that the outstanding principal balance shall bear interest at the rate of 12 percent per annum for years five and six. Interest on the principal balance from time to time outstanding shall be paid in monthly installments of interest only on the fifth day of each month. In addition to said interest payments, principal shall be paid in installments as follows: Two years from the date of this Note -- $621,716; Three years from the date of this Note -- $250,000.00; Four years from the date of this Note -- $250,000.00; Five years from the date of this Note -- $250,000.00; Six years from the date of this Note -- all principal and accrued interest shall be due and payable in full. In the event that any payment of principal or interest shall not be made within five (5) days of its due date, there shall also be due a late payment fee equal to one percent of the payment of principal or interest not made when due. This Promissory Note may by prepaid in whole or in part at any time without penalty. Presentment and demand for payment, notice of dishonor, protest and notice of protest are hereby waived. All payments shall be in lawful money of the United States. Any payment received shall be applied first to interest outstanding and then to reduction of principal. In the event that any payment of principal or interest shall not be made when due and a period often (10) days shall have past from written notice of such nonpayment without cure, then the holder of this Note may, without further notice, declare the entire principal and interest due and payable. In the event that any action is initiated to enforce or interpret the terms of this Agreement, and the prevailing party of such litigation shall be entitled to recover, as an element of cost of such a litigation, the reasonable attorneys' fees. This Note is secured by a pledge of stock pursuant to the terms of the Pledge Agreement of even date herewith, and is further personally guaranteed by Jethren Phillips. Any default under the terms of the Redemption Agreement dated November 1, 1996, pursuant to which this Note is issued or the Pledge Agreement or Personal Guaranty of Jethren Phillips shall also constitute a default under this Promissory Note and a default hereunder shall, likewise, constitute a default under said agreements. Any notice to be given hereunder shall be deemed to be effective on the third day following deposit of such notice in the United States mail postage prepaid, first-class, return receipt requested and directed to parties at the addresses set forth below: Spectrum Naturals, Inc. 133 Copeland Street Petaluma, CA 94952 Debora Bainbridge Phillips Spectrum Naturals, Inc By: /s/ Jethren Phillips -------------------------------- Jethren Phillips EX-10.31 13 0013.txt SETTLEMENT AGREEMENT & RELAESE Exhibit 10.31 NIMBUS AND SPECTRUM Settlement Agreement & Release Spectrum Naturals, Inc., & Nimbus Publications, Inc. SETTLEMENT AGREEMENT & RELEASE ------------------------------ The following agreement is made this 28 th Day of March, 1999 between Nimbus Publications, Inc., A body Corporate, doing business in British Columbia, Canada (hereinafter called Nimbus) OF THE FIRST PART AND Spectrum Naturals,. Inc., A body corporate doing business in California, USA. (hereinafter called Spectrum) OF THE SECOND PART RECITALS: 1. Whereas; Nimbus has over a period time, commencing October 1, 1988 and up until the present provided extensive services and business innovations to Spectrum which have enriched Spectrum's markets, products and sales revenue resulting in greatly increased equity value over the period for Spectrum and its shareholders. 2.Whereas; Spectrum wishes to recognize the beneficial contribution by Nimbus to Spectrum's successes and undertakes to demonstrate its appreciation in the form of a settlement payment. Spectrum and Nimbus wish to resolve any and all claims NIMBUS AND SPECTRUM Settlement Agreement & Release 2 for remuneration now existing in favor of Nimbus, including, but not limited to, claims arising from oral or written representations that stated or implied some degree of equity reward to Nimbus. Spectrum and Nimbus therefore wish to resolve any and all such claims by the payment of a sum of cash specific which hereinafter shall be referred to as the "Settlement." NOW THEREFOR IT IS AGREED AS FOLLOWS: 1.RELEASE. Nimbus on its behalf and on behalf of its directors, officers, shareholders, employees, successors and assigns1 hereby forever releases any and all claims for remuneration now existing in favor of Nimbus, including, but not limited to, claims arising from oral or written representations that stated or implied some degree of equity reward to Nimbus. 2. PAYMENT SUM AND TERMS OF SETTLEMENT. Spectrum shall pay to Nimbus a sum totalling $ 75,000.00 in United States currency in equal serial monthly payments and render such payments by either (a)wire, (b)check or (c)bank money draft. The first serial monthly payment will commence on January 15, 2000. Thereafter 14 successive serial payments will be made by Spectrum in the sum of $5,000.00 US pe.r month. The final and 15th payment will be issued to Nimbus on March 15, 2001. 3. WAIVER OF INTEREST. There will be no interest accruing on the indebtedness. There shall be no interest accruing on any remaining balance of the Settlement sum. NIMBUS AND SPECTRUM Settlement Agreement & Release 3 4. ACCELERATED PAYMENTS.Speccrum may accelerate the payments set forth in Clause 2 at any time, and from time to time without penalty. 5) FAILURE TO PAY SETTLEMENT. Spectrum shall issue to Nimbus promissory note for the sum owed. 6) ARBITRATION. Any controversy or claim arising out of or relating to this agreement, or breach thereof shall be settled by arbitration in Sonoma County, California pursuant to the arbitration procedures as established in the California Code of Ci~.ril Procedure, and it is specifically agreed that the discovery rights and obligations contained under Section 1283.05 of the California Code of Civil Procedure are incorporated herein. 7) NOTICES. Any notice required under this agreement shall be addressed as follows and be deemed by the receipts on the earlier of the fifth (5th) day following the delivery by use of national mail carrier or internationally recognized courier or on the date of actual receipt: NIMBUS: ATTN: Rees Moerman, Nimbus Publications, Inc., C/o Selimer & Associates, Chartered Accountants, 201 2nd Avenue, Kamloops, BC, Canada V2C--3K6 Voice (250) 828--1975 Facsimile (250) 828--0898 SPECTRUM: ATTN: Jethren Phillips, CEO, Spectrum Naturals, and 133 Copeland Street, Petaluma, CA 94952 Voice: 707--778--8900 Facsimile 707--765--1026 NIMBUS AND SPECTRUM Settlement Agreement & Release 4 8). INTERPRETATION OF GOVERNING LAWS. This agreement is interpreted under the laws of the State of California. 9) ENFORCEMENT OF AGREEMENT. in the event of any action to enforce and interpret the provisions of the agreement, the prevailing party will be entitled to their attorney's fees and costs 10) RECITALS. The recitals hereto form an integral art of this agreement. 11) FINAL AGREEMENT. This agreement represents the entire agreement between the parties hereto and supersedes all previous agreements whether oral or written. 