0001108890-01-500188.txt : 20011119 0001108890-01-500188.hdr.sgml : 20011119 ACCESSION NUMBER: 0001108890-01-500188 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011106 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22231 FILM NUMBER: 1775534 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 10-Q 1 spectrum10q093001.txt DATED 09-30-01 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ________________ Commission File No. 333-22997 SPECTRUM ORGANIC PRODUCTS, INC. ---------------------------------------------------- (Exact name of registrant as specified in its Charter) California 94-3076294 ------------------------------ -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 133 Copeland Street Petaluma, California 94952 -------------------------------------- (Address of principal executive offices) (707)778-8900 ----------------------------- Registrant's telephone number Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, no par value, 45,560,354 shares as of November 1, 2001. Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ----------------------------- SPECTRUM ORGANIC PRODUCTS, INC. BALANCE SHEETS ASSETS (Unaudited) September 30, December 31, 2001 2000 ------------ ------------ Current Assets: Cash $ 1,100 $ 900 Accounts receivable, net 5,004,100 2,971,700 Inventories, net 6,390,200 6,676,400 Prepaid expenses and other current assets 86,900 84,600 ------------ ------------ Total Current Assets 11,482,300 9,733,600 Property and Equipment, net 3,145,300 3,254,900 Other Assets: Goodwill, net 2,482,000 9,721,100 Other assets, net 130,700 131,800 ------------ ------------ Total Assets $ 17,240,300 $ 22,841,400 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Bank overdraft $ 648,900 $ 539,000 Line of credit 5,891,400 5,432,200 Accounts payable, trade 4,733,600 6,057,600 Accrued expenses 971,800 715,400 Current maturities of notes payable, former stockholder 328,100 375,000 Current maturities of notes payable and capitalized lease obligations 329,200 1,312,900 Current maturities of notes payable, stockholders 131,200 110,800 ------------ ------------ Total Current Liabilities 13,034,200 14,542,900 Notes payable, former stockholder, less current maturities 805,900 961,400 Notes payable and capitalized lease obligations, less current maturities 674,800 149,900 Notes payable, stockholders, less current maturities 236,500 337,200 ------------ ------------ Total Liabilities 14,751,400 15,991,400 ------------ ------------ Commitments and Contingencies Stockholders' Equity: Preferred stock, 5,000,000 shares authorized, no shares issued or outstanding -- -- Common stock, without par value, 60,000,000 shares authorized, 45,560,354 and 44,495,828 issued and outstanding at September 30, 2001 and December 31, 2000, respectively 8,850,200 8,616,200 Additional paid-in capital 407,300 304,200 Accumulated deficit (6,768,600) (2,070,400) ------------ ------------ Total Stockholders' Equity 2,488,900 6,850,000 ------------ ------------ Total Liabilities and Stockholders' Equity $ 17,240,300 $ 22,841,400 ============ ============ The accompanying notes are an integral part of the financial statements 2
SPECTRUM ORGANIC PRODUCTS, INC. STATEMENTS OF OPERATIONS (Unaudited) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Gross Sales $ 11,330,300 $ 11,411,200 $ 33,838,500 $ 34,977,000 Discounts and Allowances 735,400 796,700 2,400,700 2,257,700 ------------ ------------ ------------ ------------ Net Sales 10,594,900 10,614,500 31,437,800 32,719,300 Cost of Goods Sold 7,738,900 7,941,300 22,698,000 24,340,300 ------------ ------------ ------------ ------------ Gross Profit 2,856,000 2,673,200 8,739,800 8,379,000 ------------ ------------ ------------ ------------ Operating Expenses: Sales and Marketing 1,560,600 1,546,000 4,726,900 4,810,800 General and Administrative 859,300 922,000 2,585,700 2,701,100 Amortization of Goodwill 62,200 225,500 458,600 684,200 Loss on Sale of Product Lines and Plant Closure -- 250,000 4,976,400 388,400 ------------ ------------ ------------ ------------ Total Operating Expenses 2,482,100 2,943,500 12,747,600 8,584,500 ------------ ------------ ------------ ------------ Income (Loss) from Operations 373,900 (270,300) (4,007,800) (205,500) ------------ ------------ ------------ ------------ Other Income (Expense): Interest Expense (179,500) (366,400) (705,900) (1,067,300) Other, net 1,500 400 15,500 61,900 ------------ ------------ ------------ ------------ Total Other Expenses (178,000) (366,000) (690,400) (1,005,400) ------------ ------------ ------------ ------------ Net Income (Loss) $ 195,900 $ (636,300) $ (4,698,200) $ (1,210,900) ============ ============ ============ ============ Basic and Fully Diluted Income (Loss) Per Share $ 0.00 $ (0.01) $ (0.10) $ (0.03) ============ ============ ============ ============ Weighted Average Shares Outstanding 45,560,354 44,423,844 45,170,889 44,169,015 ============ ============ ============ ============ The accompanying notes are an integral part of the financial statements 3
SPECTRUM ORGANIC PRODUCTS, INC. STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, September 30, 2001 2000 ------------ ------------ Net Loss $ (4,698,200) $ (1,210,900) Adjustments to Reconcile Net Loss to Net Cash (Used In) Provided by Operating Activities: Provision for allowances against receivables (54,300) (17,900) Provision for reserves for inventory obsolescence (196,200) (285,000) Depreciation and amortization 309,800 429,800 Amortization of goodwill 458,600 684,200 Loss on sale of product lines and plant closure 4,976,400 338,400 Loss on sale of fixed assets 63,300 -- Imputed interest on notes payable and conversion of notes payable to equity 27,000 42,100 Imputed interest on stock warrants issued 52,700 118,700 Increase in cash surrender value of life insurance (6,700) (10,200) Amortization of original issue discount on unsecured and subordinated notes payable -- 55,200 Changes in Assets and Liabilities: Accounts receivable (1,978,100) (986,500) Inventories (345,700) 1,426,800 Prepaid expenses and other assets 18,800 112,900 Accounts payable (1,250,000) 192,900 Accrued expenses 256,400 (763,000) ------------ ------------ Net Cash (Used In) Provided by Operating Activities (2,366,200) 127,500 ------------ ------------ Cash Flows from