12) TIME. Time shalibe of essence in execution of this agreement 13) SCHEDULES & EXHIBITS. Any schedules and or exhibits hereto appended shall form part of this agreement. In witness whereof, the parties hereby affix their seal and signature. (CORPORATE SEAL) Nimbus Publications, Inc., NIMBUS AND SPECTRUM OUTSTANDING PROMISES SE1TLEMIENT By: /s/ Rees Moerman ------------------------------- Rees Moerman Managing Director (CORPORATE SEAL) Spectrum Naturals, Inc., By: /s/ Jethren Phillips ------------------------------- Jethren Phillips, CEO PROMISSORY NOTE $75,000.00 DATE: March 28, 1999 For value received, the undersigned promises to pay in lawful money of the United States of America, to Nimbus Publications, Inc., a body corporate, doing business in British Columbia, Canada, or to its order, at do Selimer & Associates, Chartered Accountants, 201 2nd Avenue, Kamloops, B.C., Canada V2C-3K6, or such other place as may be designated by the holder of this Promissory Note (the "Note"), from time to time, the principal sum of Seventy Five Thousand Dollars ($75,000.00). No interest shall accrue on the principal balance of this Note. Payments of principal shall be payable in monthly installments of no less than Five Thousand Dollars ($5,000) commencing on January 15, 2000, and continuing on the same day of each calendar month thereafter until such time that this Note is paid in full. This Note shall mature on March 15, 2001, on which date the remaining principal balance, if any, shall be due and payable. The principal balance of this Note, or any portion thereof, may be prepaid at any time, and from time to time, without penalty. This Note is made and delivered to Nimbus Publications, Inc. in furtherance of that certain Settlement Agreement and Release between it and the undersigned of even date herewith. In the event that any action or proceeding is brought to enforce any of the terms of this Note, the prevailing party shall be entitled to its' reasonable attorneys' fees and costs incurred. The provisions of this Note shall apply to, inure to the benefit of, and bind all parties hereto, their heirs, legatees, devisees, administrators, executors, personal representatives, successors and assigns. IN WITNESS WHEREOF the undersigned has executed this Note effective as of the date first set forth above. SPECTRUM NATURALS, INC., A California Corporation By: /s/ Jethren Phillips ------------------------------- Jethren Phillips, CEO Corporate/Promissory Note EX-10.32 14 0014.txt ASSIGNMENT OF FOOD PROCESSING AND PACKAGING Exhibit 10.32 ASSIGNMENT ---------- Tri H Investors, a California General Partnership hereby assigns all of its rights, title, benefits, and interest in and to that certain Food Processing and Packing Credit Agreement, by and between Triple H Food Processors, Inc. and in Tri H Investors dated November 27, 2000 and attached hereto as Exhibit A, to Spectrum Organic Products, Inc., a California Corporation. TRI H INVESTORS, a California General Partnership Dated: November 27, 2000 By: /s/ Thomas G. Harris ------------------------------------ THOMAS G. HARRIS, General Partner EXHIBIT "A" FOOD PROCESSING AND PACKING CREDIT AGREEMENT This Food Processing and Packing Credit Agreement is made and entered into this 27 day of November, 2000 by and between TRIPLE H FOOD PROCESSORS, INC., a California Corporation, with its principal place of business located 5821 Wilderness Avenue, Riverside, California, (hereinafter referred to as "PACKER"), and TRI H INVESTORS, a California General Partnership with its principal place of business located at 5821 Wilderness Avenue, Riverside, California, (hereinafter referred to as "TRI H"), as follows: RECTTALS -------- WHEREAS, the PACKER and TRI H have entered into a certain Lease of Personal Property, dated November 27, 2000, under the terms of which TRI H has leased to the PACKER certain items of food processing and packing equipment and fixtures for use in its food packing and process business, and under the terms of which the PACKER has agreed, among other thinks, to provide to TRI H per case food processing and packing credits in the total sum of $215,000.00, to be used as a credit, deduction or offset against any food processing and packing services provided or to be provided by PACKER to TRI H, or its duly authorized assignees; and WHEREAS, TRI H, or its duly authorized assignees, desire to utilize the various food processing and packing credits, deductions, or offsets against any sums owed to the PACKER for packing services rendered or provided by the PACKER during the term of any food processing or packing production contract that is in force and effect by and between the PACKER and TRI H, or its duly authorized assignees during the term of this Agreement; NOW, THEREFORE, in consideration of the foregoing and the promises, representations, agreements and warranties contained herein, the parties hereto agree as follows: 1. Until the credit, deduction or offset amount set forth in paragraph 2. hereinbelow has been fully utilized or exhausted, the PACKER shall credit, deduct, or offset against any contract food packaging and processing fees that would otherwise be due and payable to PACKER under the terms of any food processing or packaging contract that is then in force and effect by and between the PACKER and TRI I-I, or its duly authorized assignees, the following per case amounts for the following types of products: A. Organic sauces and salsas: $0.20 per case; B. Non-organic products: $0.10 per case; C. Organic/Non-organic salad dressings: $0.10; and D. New products not currently formulated: $0.20 per case for organic products and $0.10 per case for non-organic products. 2. The total amount of the credit, deduction or offset under this Agreement shall be the sum of $215,000.00, and the credit, deduction or offset shall begin to accrue on per case basis only upon the execution of a written Processing and Packaging Agreement by and between the PACKER and TRJ H, or its duly authorized assignees, and the actual commencement of production by the PACKER pursuant to any such Processing and Packaging Production Agreement. The 2 credit, deduction, or offset amount, based upon the above-listed products and per case amounts, shall be shown on each invoice from the PACKER to TRI H, or its duly authorized assignees, until the entire 521 5,000.00 amount has been fully credited, deducted, or offset, or until the termination of the said written Processing and Packaging Production Agreement, whichever event occurs first, except as otherwise provided hereinbelow and in said Processing and Packaging Agreement. In no event shall the total credit, deduction, or offset hereunder exceed the sum of $215,000.00 under any circumstances. IN THE EVENT THAT ANY REQUIRED PROCESSING AND PACKAGING AGREEMENT BETWEEN THE PACKER AND TRI H. OR ITS DULY AUTHORTZED ASSTGNEE, IS NOT RENEWED BY TRT H, OR ITS DULY AUTHORIZED ASSIGNEE, OR IN THE EVENT THAT ANY REQUIRED PROCESSING AND PACKAGING AGREEMENT IS TERMINATED BY TRI H, OR ITS DULY AUTHORIZED ASSIGNEE, FOR ANY REASON, OTHER THAN AS A RESULT OF A DEFAULT BY THE PACKER THEREUNDER, OR IF ANY REQUIRED PROCESSING AND PACKING AGREEMENT IS TERMINATED BY THE PACKER AS A RESULT OF A DEFAULT THEREUNDER BY TRI H, OR ITS DULY AUTHORIZED ASSIGNEE, THEN THERE SHALL BE NO REFUND OR ADJUSTMENT OF ANY KIND FOR ANY UNUSED CREDIT, DEDUCTION, OR OIFFSET AMOUNT AS A CONSEQUENCE OF THE TERMINATION OF ANY SUCH REQUIRED PROCESSING AND PACKAGING PRODUCTION AGREEMENT BY AND BETWEEN THE PACKER AND TRI H, OR ITS DULY AUTHOR1ZEE ASSIGNEES. THE 3 FOREGOING NOTWITHSTANDING, IN THE EVENT THAT ANY REQUIRED PROCESSTNG AND PACKAGING AGREEMENT IS NOT RENEWED BY THE PACKER, OR IN THE EVENT THAT ANY REQUIRED PROCESSING AND PACKAGING AGREEMENT IS TERMINATED BY THE PACKER OR IS TERPffNATEID BY TRI H, OR ITS DULY AUTHORIZED ASSIGNEE, AS A RESULT OF A DEFAULT BY PACKER UNDER THE PROCESSING AND PACKAGING AGREEMENT, THEN ANY UNUSED CREDIT HEREUNDER SHALL IMMEDIATELY BE PAID TO TRI H OR ITS DULY AUTHORIZED ASSIGNEE. 3. Miscellaneous Provisions: Choice of Law A. This Agreement shall be deemed to be executed and delivered in Riverside, Riverside County, California and governed by and construed in accordance with the laws of the State of California. Heirs and Successors B. This Agreement and each of its provisions shall be binding on and shall inure to the benefit of the respective heirs, devisees, legatees, executors, administrators, trustees, successors, and assigns of the parties to this Agreement and their duly authorized assignees. Nothing contained in this Paragraph shall be construed as a consent by PACKER to any assignment of this Agreement or any rights or interest therein by TRI H. Except, however, consent is hereby given by the PACKER for the assignment of this Agreement by TRI H to 4 SPECTRUM ORGANIC PRODUCTS, INC., a California Corporation, but no consent is given to any other assignments by TRI H or by SPECTRUM ORGANIC PRODUCTS, INC. without the prior written consent of PACKER. Time C. Time is of the essence in this Agreement and in each provision contained within, and each provision is made and declared to be a material, necessary, and essential part of this Lease. Arbitration D. Any controversy or claim, including any claims of interpretation or misrepresentation, arising out of or related to this Agreement or breach of this Agreement shall be settled by binding arbitration. The arbitration shall be concluded by a single arbitrator in Riverside County, California, under the then current rules of the American Arbitration Association provided that the arbitrator shall be chosen from a panel of persons knowledgeable in the food packing/processing business. The decision and award of the arbitrator shall be final and binding and the award so rendered may be entered in any court having jurisdiction. The arbitration shall be held and the award shall be deemed to be made in Riverside, California. Agreement Survives Partial Invalidity E. If any provisions of this Agreement or the application of any of its provisions to any party or circumstance is held invalid or unenforceable, the remainder of this Agreement and the application of the provisions to the other parties or circumstances shall remain valid and in full force and effect. 5 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first written hereinabove. TRI H: TRI-H INVESTORS A California General Partnership By: /s/ THOMAS G. HARRIS -------------------------------- THOMAS G. HARRIS, General Partner PACKER: TRI H FOOD PROCESSORS, INC., A California Corporation By: /s/ RICHARD J. HARRIS -------------------------------- RICHARD J. HARRIS, Secretary/Treasurer 6 EX-10.33 15 0015.txt AGREEMENT FOR PURCHASE AND SALE OF FIXTURES Exhibit 10.33 AGREEMENT FOR PURCHASE AND SALE OF FIXTURES ------------------------------------------- Agreement dated as of November 27, 2000, by and between TRI H INVESTORS, a California General Partnership, whose address is 5821 Wilderness Avenue, Riverside, California, 92504 (the "BUYER"); and SPECTRUM ORGANIC PRODUCTS, iNC., a California Corporation, whose address is 133 Copeland Street, Petaluma, California 94952, (the "SELLER"). BACKGROUND AND INFORMATION SELLER is engaged in the business of food processing and packing. BUYER desires to acquire from SELLER and SELLER desires to sell to BUYER those certain food processing and packing fixtures that are affixed to the real property located at 550 Monterey Road, Morgan Hill, California, more particularly set forth on Exhibit "A" attached hereto and incorporated herein by this reference as though set forth in full, (the purchased fixtures to be acquired are hereinafter referred to as the "PURCHASED FIXTURES"). SELLER is willing to sell and BUYER is willing to buy the PURCHASED FIXTURES, but only upon the terms and conditions hereinafter set forth. Accordingly, in consideration of the premises and the mutual agreements contained in this Agreement, SELLER, BUYER hereby agree as follows: OPERATIVE PROVISIONS 1. Agreement to Sell and Purchase. Subject to the terms and conditions of this Agreement, at the closing referred to in Section 2. hereof: (the "CLOSING"), the BUYER shall acquire the PURCHASED FIXTURES from the SELLER. 2. Escrow. The purchase and sale of the PURCHASED FIXTURES that are the subject of this Agreement shall be as set forth hereinbelow through an. escrow to be established immediately on execution of this Agreement by BUYER and SELLER with INTERNATIONAL CITY ESCROW, INC., located at: 5000 E. Spring Street, Suite 120, Long Beach, California, (hereinafter referred to as the ESCROW AGENT or the "ESCROW", whenever the context so requires), by delivering of the documents and instruments of transfer required under the provisions of paragraph 3. b. hereinbelow, against delivery by the BUYER of the purchase price, as provided in paragraph 4. hereinbelow. A. Escrow Instructions. The parties agree to execute Escrow Instructions prepared by the ESCROW AGENT in substantially the form of Exhibit "B" attached hereto, (hereinafter referred to as the "ESCROW INSTRUCTIONS"). In the event there is any conflict between any term or provision of the ESCROW INSTRUCTIONS and any term or provision of this Agreement, the term or provision of this Agreement shall govern in all cases. 2 B. Definition. As used in this Agreement, "CLOSING" means the passing of good and marketable title to the PURCHASED FIXTURES mentioned in paragraph 1. from SELLER to BUYER. The CLOSING shall take place at the offices of the ESCROW AGENT. Except as otherwise stated in paragraph 3.b. hereinbelow, the costs and expenses of ESCROW shall be paid by BUYER. C. Waiver. BUYER waives complianee with the provisions of the California Commercial Code relating to transfers in connection with the sale of assets. However, nothing in this subparagraph shall estop or prevent either the BUYER or SELLER from asserting as a bar or defense to any action or proceeding brought under that law that it does not apply to the sale contemplated under this Agreement. 3. Closing. A. Time and Place. The consummation of the transactions contemplated by this Agreement shall take place at the CLOSING, to he held at 2:00 p.m. on the earlier of: (1) the date five business days after the BUYER provides written notice to the SELLER that all of the conditions to the CLOSING have been satisfied or waived: or (2) November 30, 2000, whichever occurs first, at the offices of the ESCROW AGENT, or at such other time, date or place as the parties hereto may mutually agree. 3. B. Deliveries at the CLOSING. At the CLOSING, SELLER shall deliver to the ESCROW AGENT such conveyances, bills of sale, assignments, agreements, UCC lien releases, and other documents, in form and substance satisfactory to BUYER'S counsel, as may be reasonably requested by BUYER'S counsel to effect the sale and transfer of the PURCHASED FIXTURES with good and marketable title, free and clear of any and all liens, claims and encumbrances of any type, and to consummate the transactions contemplated by this Agreement, and SELLER shall make such other deliveries specified in or contemplated by this Agreement.. On or before the CLOSING, BUYER shall deliver to the ESCROW AGENT, cash, or a certified bank or cashier's check or wire transfer in accordance with Section 4. hereof, together with sufficient funds to pay the escrow costs and expenses, and an original assignment executed by BUYER assigning all of BUYER'S right, title and interest in and to that certain Food Processing and Packing Credit Agreement by and between BUYER and TRIPLE H FOOD PROCESSORS, INC., a California Corporation, a copy of which is attached hereto as Exhibit "C". 4. Purchase Price and Payments. A. Purchase Price. The purchase price to be paid for the BUYER'S acquisition of the PURCHASED FIXTURES shall be the sum of $595,000.00, to be paid in the form of cash and the assignment of the said Food Processing and Packing Credit Agreement, as more particularly set forth hereinbelow. 4 B.Payments of Purchase Price. The PURCHASE PRICE shall be paid as follows: (1) Cash. On or before the CLOSING, BUYER shall deliver to the ESCROW AGENT, cash, or a certified bank or cashier's check or wire transfer in readily available funds, the sum of $380,000.00, together with sufficient additional funds to pay the escrow costs and expenses. (2) Assignment of Food Processing and Packing Credit Agreement. On or before the CLOSING, BUYER shall deliver to the ESCROW AGENT an original assignment executed by BUYER assigning all of BUYER'S right, title and interest in and to that certain Food Processing and Packing Credit Agreement by and between BUYER and TRIPLE H FOOD PROCESSORS, INC., a California Corporation, a copy of which is attached hereto as Exhibit "C". The parties specifically agree and acknowledge that for purposes of this Agreement the said Food Processing and Packing Credit Agreement has a value of $215,000.00, which shall be credited to the purchase price. 