Investing Activities: Purchase of property and equipment (344,200) (324,300) Proceeds from sale of assets 5,500 53,000 Proceeds from sale of product lines and related inventories 2,778,100 -- Merger-related expenses -- (169,900) Transaction fees on sale of product lines (139,700) -- ------------ ------------ Net Cash Provided by (Used In) Investing Activities 2,299,700 (441,200) ------------ ------------ Cash Flows from Financing Activities: Increase in checks drawn against future deposits 109,900 193,500 Proceeds from lines of credit 31,879,000 33,113,200 Repayment of lines of credit (31,419,800) (32,505,400) Repayment of notes payable, former stockholder (218,700) (275,000) Repayment of notes payable to stockholders (130,200) (209,800) Proceeds from notes payable 50,000 276,100 Principal repayments under notes payable (242,800) (336,900) Repayment of capitalized lease obligations (30,700) (41,500) Proceeds of loan against cash surrender value of life insurance -- 98,400 Restricted shares purchased by board members 70,000 -- Warrants exercised -- 1,300 ------------ ------------ Net Cash Provided by Financing Activities 66,700 313,900 ------------ ------------ Net Increase In Cash 200 200 Cash, beginning of the year 900 1,100 ------------ ------------ Cash, end of the period $ 1,100 $ 1,300 ============ ============ Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes $ 800 $ 15,400 Cash paid for interest $ 666,000 $ 855,900 Non-Cash Financing Activities: Conversion of notes payable to common stock $ 164,000 -- The accompanying notes are an integral part of the financial statements 4
SPECTRUM ORGANIC PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS 1. Basis of Presentation: The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. They include all adjustments, which in the opinion of Management, are necessary in order to make the financial statements not misleading. Operating results for the three-month and nine-month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2001. These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include certain disclosures required by generally accepted accounting principles. Accordingly, the statements should be read in conjunction with Spectrum Organic Products, Inc. financial statements and notes thereto included in the Company's Form 10-KSB for the year ended December 31, 2000. Certain reclassifications have been made to the prior year unaudited interim financial statements to be consistent with the presentation at September 30, 2001. These reclassifications had no impact on net income or retained earnings. 2. Business Combination: On October 6, 1999 Spectrum Naturals, Inc. ("SNI"), its affiliate Spectrum Commodities, Inc. ("SCI") and Organic Ingredients, Inc. ("OI"), all California corporations, were merged with and into Organic Food Products, Inc. ("OFPI"), also a California corporation (the "Merger"). Effective with the Merger, the newly combined entity changed its name to Spectrum Organic Products, Inc. ("the Company" or "SPOP"). Since former SNI stockholders hold a controlling interest in the Company after the Merger, the transaction was accounted for as a reverse acquisition, with SNI as accounting acquirer and OFPI and OI as accounting acquirees. 3. Sale of Product Lines: On June 11, 2001 the Company sold its tomato-based product lines to Acirca, Inc., an unrelated third party, in a transaction approved by unanimous vote of the Company's Board of Directors. Acirca has been, and may continue to be, a customer of the Company, purchasing organic ingredients from the Company. The assets sold included inventories, trademarks and goodwill associated with the Millina's Finest, Garden Valley Natural, Parrot and Frutti di Bosco brands of pasta sauces and salsas, as well as children's meals sold under the Grandma Millina's Kitchen Kids' Meals brand and certain private label pasta sauce and salsa products. The total consideration in connection with the sale was $3,128,100, which included $2,000,000 paid at the closing and $778,100 paid for saleable inventory sold to Acirca. Also included in the total amount of consideration was $350,000 deposited in an escrow account to be applied towards indemnity claims of Acirca and, to the extent not utilized for any indemnity claims of Acirca, released to the Company in two equal installments at the six month and one year anniversaries of the sale. Because of this contingency, the $350,000 in escrow was not recorded as part of the consideration received on the sale. 5
Since the product lines sold comprised all of the remaining assets of OFPI, the remaining net goodwill associated with the reverse acquisition of OFPI in October 1999 of $6,776,200 was written-off. Accordingly, the Company recorded a non-cash loss on the sale of the product lines of $4,976,400, which was computed as follows: Total cash consideration $3,128,100 Less escrowed funds included above 350,000 ---------- Net cash proceeds from sale 2,778,100 ---------- Assets sold: Inventories 778,100 Label plates, molds and dies, net of accumulated amortization 10,500 Goodwill, net of accumulated amortization 6,776,200 Transaction fees 139,700 Write-off of remaining inventories not purchased 50,000 ---------- 7,754,500 ---------- Net Loss on Sale of Product Lines $4,976,400 ========== The transaction fees represented investment banking, legal and accounting fees associated with the sale. The write-off of remaining inventories represented losses on close-out sales of dry cut pasta and canned tomatoes, which were products previously sold by the Company under the disposed brand names that were not purchased by the buyer. 4. Plant Closure: In May 2000, the Company committed to a plan to close its leased manufacturing facility in Morgan Hill, California. Production of the tomato-based product lines, which were sold as discussed in Note 3, was transferred to a third-party co-packer who also purchased certain manufacturing equipment from the Company. As a result, production at the Morgan Hill facility ceased on July 21, 2000. The facility currently remains under lease while the Company returns the facility to its condition on the date it was leased. Management has reached an agreement in principle with the landlord for a lease termination and anticipates being free of its obligations under the lease by December 31, 2001. Rental payments for the nine-month period ended September 30, 2001 for the Morgan Hill facility were $72,100. All rent through December 31, 2001 has been accrued and is included in accounts payable at September 30, 2001. 6