5. TITLE: At the close of ESCROW and transfer of title, SELLER will deliver to BUYER good and marketable title to the said PURCHASED FIXTURES, free and clear of any and all restrictions on or conditions of transfer or assignment, and 5 free and clear of any and all mortgages, liens, pledges, charges, encumbrances, equities, claims, rights, conditions and/or restrictions. 6. REMOVAL, DISASSEMBLY, AND TRANSPORTATION CHARGES AND FEES: Any and all removal, disassembly, and transportation, charges and fees associated with the removal of the PURCHASED FIXTURES from SELLER'S facilities at Morgan Hill, California shall be paid solely and exclusively by the BUYER and the BUYER shall indemnify, defend and hold the SELLER free and harmless therefrom. 7. DISASSEMBLY AND LOADING OF PURCHASED ASSETS: BUYER, at its sole cost and expense, shall disassemble the PURCHASED FIXTURES so as not to cause any material damage to SELLER'S facilities, and BUYER shall indemnify, defend and hold SELLER and its agents and employees free and harmless from and against any and all liabilities, damages, injuries, claims, suits, expenses (including reasonable attorney's fees, court costs and out-of-pocket expenses) that may in any way arise from the actions of BUYER or its employees or agents in disassembling, loading and transporting the PURCHASED FIXTURES. SELLER agrees to provide reasonable access to its plant/facilities to BUYER and BUYER'S employees and agents for the purpose of disassembling, loading and transporting the PURCHASED FIXTURES. 6 8. TECHNICAL ASSISTANCE TO INSTALL THE PURCHASED FIXTURES: If requested in writing by BUYER, SELLER agrees to provide at no cost or expense technical assistance to BUYER at its plant/facilities with respect to the removal/disassembly of the PURCHASED FIXTURES. SELLER shall designate an officer, employee, agent or other qualified representative to provide any such technical assistance which may be requested by BUYER. 9. EXCISE AND PROPERTY TAXES: BUYER shall pay all sales and use taxes, if any are owed, arising out of the transfer of the PURCHASED FIXTURES. BUYER shall not be responsible for any property, business, occupation, withholding, or similar taxes of any kind related to the PURCHASED FIXTURES, all of which shall be the sole responsibility of SELLER. 10. WARRANTIES OF SELLER SELLER shall indemnify, defend, and hold BUYER free and harmless from and against any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries and deficiencies, including interest, penalties and reasonable attorney's fees, that arise, result from, or relate to any breach of, or failure by SELLER to perform any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit, instrument or bill of sale furnished or to be furnished by SELLER hereunder. 7 11. DISCLA1MER OF ALL OTHER WARRANTIES: THE PURCHASED FIXTURES WHICH ARE THE SUBJECT OF THIS AGREEMENT ARE PURCHASED BY THE BUYER "AS-IS, WHERE-IS" AND "WITH ALL FAULTS", AND BUYER ACKNOWLEDGES THAT NO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE ARE TO BE IMPLIED IN THIS TRANSACTION. 12. INDEMNiFICATION: Each party shall indemnify and hold the other party harmless and will, upon request, defend the other against all actions, proceedings, claims, demands, suits, outlays, damages or expenses, including reasonable legal fees and other costs that may be assessed against the other, and which the other may incur in defending any proceedings in which the damage sustained arose from a failure of the defaulting party to meet its obligations under this AGREEMENT, or from any other act or omission of the defaulting or breaching party, its representatives, agents or employees. 13. MISCELLANEOUS: A. SURVIVAL OF REPRESENTATIONS AND WARRANTIES: The representations, warranties, covenants and agreements of both BUYER and SELLER shall remain in full force regardless of any investigation or approval by BUYER and shall survive the delivery of the PURCHASED FIXTURES to BUYER. 8 B. ASSIGNMENT: This AGREEMENT shall be binding upon, inure to the benetit ot, and be enforceable by the heirs, successors, administrators, executors and assigns of BUYER and SELLER except however, neither party shall transfer or assign this AGREEMENT or any part thereof without the prior written consent of the other party. C. CHOICE OF LAW: This AGREEMENT shall be governed by the internal laws of the State of California, without giving effect to the internal "choice of law" rules, provisions, or statutes of the State of California. D. PARTIAL INVALIDITY If any term, covenant, condition or provision of this AGREEMENT is held by a arbitrator or court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. E. MUTUAL ASSURANCES: As additional consideration for the purchase and sale contemplated herein, the parties hereto mutually agree to undertake to do, and to do, any and all other acts and things necessary, proper or required to accomplish the purchase and sale, including but not limited to, the execution and filing of any and all bills of sale, documents, applications, statements, consents and declarations. 9 F. ENTIRE AGREEMENT This AGREEMENT constitutes the sole and entire agreement between the parties hereto with regard to the subject matter hereof. No course of prior dealings between the parties and no usage of trade shall be relevant or admissible to supplement, explain, or vary any of the terms of this AGREEMENT. Acceptance of, or acquiescence in, a course of performance rendered under this or any prior agreement shall not be relevant or admissible to determine the meaning of this AGREEMENT even though the accepting or acquiescing party has knowledge of the nature of the performance and an opportunity to make objection. No representations, understandings, or agreement have been made or relied upon in the making of this AGREEMENT other than those specifically set forth herein. This AGREEMENT may be modified only in an instrument signed by the parties or their duly authorized agents. G. INTERPRETATION & CONSTRUCTION: The parties to this AGREEMENT were represented by separate counsel and this AGREEMENT was prepared through the joint efforts of the parties. Therefore, the language in all parts of this AGREEMENT shall in all cases be simply construed according to its fair meaning and not strictly for or against BUYER or SELLER. Accordingly, the parties hereby waive ss. 1654 of the California Civil Code and all other rules of law or construction which state that in cases of uncertainty, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist. 10 H. TIME OF THE ESSENCE Time is hereby expressly declared to be of the essence of this AGREEMENT and each and every term and provision hereof. I. CAPTIONS: Captions of the articles, sections or paragraphs of this AGREEMENT are for convenience and reference only, and the words contained therein shall in no way be held to explain, modify, amplify or aid in the interpretation, construction or meaning of the provisions of this AGREEMENT. J. NOTICES: Except as otherwise expressly provided herein or by law, any and all notices or other communications required or permitted by this AGREEMENT or by law, to be served on, given to, or delivered to either party hereto, BUYER or SELLER by the other party to this AGREEMENT shall be in writing and shall be deemed duly served, given, delivered and received when personally delivered to the principal office or business address of the party to whom it is directed by confirmed telephonic