5. Inventories: Inventories consisted of the following: September 30, December 31, 2001 2000 ------------ ------------ Raw materials $ 767,600 $ 1,130,300 Finished goods 5,991,900 6,111,600 ------------ ------------ Total Inventories 6,759,500 7,241,900 Less: Provision for obsolete inventory (369,300) (565,500) ------------ ------------ Net Inventories $ 6,390,200 $ 6,676,400 ============ ============ Included with the sale of product lines was $778,100 of saleable finished case goods and packaging material inventories which were sold at the Company's cost. Also recorded as part of the sale of product lines was a write-off for obsolete inventories of $50,000 to cover losses on closeout sales of dry cut pasta and canned tomatoes, which were products previously sold under the disposed brand names but not purchased by Acirca. 6. Commitments and Contingencies: Litigation and Settlements -------------------------- In February 1998, OFPI acquired the natural fruit juice and water bottling operations of Sunny Farms Corporation for cash and common stock. A portion of the common stock consideration was held in escrow, contingent upon earn-out calculations for the year following the acquisition. Subsequently, Sunny Farms sought voluntary relief pursuant to chapter 7 of the U.S. Bankruptcy Code in November 1998. In October 2000, attorneys for the bankruptcy trustee filed a complaint against the Company in the U.S. Bankruptcy Court for the Northern District of California, challenging the Company's earn-out calculations and requesting that a portion of the common stock held in escrow be released. The Company and the Sunny Farms bankruptcy trustee reached an agreement on October 9, 2001 regarding the earn-out calculations and subsequent shares to be released from escrow, which is in the process of being approved by the Bankruptcy Court. An estimated accrual of $94,400 for common shares to be released was included in accounts payable at September 30, 2001. In October 2000, the Company was notified by counsel for GFA Brands, Inc. that nutritional claims pertaining to Spectrum Naturals Organic Margarine were infringing upon two patents issued in the United States that pertain to particular fat compositions suitable for human ingestion. The patent holder exclusively licensed each of these patents to GFA Brands. Management believes that the margarine does not infringe upon either patent, and further, that the patents are unenforceable in any case. Management engaged legal counsel that specialize in this area and received an opinion letter in February 2001 confirming that, in the opinion of counsel, the manufacture or sale of Spectrum Naturals Organic Margarine does not infringe upon the GFA patents, either literally or under the doctrine of equivalents. 7
The Company filed a complaint against GFA Brands for declaratory judgment of non-infringement and invalidity of the two patents on August 28, 2001 in the U.S. District Court for Northern California. The Complaint requests a declaratory judgment that the margarine does not infringe either patent, a declaratory judgment that both patents are invalid, that GFA Brands be enjoined from threatening or asserting any action for infringement of either patent, and attorney's fees. Management believes the Company has meritorious defenses and that a loss is not probable at this time, therefore, no provision for loss has been recorded at September 30, 2001. Liquidity --------- On June 11, 2001 the Company sold its tomato-based product lines to an unrelated third party in order to raise cash for working capital purposes. The sale generated cash consideration of $3,128,100, of which $350,000 was deposited into an escrow account and subject to indemnity claims of the buyer, if any, over the course of the one-year period ending June 11, 2002. The remaining $2,778,100 in immediately available cash was applied against the Company's outstanding line of credit and subsequently, was partially utilized to bring the Company's vendors current. At September 30, 2001 the Company had $808,300 in available borrowings under its line of credit. On October 18, 2001 the Company entered into an amendment (the "Amendment") to the existing Credit and Security Agreement (the "Agreement") with its primary lender, Wells Fargo Business Credit, Inc. ("WFBC"). The Amendment includes new financial covenants based on the Company's current financial position and latest forecasts of future results, a new term loan for up to $100,000 for new production equipment to be purchased by the Company, incentive targets which, if achieved, will enable the Company to reduce the interest rates charged by WFBC by 100 basis points, and also entails a two year extension through October 2004 under the same terms as the original Agreement. In consideration for the Amendment, the Company will pay WFBC an accommodation fee of $20,000 in two equal installments on November 1, and December 3, 2001. As a result of executing the Amendment, the Company has returned to an in-compliance status with WFBC. Accordingly, the Company reclassified $418,500 of the WFBC term debt from current liabilities to long-term debt at September 30, 2001. The Company continues to be highly leveraged and is currently seeking additional working capital from various sources such as the sale of certain assets or the issuance of common stock. However, Management believes that future cash flows from operations should provide adequate funds to meet the Company's estimated cash requirements for the foreseeable future. The majority shareholder, who holds approximately 69% 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. 8 7. New Applicable Accounting Pronouncements: In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for Certain Sales Incentives." This issue addresses the recognition, measurement, and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or are exercisable by a customer as a result of a single exchange transaction. In April 2001, the EITF reached a consensus on Issue 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." This issue addresses the recognition, measurement and income statement classification of consideration, other than that directly addressed by Issue 00-14, from a vendor to a retailer or wholesaler. The Company is currently analyzing Issues 00-14 and 00-25. However, based on Management's current understanding and interpretation, neither is expected to have a material impact on the Company's financial position or results of operations, except that certain reclassifications may occur. The conclusions reached in Issue 00-25 and Issue 00-14 (amended by Issue 00-25) are effective for fiscal quarters beginning after December 15, 2001. In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of certain intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combination (the merger of OFPI, OI, SNI and SCI as discussed in Note 2 to the financial statements) was accounted for using the purchase method. As of September 30, 2001 the net carrying amount of goodwill remaining after the sale of the tomato-based product lines, as discussed in Note 3 to the financial statements, was $2,482,000 and other intangible assets was $58,000. Amortization expense of goodwill and other intangible assets during the nine-month period ended September 30, 2001 was $468,300. At present, the Company is currently assessing but has not yet determined the impact the adoption of SFAS 141 and SFAS 142 will have on its financial position and results of operations. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------- The following discussion should be read in conjunction with the financial statements and related notes and other information included in this report. The financial results reported herein are not necessarily indicative of the financial results that may be achieved by the Company in any future period. Investors should carefully consider the following information as well as other information contained in this report. Information included in this report contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that the future results covered by the forward-looking statements will be achieved. The following matters constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties that could cause actual results to vary materially from the future results covered in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. The Company's operating results could vary from period to period as a result of a number of factors. These factors include, but are not limited to, the purchasing patterns of significant customers, the timing of new product introductions by the Company and its competitors, the amount of slotting fees, new product development and advertising expenses incurred by the Company, variations in sales by distribution channel, fluctuations in market prices of raw materials, competitive pricing policies, and situations that the Company cannot foresee. These factors could cause the Company's performance to differ from investor expectations, resulting in volatility in the price of the common stock. Introduction: On October 6, 1999, Spectrum Naturals, Inc. ("SNI") and its affiliate, Spectrum Commodities, Inc. ("SCI"), and Organic Ingredients, Inc. ("OI"), all California corporations were merged with and into Organic Food Products, Inc. ("OFPI" or the "Registrant"), (collectively "SPOP" or the "Company"), pursuant to the Agreement and Plan of Merger and Reorganization, dated May 14, 1999 (the "Merger"). Since former SNI stockholders hold a controlling interest in the Company after the Merger, the transaction was accounted for as a reverse acquisition, with SNI as accounting acquirer and OFPI and OI as accounting acquirees. Upon the effective date of the Merger, SNI, SCI and OI ceased to exist, the Registrant continued as the surviving legal entity, and immediately changed its name to Spectrum Organic Products, Inc. 10 -------------------------------------------------------------------------------- Results of Operations for the Three-Month Periods Ending September 30, 2001 and September 30, 2000 -------------------------------------------------------------------------------- Summary of Results: Management believes that Earnings Before Interest, Taxes, Depreciation, Amortization and Losses on Asset Disposals ("EBITDA as adjusted") is an important measure of the Company's operating performance. For the three months ended September 30, 2001, EBITDA as adjusted was $540,100 compared to $347,200 for the prior year, an increase of $192,900 or 56%. The improved performance in 2001 was primarily attributable to improved gross margins and reduced general and administrative expenses. Revenues: SPOP's gross sales for the three months ended September 30, 2001 were $11,330,300 compared to $11,411,200 for 2000, a decrease of $80,900, or 0.7% versus 2000. The decrease in 2001 was entirely due to the lost sales associated with the disposed product lines, partially offset by higher sales of branded culinary products and nutritional supplements. Within the branded culinary products, sales were significantly higher than prior year in packaged mayonnaise (+31.3%), packaged dairy case products (+27.2%), and individually quick frozen fruits and vegetables (a new product category this year). Nutritional supplement sales increased 11.7% versus the prior year. Comparable gross sales (after eliminating sales of disposed or discontinued product lines from both periods) for the third quarter increased by 13.2% versus the prior year. During the three months ended September 30, 2001 and 2000, gross sales by source were as follows: 2001 2000 ---- ---- Consumer Brands - Culinary Products $ 4,383,800 $ 3,977,200 Consumer Brands - Nutritional Supplements 2,221,000 1,988,600 Industrial Ingredients 3,612,800 3,665,100 Private Label Products/Other 1,021,500 500,000 Disposed/Discontinued Product Lines 91,200 1,280,300 ----------- ----------- Total Gross Sales $11,330,300 $11,411,200 =========== =========== Discounts and allowances as a percent of gross sales decreased to 6.5% of gross sales for 2001 compared to 7.0% in 2000. The decrease was primarily the result of decreased promotion levels on nutritional supplements in both liquid and capsule forms, as well as packaged oils and packaged mayonnaise on the culinary side. Cost of Goods Sold: The Company's cost of goods sold decreased as a percent of gross sales for the three-month period ended September 30, 2001 to 68.3% compared to 69.6% for the same period in 2000. The decrease was due primarily to non-recurring costs during the prior year associated with the move to a new centralized distribution facility and inventory losses on the disposed product lines. 