facsimile transmission or cable, or in lieu thereof: when deposited in the United States mail, first-class postage prepaid, addressed to SELLER as follows: SPECTRUM ORGANIC PRODUCTS, INC. 133 Copeland Street Petaluma, California 94952 and to BUYER as follows: TRI H INVESTORS 5821 Wilderness Ave. Riverside, California 92504 11 The parties may change their addresses for the purpose of this paragraph by giving written notice of such change to the other parties in the manner provided herein. K. ARBITRATION OF DISPUTES: Any controversy, claim or dispute between the parties, directly or indirectly, concerning this AGREEMENT or breach hereof: or the subject matter hereof: shall be finally settled by arbitration as provided herein. In the event a dispute is to be submitted to arbitration, the dispute shall be settled by arbitration in the City of Riverside, Riverside County, California, and judgment upon the award rendered may be entered in any court having jurisdiction thereof Except as specifically provided herein the arbitration shall proceed in accordance with the laws of the State of California. The party requesting arbitration shall give a written demand for arbitration to the other party by registered or certified mail. The demand shall set forth a statement for the nature of the dispute, the amount involved and the remedies sought. No later than thirty (30) calendar days after the demand for arbitration is served, the parties shall jointly select and appoint a retired Judge in the County Court to act as the arbitrator. If the parties do not agree on the selection of an arbitrator, the party seeking arbitration shall apply to the County Court for the appointment of a retired Judge of that court to serve as the arbitrator. As rules for the arbitration, the arbitrator shall apply the provisions of Sections 1282 through 1284.2 of the California Code of Civil Procedure and the parties may pursue discovery in accordance with California Code of Civil Procedure Section 1283.05. No later than ten (10) calendar days after the arbitrator is appointed, the arbitrator shall schedule the arbitration for hearing to commence on a mutually convient date. The hearing shall commence no later than one 12 hundred eighty (180) calendar days after the arbitrator is appointed and shall continue from day to day until completed. All discovery shall be completed no later than the commencement of the arbitration hearing, or one hundred eighty (180) calendar days after the date that a proper demand for arbitration is served, whichever occurs earlier, unless upon a showing of good cause the arbitrator extends or shortens such period. The arbitrator shall issue his or her award in writing no later than twenty (20) calendar days after the conclusion of the hearing. The arbitration award shall be final and binding regardless of whether one of the parties fails or refuses to participate in the arbitration. The results of such arbitration shall be conclusive and binding, provided, however, that both parties shall have the right to apply to a court of competent jurisdiction for such equitable relief as is necessary to preserve and enforce their rights under this AGREEMENT. Notwithstanding any of the foregoing provisions, either party may join the other party to any action, suit or proceeding with respect to which the party seeking such joinder is a defendant, if the other party is required to defend, indemnify, and hold harmless such defendant in accordance with the terms and provisions hereof. L. NON-EXCLUSWE REMEDIES: Any remedies of BUYER and/or SELLER set forth in this AGREEMENT shall not be exclusive, but shall be cumulative and in addition to all rights and remedies now or hereinafter provided in this AGREEMENT or allowed by law or equity. Upon any breach of this AGREEMENT by any party, the other party shall be free to exercise any and all rights and remedies that party may have concurrently or simultaneously and that party shall not be required to first 13 exercise or exhaust any individual right or remedy that party may have, but that party shall be free to exercise all such rights and remedies at the same time. M. ATTORNEY'S FEES: If any legal action, arbitration or other proceeding is brought for the enforcement of this AGREEMENT, or because of an alleged dispute, breach, default or misrepresentation in conne~ction with any of the provisions of this AGREEMENT, or any of the Exhibits which are incorporated herein, then the successful or prevailing party shall be entitled to recover reasonable attorney's fees and all other costs incurred in any such action or proceeding, in addition to any other relief to which he may be entitled. IN WITNESS WHEREOF, the parties hereto have executed this AGREEMENT on the date first written hereinabove, at Riverside, Riverside County, California. BUYER: SELLER: - ------ ------ TRI H INVESTORS, SPECTRUM ORGANIC PRODUCTS, INC. A California General Partnership A California Corporation By: /s/ Richard J. Harris By: /s/ Hubert Holcombe, Jr. -------------------------- -------------------------------- RICHARD J. HARRIS HUBERT HOLCOMBE, JR., General Partner Vice President of Operations 14 EXHIBIT "A" (List/Description of Fixtures) 15 GLASS BOTTLING FIXTURES Property Tag Qty Description - ------------ --- ----------- Number ------ 19 1 Ouellette Machinery Systems, Inc. Model BKSAD-500 low level bulk glass depallettizer, s/n 090 20A & 20B 2 Cherry Burrell 2500 gallon cap. S/S vertical mix tanks with front manholes, bottom side agitators, dome-top, dish-bottom 21A & 21B 2 APV Crepaco 1000 gallon s/s jacketed dome-top processors, sin's K1602, K1518, (1997), 75 PSI jackets, 7.5hp, dual speed, top-mounted, full- sweep scrape surface agitators 22 1 Groen 200 gallon, s/s jacketed kettle, s/n 20919, 100 PSI working ressure, working top with covers 23 1 Wilden model M15 s/s diaphram pump 24 1 Waukesha size 130 s/s positive rotary pump, s/n 19793997 with 5 hp van speed motor 25 1 Waukesha size 125 s/s positive rotary pump, s/n D049137SS with 5 hp van-speed motor 26 1 Lock model HDS metal check inline liquid metal detector with G&H air actuated diverter valve 27 LOT Assorted s/s pipe, air-actuated valves, butterfly valves, T's, elbows, clamps, assorted fittings, throughtout main production bottling area 28A,B,C,D,E 5 Neptune flow meters with registers, (2) in storage 29 1 Sentry racetrack type bottle inverter/cleaner, model 4858, S/n 1399 with bottle feed section and Enterprice Glass tempering unit 30 1 Elmar remanufactured model RPE-5281RH 28 valve rotary filler, s/n EM95-2137, remanufactured 1996, to 50 oz car, with Elmar worldwide programmable controls 31 1 Diversified, in-line through-feed capper, with cap feeder and orientator with s/s 6" cleated belt incline cap conveyor, and exhaust hood 32 1 Sentry all s/s wash tunnel/bottle pre-heater with water spray jets 33 1 Jerry Weir dry heat type pasteurizer/cooler with 8.5' x 50' overall length, 8.5' W plastic through=feed exhaust conveyor with steam and air heat exchanger, blowers, full length exhaust hood, cool rinse tunnel, air knife dryer with blower 34 1 Sentry 8' W x 20' L bi-directional accumulating table 35 1 Urschel model J dicer, s/n 1036 36 1 Krones Canmatic labeler, s/n 73-D95, dual-clutch, 18 station, (6) sets of change parts, Krones Stratec label check, (Note: electronics upgraded in 1999) 37 1 Culbro type TAMP-R-ALERT neck sleever, s/n 13824558603 38 1 Peco Vac-Trac II vacuum/pressure dud detector, approx with kick out 39 1 Videojet excel series 100 inkjet coder, s/n E93G26002 40 LOT Morrison model 60 no. 10 can timing screw, s/n 84-3388, with automatic no. 10 can opener, bottle inverter and s/s dump tank 41 1 Seco 8' x 6.5' bi-diredtional plastic belt accumulating table, s/s framed Property Tag Qty Description ------------ --- ----------- Number ------ 43 1 Combi America drop case packer with (6) heads, s/n DPi 119724970 with Hytrol case conveyor and plastic table top bottle feed conveyor 44 1 3M Matic 200A adjustable case sealer, s/n 10205 45 1 Videojet Maxum II, s/n 292H05084, inkjet case coding system 46 1 Arpac model 115-24 tray overwrap system with shrink tunnel, s/n 2462 47 1 Vongal model SRLX-484ORHSEPD case palletizer, s/n 2106 LOT Assorted s/s-framed bottling line conveyor, approx. 