11 Gross Profit: Gross profit for the three months ended September 30, 2001 was $2,856,000 versus $2,673,200 for 2000, an increase of $182,800 or 6.8%. Gross profit as a percentage of gross sales was 25.2% for 2001 versus 23.4% for the three months ended September 30, 2000, primarily due to the reduced promotional expenditures and the non-recurring costs in the prior year. Sales and Marketing Expenses: The Company's sales and marketing expenses for the three months ended September 30, 2001 were $1,560,600 or 13.8% of gross sales, versus $1,546,000 or 13.5% of gross sales for 2000. There were no significant variances in spending levels between the two periods. General and Administrative Expenses: The Company's general and administrative expenses for the three months ended September 30, 2001 were $859,300 or 7.6% of gross sales, versus $922,000 or 8.1% of gross sales for 2000. The decrease in spending of $62,700 was primarily attributable to lower professional fees, partially offset by increased insurance costs. Amortization of Goodwill: The Company recorded goodwill of $10,848,200 in connection with the Merger. Amortization expense for the three months ended September 30, 2001 was $62,200, versus $225,500 of amortization expense for 2000. Since the sale of the tomato-based product lines comprised all of the remaining assets of OFPI, the remaining unamortized goodwill associated with the reverse acquisition of OFPI in October 1999 of $6,776,200 was written-off in June as part of the sale. The remaining goodwill associated with the acquisition of OI continues to be amortized over a twelve-year life, resulting in $62,200 in expense for the third quarter. Loss on Sale of Product Lines and Plant Closure: During the prior year, the Company recorded a provision of $250,000 for losses on the sale of surplus production equipment at the Company's leased manufacturing facility in Morgan Hill, California where production of the tomato-based product lines occurred until July 21, 2000. Interest Expense: The Company's interest expense for the three months ended September 30, 2001 was $179,500 versus $366,400 for 2000. The reduction of $186,900 or 51% was primarily attributable to significant reductions in the prime rate during 2001 and lower non-cash interest expense associated with the private placement notes. During the third quarter, non-cash interest expense of $11,200 was recorded for the value of the common stock purchase warrants issued to the private placement note holders versus $48,600 for the prior year. Net Income/(Loss): The Company reported net income of $195,900 versus a net loss of $636,300 for the three-month periods ended September 30, 2001 and September 30, 2000, respectively. The improvement in 2001 was primarily due to improved gross margins, reduced interest expense, reduced general and administrative expenses and the non-recurring loss on the plant closure recorded in the prior year. 12 -------------------------------------------------------------------------------- Results of Operations for the Nine-Month Periods Ending September 30, 2001 and September 30, 2000 -------------------------------------------------------------------------------- Summary of Results: Management believes that Earnings Before Interest, Taxes, Depreciation, Amortization and Losses on Asset Disposals ("EBITDA as adjusted") is an important measure of the Company's operating performance. For the nine months ended September 30, 2001, EBITDA as adjusted was $1,737,000 compared to $1,296,900 for the prior year, an increase of $440,100 or 34%. The improved performance in 2001 was primarily attributable to improved gross margins and reduced operating expenses. Revenues: SPOP's gross sales for the nine months ended September 30, 2001 were $33,838,500 compared to $34,977,000 for 2000, a decrease of $1,138,500, or 3.3% versus 2000. The decrease in 2001 was entirely due to lower sales of industrial organic ingredients (particularly citrus products and bulk nutritional oils) and the lost sales associated with the disposed product lines, partially offset by higher sales of branded culinary products and nutritional supplements. Within the branded culinary products, sales were significantly higher than prior year in packaged oil (+7.6%), packaged mayonnaise (+17.2%) and individually quick frozen fruits and vegetables (a new product category this year). Branded nutritional supplement sales increased 13.2% versus the prior year. Comparable gross sales (after eliminating sales of disposed or discontinued product lines from both periods) increased by 2.2% versus the prior year. During the nine months ended September 30, 2001 and 2000, gross sales by source were as follows: 2001 2000 ---- ---- Consumer Brands - Culinary Products $12,745,900 $11,174,000 Consumer Brands - Nutritional Supplements 6,718,800 5,937,700 Industrial Ingredients 10,052,400 12,552,100 Private Label Products/Other 1,860,300 1,042,200 Disposed/Discontinued Product Lines 2,461,100 4,271,000 ----------- ----------- Total Gross Sales $33,838,500 $34,977,000 =========== =========== Discounts and allowances as a percent of gross sales increased to 7.1% of gross sales for 2001 compared to 6.5% in 2000. The increase was primarily the result of increased promotion levels during 2001 on the disposed product lines. Cost of Goods Sold: The Company's cost of goods sold decreased as a percent of gross sales for the nine-months ended September 30, 2001 to 67.1% compared to 69.6% for the same period in 2000. The decrease was due primarily to lower costs on the nutritional supplement oils and packaged dairy case products, as well as lower cost of goods associated with the disposed product lines as a result of the Morgan Hill plant closure in July, 2000. 