100' LOT Approx. 85' assorted power roller case conveyor 48 1 Weightronics model 3275 digital scale 49 1 Blue M Magni-Whirl constant temperature bath 50 1 Restau-Matic "Dynamic" model SMX mixer LOT (2) s/s tables, s/s pails, s/s 3-compartment sink, pneumatic #10 can opener 51 LOT 11 wizard electric drum deheaders, (new 1998) 52 1 Best Flex expandable box conveyer 53 1 Weightronix QE-3265 bench top digital scale, s/n 006277 54 1 Sandpiper model EB35M 3" s/s diaphram pump, s/n 688251 55 1 WeightronixWl 125 digital platform scale with 4' x 4's/s remote platform 56 1 Labelaire pressure labeler, model and s/n n/a EXHIBIT "B" (Escrow Instructions) EXHIBIT "C" (Food Processing and Packing Credit Agreement) FOOD PROCESSING AND PACKING CREDIT AGREEMENT This Food Processing and Packing Credit Agreement is made and entered into this 27 day of November, 2000 by and between TRIPLE H FOOD PROCESSORS, INC., a California Corporation, with its principal place of business located 5821 Wilderness Avenue, Riverside, California, (hereinafter referred to as "PACKER"), and TRI H INVESTORS, a California General Partnership with its principal place of business located at 5821 Wilderness Avenue, Riverside, California, (hereinafter referred to as "TRI H"), as follows: RECTTALS -------- WHEREAS, the PACKER and TRI H have entered into a certain Lease of Personal Property, dated November 27, 2000, under the terms of which TRI H has leased to the PACKER certain items of food processing and packing equipment and fixtures for use in its food packing and process business, and under the terms of which the PACKER has agreed, among other thinks, to provide to TRI H per case food processing and packing credits in the total sum of $215,000.00, to be used as a credit, deduction or offset against any food processing and packing services provided or to be provided by PACKER to TRI H, or its duly authorized assignees; and WHEREAS, TRI H, or its duly authorized assignees, desire to utilize the various food processing and packing credits, deductions, or offsets against any sums owed to the PACKER for packing services rendered or provided by the PACKER during the term of any food processing or packing production contract that is in force and effect by and between the PACKER and TRI H, or its duly authorized assignees during the term of this Agreement; NOW, THEREFORE, in consideration of the foregoing and the promises, representations, agreements and warranties contained herein, the parties hereto agree as follows: 1. Until the credit, deduction or offset amount set forth in paragraph 2. hereinbelow has been fully utilized or exhausted, the PACKER shall credit, deduct, or offset against any contract food packaging and processing fees that would otherwise be due and payable to PACKER under the terms of any food processing or packaging contract that is then in force and effect by and between the PACKER and TRI I-I, or its duly authorized assignees, the following per case amounts for the following types of products: A. Organic sauces and salsas: $0.20 per case; B. Non-organic products: $0.10 per case; C. Organic/Non-organic salad dressings: $0.10; and D. New products not currently formulated: $0.20 per case for organic products and $0.10 per case for non-organic products. 2. The total amount of the credit, deduction or offset under this Agreement shall be the sum of $215,000.00, and the credit, deduction or offset shall begin to accrue on per case basis only upon the execution of a written Processing and Packaging Agreement by and between the PACKER and TRJ H, or its duly authorized assignees, and the actual commencement of production by the PACKER pursuant to any such Processing and Packaging Production Agreement. The 2 credit, deduction, or offset amount, based upon the above-listed products and per case amounts, shall be shown on each invoice from the PACKER to TRI H, or its duly authorized assignees, until the entire 521 5,000.00 amount has been fully credited, deducted, or offset, or until the termination of the said written Processing and Packaging Production Agreement, whichever event occurs first, except as otherwise provided hereinbelow and in said Processing and Packaging Agreement. In no event shall the total credit, deduction, or offset hereunder exceed the sum of $215,000.00 under any circumstances. IN THE EVENT THAT ANY REQUIRED PROCESSING AND PACKAGING AGREEMENT BETWEEN THE PACKER AND TRI H. OR ITS DULY AUTHORTZED ASSTGNEE, IS NOT RENEWED BY TRT H, OR ITS DULY AUTHORIZED ASSIGNEE, OR IN THE EVENT THAT ANY REQUIRED PROCESSING AND PACKAGING AGREEMENT IS TERMINATED BY TRI H, OR ITS DULY AUTHORIZED ASSIGNEE, FOR ANY REASON, OTHER THAN AS A RESULT OF A DEFAULT BY THE PACKER THEREUNDER, OR IF ANY REQUIRED PROCESSING AND PACKING AGREEMENT IS TERMINATED BY THE PACKER AS A RESULT OF A DEFAULT THEREUNDER BY TRI H, OR ITS DULY AUTHORIZED ASSIGNEE, THEN THERE SHALL BE NO REFUND OR ADJUSTMENT OF ANY KIND FOR ANY UNUSED CREDIT, DEDUCTION, OR OIFFSET AMOUNT AS A CONSEQUENCE OF THE TERMINATION OF ANY SUCH REQUIRED PROCESSING AND PACKAGING PRODUCTION AGREEMENT BY AND BETWEEN THE PACKER AND TRI H, OR ITS DULY AUTHOR1ZEE ASSIGNEES. THE 3 FOREGOING NOTWITHSTANDING, IN THE EVENT THAT ANY REQUIRED PROCESSTNG AND PACKAGING AGREEMENT IS NOT RENEWED BY THE PACKER, OR IN THE EVENT THAT ANY REQUIRED PROCESSING AND PACKAGING AGREEMENT IS TERMINATED BY THE PACKER OR IS TERPffNATEID BY TRI H, OR ITS DULY AUTHORIZED ASSIGNEE, AS A RESULT OF A DEFAULT BY PACKER UNDER THE PROCESSING AND PACKAGING AGREEMENT, THEN ANY UNUSED CREDIT HEREUNDER SHALL IMMEDIATELY BE PAID TO TRI H OR ITS DULY AUTHORIZED ASSIGNEE. 3. Miscellaneous Provisions: Choice of Law A. This Agreement shall be deemed to be executed and delivered in Riverside, Riverside County, California and governed by and construed in accordance with the laws of the State of California. Heirs and Successors B. This Agreement and each of its provisions shall be binding on and shall inure to the benefit of the respective heirs, devisees, legatees, executors, administrators, trustees, successors, and assigns of the parties to this Agreement and their duly authorized assignees. Nothing contained in this Paragraph shall be construed as a consent by PACKER to any assignment of this Agreement or any rights or interest therein by TRI H. Except, however, consent is hereby given by the PACKER for the assignment of this Agreement by TRI H to 4 SPECTRUM ORGANIC PRODUCTS, INC., a California Corporation, but no consent is given to any other assignments by TRI H or by SPECTRUM ORGANIC PRODUCTS, INC. without the prior written consent of PACKER. Time C. Time is of the essence in this Agreement and in each provision contained within, and each provision is made and declared to be a material, necessary, and essential part of this Lease. Arbitration D. Any controversy or claim, including any claims of interpretation or misrepresentation, arising out of or related to this Agreement or breach of this Agreement shall be settled by binding arbitration. The arbitration shall be concluded by a single arbitrator in Riverside County, California, under the then current rules of the American Arbitration Association provided that the arbitrator shall be chosen from a panel of persons knowledgeable in the food packing/processing business. The decision and award of the arbitrator shall be final and binding and the award so rendered may be entered in any court having jurisdiction. The arbitration shall be held and the award shall be deemed to be made in Riverside, California. Agreement Survives rvives Partial Invalidity D. If any provisions of this Agreement or the application of any of its provisions to any party or circumstance is held invalid or unenforceable, the remainder of this Agreement and the application of the provisions to the other parties or circumstances shall remain valid and in full force and effect. 