13 Gross Profit: Gross profit for the nine months ended September 30, 2001 was $8,739,800 versus $8,379,000 for 2000, an increase of $360,800 or 4.3%. Gross profit as a percentage of gross sales was 25.8% for 2001 versus 24.0% for the nine months ended September 30, 2000, primarily due to the improved margins on the nutritional supplement products, packaged dairy case products and the lower cost of goods associated with the disposed product lines as a result of the Morgan Hill shutdown. Sales and Marketing Expenses: The Company's sales and marketing expenses for the nine months ended September 30, 2001 were $4,726,900 or 14.0% of gross sales, versus $4,810,800 or 13.8% of gross sales for 2000. The decrease in spending of $83,900 was primarily attributable to reduced spending on trade shows, consulting fees and broker commissions, partially offset by increased advertising and slotting fees. General and Administrative Expenses: The Company's general and administrative expenses for the nine months ended September 30, 2001 were $2,585,700 or 7.6% of gross sales, versus $2,701,100 or 7.7% of gross sales for 2000. The decrease in spending of $115,400 was primarily attributable to lower banking, accounting and legal fees, partially offset by increased insurance and utility costs. Amortization of Goodwill: The Company recorded goodwill of $10,848,200 in connection with the Merger. Amortization expense for the nine months ended September 30, 2001 was $458,600, versus $684,200 of amortization expense for 2000. Since the sale of the tomato-based product lines comprised all of the remaining assets of OFPI, the remaining unamortized goodwill associated with the reverse acquisition of OFPI in October 1999 of $6,776,200 was written-off in June as part of the sale. The remaining goodwill associated with the acquisition of OI continues to be amortized over a twelve-year life. Loss on Sale of Product Lines and Plant Closure: Since the product lines sold comprised all of the remaining assets of OFPI, the remaining net goodwill associated with the reverse acquisition of OFPI in October 1999 of $6,776,200 was written-off as part of the entry to record the sale. Accordingly, the Company recorded a non-cash loss on the sale of the product lines of $4,976,400 in the month of June 2001. During the prior year, the Company recorded a provision of $388,400 for losses on the sale or disposal of production equipment and leasehold improvements at the Company's leased manufacturing facility in Morgan Hill, California where production of the tomato-based product lines occurred until July 21, 2000. Interest Expense: The Company's interest expense for the nine months ended September 30, 2001 was $705,900 versus $1,067,300 for 2000. The reduction of $361,400 or 34% was primarily attributable to significant reductions in the prime rate during 2001 14 and lower non-cash interest expense associated with the private placement notes. Non-cash interest expense of $52,700 was recorded during the nine months ended September 30, 2001 versus $118,700 for 2000 for the value of the common stock purchase warrants issued to the private placement note holders. Net Loss: The Company reported a net loss of $4,698,200 and $1,210,900 for the nine-month periods ended September 30, 2001 and September 30, 2000, respectively. Excluding the loss on the disposed product lines and plant closure, the Company reported net income of $278,200 versus a net loss of $822,500 for the prior year. The improvement in 2001 was primarily due to improved gross margins, reduced interest expense and lower operating expenses. Seasonality: Historically, the Company has experienced only minor seasonal fluctuations in revenues. Typically, the third and fourth quarters feature stronger demand for the Company's culinary products than the first and second quarters. In the ordinary course of its business, the Company enters into commitments to purchase raw materials over a period of time, generally six months to one year, at contracted prices. At September 30, 2001, these future commitments were not at prices in excess of current market, or in quantities in excess of normal requirements. The Company does not utilize derivative contracts either to hedge existing risks or for speculative purposes. Liquidity and Capital Resources: The Company maintains a credit facility with its primary lender, Wells Fargo Business Credit ("WFBC"), consisting of term debt and a revolving line of credit, that is secured by substantially all assets of the Company and bears interest at prime plus 1% to 1+1/4%. Advances under the revolving line of credit are limited to a borrowing base consisting of certain accounts receivable and inventory. Also included in the facility are two term notes requiring payment over 60 months. Due to operating losses following the Merger, the Company was in default of certain financial covenants that were based on financial projections made at the time the facility was put in place. As a result of the default, WFBC began assessing an additional 100 basis points to the interest rates charged for the revolving line of credit and the two term notes as of July 17, 2000. On October 18, 2001 the Company entered into an amendment (the "Amendment") to the existing Credit and Security Agreement (the "Agreement") with WFBC. The Amendment includes new financial covenants based on the Company's current financial position and latest forecasts of future results, a new term loan for up to $100,000 for new production equipment to be purchased by the Company, incentive targets which, if achieved, will enable the Company to reduce the interest rates charged by WFBC by 100 basis points, and also entails a two year extension through October 2004 under the same terms as the original Agreement. In consideration for the Amendment, the Company will pay WFBC an accommodation fee of $20,000 in two equal installments on November 1, and December 3, 2001. As a result of executing the Amendment, the Company has returned to an in-compliance status with WFBC. Accordingly, the Company reclassified $418,500 of the WFBC term debt from current liabilities to long-term debt as of September 30, 2001. 15 At September 30, 2001 the Company had $808,300 in available borrowing under its line of credit versus none at December 31, 2000. The Company's bank overdraft as of September 30, 2001 was $648,900 compared to $539,000 at December 31, 2000. During the first nine months of 2001, the Company used $2,366,200 in cash from operating activities, compared to generating $127,500 in cash in 2000. The additional cash used was primarily due to reductions in trade payables financed by the sale of the disposed product lines and increased trade accounts receivable primarily due to seasonal fluctuations. Cash provided by investing activities was $2,299,700 in 2001 compared to cash used of $441,200 in 2000, which primarily reflected the proceeds from the sale of the tomato-based product lines in 2001. Cash provided by financing activities was $66,700 in 2001 compared to $313,900 in 2000. The decrease in funds provided by financing activities during 2001 primarily reflected lower utilization of the revolving line of credit and lower proceeds from notes payable, partially offset by lower principal payments on long-term debt. The Company is highly leveraged and is currently investigating potential additional sources of working capital such as the sale of certain assets and the issuance of common stock. However, Management believes that future cash flows from operations should provide adequate funds to meet the Company's estimated cash requirements for the foreseeable future. Moreover, the majority shareholder has indicated that he has the intent and ability to support the operations of the Company with additional funding for the next fiscal year, if needed. The Company's future results of operations and any forward-looking statements contained in this report involve a number of risks and uncertainties. In addition to the issues discussed above, other factors that could cause actual results to differ materially are general business conditions and the general economy, competitors' pricing and marketing efforts, availability of third-party materials at reasonable prices, risk of nonpayment of accounts receivable, risk of inventory obsolescence due to shifts in market demand, timing of product introductions, and litigation involving product liabilities and consumer issues. New Applicable Accounting Pronouncements: In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for Certain Sales Incentives." This issue addresses the recognition, measurement, and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or are exercisable by a customer as a result of a single exchange transaction. The Company is currently analyzing Issue 00-14. However, based on Management's current understanding and interpretation, Issue 00-14 is not expected to have a material impact on the Company's financial position or results of operations, except that certain reclassifications may occur. In April 2001, the EITF reached a consensus on Issue 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." This issue addresses the recognition, measurement and income statement classification of consideration, other than that directly addressed by Issue 00-14, from a vendor to a retailer or wholesaler. The Company is currently analyzing Issue 00-25. However, based on Management's current understanding and interpretation, Issue 00-25 is not expected to have a material impact on the Company's financial position or results of operations, except that certain reclassifications may occur. The conclusions reached in Issue 00-25 and Issue 00-14 (amended by Issue 00-25) are effective for fiscal quarters beginning after December 15, 2001. 16 In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of certain intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combination (the merger of OFPI, OI, SNI and SCI as discussed in Note 2 to the financial statements) was accounted for using the purchase method. As of September 30, 2001 the net carrying amount of goodwill remaining after the sale of the tomato-based product lines, as discussed in Note 3 to the financial statements, was $2,482,000 and other intangible assets was $58,000. Amortization expense of goodwill and other intangible assets during the nine-month period ended September 30, 2001 was $468,300. At present, the Company is currently assessing but has not yet determined the impact the adoption of SFAS 141 and SFAS 142 will have on its financial position and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------ The Company does not hold market risk sensitive trading instruments, nor does it use financial instruments for trading purposes. All sales, operating items and balance sheet data are denominated in U.S. dollars, therefore, the Company has no foreign currency exchange rate risk. Certain Company debt items are sensitive to changes in interest rates. The following table summarizes principal cash flows and related weighted average interest rates by expected maturity date for long-term debt ($ thousands): 17
Expected Maturity Date Outstanding (Years Ended December 31) Sept 30, 2001 2001 2002 2003 2004 2005 2006+ ------------- ---- ---- ---- ---- ---- ----- Long Term Debt: Fixed Rate $1,738.0 $77.4 $608.4 $586.6 $165.9 $40.7 $259.0 Avg. Int. Rate 10.8% 11.2% 11.2% 11.3% 10.9% 10.0% 8.6% Variable Rate $597.3 $44.7 $178.8 $178.8 $158.2 $36.8 -- Avg. Int. Rate 7.8% 7.5% 6.8% 7.8% 8.5% 8.7% -- Throughout the course of its fiscal year, the Company utilizes a variable interest rate line of credit at various borrowing levels. For the nine months ended September 30, 2001, the average outstanding balance under the line of credit was approximately $5,715,500, with a weighted average interest rate of 9.5%. The line of credit agreement calls for the interest rate to float at the prime rate plus 200 basis points. Under the terms of the Amendment executed on October 18, 2001, the interest rates charged will drop to prime plus 100 basis points if certain financial targets are achieved by the Company for the year ended December 31, 2001. In the ordinary course of its business, the Company enters into commitments to purchase raw materials over a period of time, generally six months to one year, at contracted prices. At September 30, 2001, these future commitments were not at prices in excess of current market, or in quantities in excess of normal requirements. The Company does not utilize derivative contracts either to hedge existing risks or for speculative purposes. PART II - OTHER INFORMATION Item 1. Legal Proceedings -------------------------- In February 