5 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first written hereinabove. TRI H: TRI-H INVESTORS A California General Partnership By: /s/ THOMAS G. HARRIS -------------------------------- THOMAS G. HARRIS, General Partner PACKER: TRI H FOOD PROCESSORS, INC., A California Corporation By: /s/ RICHARD J. HARRIS -------------------------------- RICHARD J. HARRIS, Secretary/Treasurer 6 EX-10.34 16 0016.txt LETTER DATED FEBRUARY 16, 2001 Exhibit 10.34 February 16, 2001 FirstName LastName Address 1 Address 2 City State PostalCode Dear Note Holder, As you know, Spectrum was unable to repay the $25,000 Private Placement Note due to you on March 31, 2000, as originally planned. Under the terms of your Note, the unpaid interest at March 31, 2000 of $1,250 was added to the principal, the interest rate increased to 15%, and 2,500 additional penny warrants for the purchase of Spectrum restricted common stock were issued for each month the principal remained unpaid, up to a maximum of six months. The Note goes silent with respect to default remedies after September 30, 2000. You or your broker has already received the additional penny warrants for the purchase of 15,000 shares, which expire on March 31, 2001, as well as interest at 15% through Decernber 31, 2000. Spectrum would prefer to clear the default on these Notes as quickly as possible and desires to treat all the Note holders fairly and equally. However, the Company is not in a position to retire all of these Notes at this time due to severe cash flow restraints. To address the cash flow restraints, the Company is currently putting the finishing touches on a three-year Business Plan that will also serve as a Private Placement Memorandum for a new round of equity investment. While management remains confident that the Private Placement Memorandum will enable us to secure the additional working capital needed, we believe the best solution for the Note holders and the Company is to convert the Notes into equity. Attached is a Confidentiality Agreement that must be signed by you and returned to our offices, if you would like to receive a copy of our Business Plan. The Business Plan will allow you to evaluate the following offer: Spectrum is offering each Note holder the opportunity to convert his or her Note into additional shares of restricted stock at $0.25 per share. That per share price puts a market value on Spectrum of only $11.2 million, a figure that management believes is far below the true value of the business. It also represents a 45% discount from the average closing price during January, which is also well below what management feels is a reasonable valuation. In your case, this would equate to an additional 105,000 shares ($26,250 / $0.25) in exchange for the cancellation of your Note. Alternatively, Spectrum can offer a three-year payment plan with interest only for year one at the original interest rate under your Note of 1O% and principal and interest payments thereafter. This option will also include the resumption of monthly common stock purchase warrants in the amount of 10% of the unpaid principal, retroactive to October 1, 2000, at the closing bid price on the last trading day of the quarter. These monthly warrants will continue until your Note is paid in full, and will be issued once per quarter. Attached is an amortization schedule which details the warrants, interest and principal payments should you choose to select this option. The previous commitment to immediately repay the unpaid principal and interest on your Note in the event of(1) the sale or merger of Spectrum, (2) the raising of additional equity capital of $1,000,000 or more, or (3) the refinancing of any Spectrum debt in the net amount of $1,000,000 or more remains. The final alternative is to remain where you are, with a Note in default, bearing interest at 15%. In this case, we will continue to make quarterly interest payments at 15% on your Note. Given that these Notes represent Spectrum's highest-cost debt, the Company remains highly motivated to retire them. However, by necessity, your Note remains subordinated to the Company's bank debt and the ongoing working capital requirements to run the business. Considering the restrictions on our cash flow, and management's belief that the business is worth far more than $0.25 per share, it is our hope that you will elect to convert your Note into Spectrum restricted shares. Please return the Confidentiality Agreement at your earliest convenience if you would like to review our Business Plan in deliberation of this offer. Thank you for your investment in Spectrum and your patience while we work our way through these issues. Further information regarding the Company's financial performance, including the third quarter 10-Q filed with the SEC, can be found at www.freeEDGAR.com. The Company's ticker symbol is SPOP. We appreciate your continued support. Sincerely, Robert B. Fowles Chief Financial Officer Enclosures: Confidentiality Agreement Conversion Election Form & Amortization Schedule Spectrum Organic Products Confidentiality Agreement --------------------------------------------------- February 17, 2001 Mr. Potential Investor: In connection with your efforts to evaluate a potential transaction with Spectrum Organic Products, Inc. (the "Company"), you have requested information concerning the Company. As a condition to our furnishing you with such information, you agree to treat any information concerning the Company (whether prepared by the Company, its advisors or otherwise) which is furnished to you by or on behalf of the Company (herein collectively referred to as the "Confidential Material") in accordance with the provisions of this letter and to take or abstain from taking certain actions as set forth herein. The term "Confidential Material" does not include information which (1) is already in your or your subsidiaries possession, provided that such information is not known by you to be subject to another confidentiality agreement, is or (2) becomes generally available to the public, other than as a result of a disclosure by you or your agents, directors, employees or advisors, or (3) becomes available to you or your subsidiary on a non-confidential basis from a source other than the Company or its representatives, provided that such source is not known to be bound by a confidentiality agreement with an obligation of secrecy to the Company or another person, or (4) is independently developed by you or your subsidiary. You hereby agree that the Confidential Material will be used solely for the purpose of evaluating a possible transaction with the Company, and that such information will be kept confidential by you and your representatives and agents (it being understood that such r.epresentatives and agents shall be informed by you of the confidential nature of such information and shall be directed by you to treat such information confidentially). In addition, without prior written consent of the Company, you will. not, and will direct your representatives and agents not to, disclose to any person either the fact that discussions or negotiations are taking place regarding a possible transaction with the Company, or any terms, conditions or any other facts with respect to such possible transaction, including the status thereof. In the event that you or your representatives or agents are requested or required in ajudicial, administrative or government proceeding to disclose any Confidential Material, you agree that you will cooperate with the Company and provide the Company with prompt notices of such request, so that the Company may seek an appropriate protective order. You agree that without the prior written consent of the Company, for a period of two years from the date hereof, neither you nor any of your affiliates, representatives, agents, employees or directors will disclose to anyone, or make use of, any of the nonpublic information contained in the Confidential Material or any additional information disclosed to you by the Company, or its representatives and agents. either orally or in writing, except for the transaction contemplated by this Agreement. Spectrum Organic Products, Inc. 2 In the event that you do not proceed with the transaction which is the subject of this Agreement within a reasonable time, you shall promptly, upon written request, redeliver to the Company all written Confidential Material and any other written material containing or reflecting any information in the Confidential Material (whether prepared by the Company, its representatives or agents, or otherwise) and will not retain any copies, extracts or other reproductions in whole or in part of such material. All documents, memoranda, notes and other written material whatsoever prepared by you or your representatives or agents based on the information in the Confidential Material shall be destroyed and such destruction shall be certified in writing to the Company by an authorized officer. Although the Company will endeavor to include in the Confidential Material information known to it which it believes to be relevant for the purpose of your investigation, you understand that the Company will not make any representations or warranties as to the accuracy or completeness of the Confidential Material. You agree the Company shall not have any liability to you or any of your representatives or advisors resulting from the use of the Confidential Material. You agree that unless and until a definitive agreement between you and the Company with respect to any transaction referred to in this agreement has been executed and delivered, neither you nor the Company or its representatives and / or agents will be under any legal obligation of any kind whatsoever with respect to such a transaction by virtue of this or any other written or oral expression by any of its representatives or agents, except for the matters specifically agreed to herein. This agreement may not be modified or waived unless done so by a separate written agreement executed by you and the Company. You agree that if you fail to comply with the terms of this confidentiality agreement, the Company may suffer irreparable harm that may not be adequately compensated by monetary damages. Accordingly, you agree that in the breach of this agreement, the Company shall be entitled to injunctive or other preliminary or equitable relief, in addition to such other remedies as may be available to the Company for such breach, includittg damages. in the event of any action at law or in equity to enforce the provisions of the agreement, the unsuccessful party shall pay to the other party all reasonable costs and expenses incurred by the prevailing party, including reasonable attorney's fees. This letter shall be governed by the laws of the State of California. This agreement contains the sole and entire agreement between the parties relating to the release of information concerning the Company; any representations, promise or conditions not contained ~ierein, or any amendment hereto, shall not be binding on either party unless it is made in a subsequent written agreement signed by an authorized representative of the party to be bound thereby. Confirmed and agreed to: Spectrum Organic Products, Inc. By: /s/ By: /s/ ---------------------------- ------------------------------- Robert B. Fowles Mr. Chief Financial Officer February 17, 2001 this day of 2001 SPECTRUM ORGANIC PRODUCTS, INC. ELECTION TO CONVERT UNSECURED SUBORDINATED PROMISSORY NOTE Spectrum Organic Products, Inc. (the Company") is the new name for the legal entity formerly known as Organic Food Products, Inc. ("OFPI"). The undersigned is the holder of an unsecured subordinated promissory note ("the Note') executed by OFPI, dated Octobdr 6, 1999, in the amount of $25,000, bearing interest at 10%. As of April 1, 2000 the Company was in default under the terms of the Note. As a result of the default, the accrued interest through March 31, 2000 was added to the principal, the interest rate was raised to 15%, and the undersigned was granted an additional 2,500 warrants to purchase restricted common stock of the Company at $01 per share for each month the principal remained unpaid, up to a maximum of six months. After September 30, 2000 the Note goes silent regarding default remedies. The undersigned acknowledges that he has received in full the additional 15,000 common stock warrants under the default, and payments totaling $2,953. 13, representing interest for the nine months ended December 31, 2000 at 15%, calculated on the principal and accrued interest balance at March 31, 2000 of $26,250. The Company and the undersigned desire to convert the Note under one of the following options, and the undersigned, for value acknowledged and received, hereby irrevocably elects to surrender his interest and rights under the Note in exchange for the following (check one): [ ] Conversion to additional shares of the Company's restricted common stock, at $0.25 per share. By selecting this option, the Company will cause to be issued to the undersigned 105,000 shares of restricted common stock as soon as practicable after receipt of this election form, properly completed, at the Company offices. [ ] Acceptance of a quarterly payment stream and common stock purchase warrants in accordance with the attached amortization schedule, which calls for payment in full of the principal balance of $26,250, plus interest thereon at 10%, to be repaid over three years beginning January 1, 2001, with interest only for the first year. By selecting this option, the Company will follow the attached amortization schedule until both principal and interest are paid in full, which will be the earlier of (1) December 31, 2003, (2) the sale or merger of the Company, (3) the raising of additional equity capital of $1,000,000 or more, or (4) the refinancing of debt in a net amount of $1,000,000 or more. Dated Signature ------------------------ ---------------------------- Printed Name ---------------------------- Address ---------------------------- ---------------------------- ----------------------------
PRIVATE PLACEMENT NOTE AMORITIZATION SCHEDULE Quarterly Principal & Interest Payment $3,661.02 Common Interest Rate: 10.0% Stock Purchase Date Date Total Unpaid Warrants Warrants Warrants Date Principal Interest Payment Balance Granted* Issued Expire ---- --------- -------- ------- ------- ------- ------ ------ Balance Forward @ 12/31/2000 12/31/00 $26,250.00 7,500 03/31/01 12/31/03 payment# 1 03/31/01 -- $ 656.25 $ 656.25 26,250.00 7,500 03/31/01 12/31/03 2 06/30/01 -- 656.25 656.25 26,250.00 7,500 06/30/01 12/31/03 3 09/30/01 -- 656.25 656.25 26,250.00 7,500 09/30/01 12/31/03 4 12/31/01 -- 656.25 656.25 26,250.00 7,500 12/31/01 12/31/03 5 03/31/02 $ 3,004.77 656.25 3,661.02 23,245.23 7,000 03/31/02 12/31/03 6 06/30/02 3,079.89 581.13 3,661.02 20,165.34 6,000 06/30/02 12/31/03 7 09/30/02 3,156.89 504.13 3,661.02 17,008.45 5,100 09/30/02 12/31/03 8 12/31/02 3,235.81 425.21 3,661.02 13,772.64 4,100 12/31/02 12/31/03 9 03/31/03 3,316.70 344.32 3,661.02 10,455.94 3,100 03/31/03 12/31/03 10 06/30/03 3,399.62 261.40 3,661.02 7,056.32 2,100 06/30/03 12/31/03 11 09/30/03 3,484.61 176.41 3,661.02 3,571.71 1,100 09/30/03 12/31/03 12 12/31/03 3,571.71 89.31 3,661.02 0.00 -- ---------- --------- ---------- ---------- ------ $26,250.00 $5,663.16 $31,913.16 66,000 ---------- --------- ---------- ------ * At closing bid price on the last trading day of the quarter.
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