1998, OFPI acquired the natural fruit juice and water bottling operations of Sunny Farms Corporation for cash and common stock. A portion of the common stock consideration was held in escrow, contingent upon earn-out calculations for the year following the acquisition. Subsequently, Sunny Farms sought voluntary relief pursuant to chapter 7 of the U.S. Bankruptcy Code in November 1998. In October 2000, attorneys for the bankruptcy trustee filed a complaint against the Company in the U.S. Bankruptcy Court for the Northern District of California, challenging the Company's earn-out calculations and requesting that a portion of the common stock held in escrow be released. The Company and the Sunny Farms bankruptcy trustee reached an agreement on October 9, 2001 regarding the earn-out calculations and subsequent shares to be released from escrow, which is in the process of being approved by the Bankruptcy Court. An estimated accrual of $94,400 for common shares to be released was included in accounts payable at September 30, 2001. In October 2000, the Company was notified by counsel for GFA Brands, Inc. that nutritional claims pertaining to Spectrum Naturals Organic Margarine were infringing upon two patents issued in the United States that pertain to particular fat compositions suitable for human ingestion. The patent holder exclusively licensed each of these patents to GFA Brands. Management believes that the margarine does not infringe upon either patent, and further, that the patents are unenforceable in any case. Management engaged legal counsel that 18
specialize in this area and received an opinion letter in February 2001 confirming that, in the opinion of counsel, the manufacture or sale of Spectrum Naturals Organic Margarine does not infringe upon the GFA patents, either literally or under the doctrine of equivalents. The Company filed a complaint against GFA Brands for declaratory judgment of non-infringement and invalidity of the two patents on August 28, 2001 in the U.S. District Court for Northern California. The Complaint requests a declaratory judgment that the margarine does not infringe either patent, a declaratory judgment that both patents are invalid, that GFA Brands be enjoined from threatening or asserting any action for infringement of either patent, and attorney's fees. Management believes the Company has meritorious defenses and that a loss is not probable at this time, therefore, no provision for loss has been recorded at September 30, 2001. Item 2. Changes in Securities and Use of Proceeds -------------------------------------------------- During the nine months ended September 30, 2001, the Company issued unregistered no par value restricted shares of its common stock as follows: Cash and Date Shares Non-Cash Issued Issued Proceeds ------ ------ -------- Shares issued to Thomas B. Simone, a non- executive Director of the Company, under a private sale (a) Feb 14, 2001 160,000 $ 50,000 Shares issued to Charles A. Lynch and Phillip L. Moore, both non-executive Directors of the Company, in lieu of cash compensation for Board fees earned during CY 2000 (b) Feb 15, 2001 64,000 20,000 Shares issued to four note holders under the private placement conversion offer to clear the default under the notes (c) Various 630,000 164,000 Default common stock purchase warrants exercised by the note holders under the private placement completed in October 1999 (d) Various 210,500 2,100 --------- -------- Total Unregistered Restricted Common Shares Issued 1,064,500 $ 236,100 ========= ========= (a) These shares were issued under a transaction approved by the Company's disinterested members of the Board of Directors. 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. In addition to the shares issued, the Company granted common stock purchase warrants to Mr. Simone for 160,000 shares at the same price, which expire five years from the date granted. The Company applied the proceeds received from Mr. Simone toward the expansion of its proprietary SpectraVac(TM) technology. 19
(b) These shares were also issued in a transaction approved by the Company's disinterested Board members. The shares were issued at $.3125 per share, the closing price of the Company's common stock as quoted on the NASDAQ OTC Bulletin Board System on the date the Board approved the transaction. The shares were issued in lieu of cash compensation for Board fees due to Mr. Lynch and Mr. Moore for CY 2000 in the amount of $10,000 each. (c) During the nine months ended September 30, 2001, the Company completed the process of curing the default under the private placement notes by offering the note holders the option of converting their notes to restricted common stock at a price of $.25 per share, or a three-year payment schedule calling for interest only during 2001, with principal and interest thereafter, plus common stock purchase warrants retroactive to October 1, 2000, equal to 10% of the outstanding principal at the closing bid price of SPOP stock at each quarter-end until the note is retired. On February 28, 2001, two note holders elected the conversion option and the Company issued 210,000 shares of restricted common stock in exchange for cancellation of both notes in the amount of $26,250 each. On June 28, 2001, two additional note holders elected the conversion option and the Company issued 420,000 shares of restricted common stock in exchange for cancellation of both notes in the amount of $52,500 each. (d) During the nine months ended September 30, 2001, the remaining outstanding common stock purchase warrants issued to the private placement note holders as a result of the default were exercised at a penny per share. All shares were issued under Regulation D of the Securities Act of 1933 (the "Act"), with resale of such shares permitted only pursuant to Rule 144 of the Act. All certificates representing the unregistered shares were endorsed with restrictive legends identifying them as unregistered under the Act. The Company has not in the past nor does it intend to pay cash dividends on its common stock in the future. The Company intends to retain earnings, if any, for use in the operation and expansion of its business. Item 3. Defaults Upon Senior Securities ---------------------------------------- As of December 31, 1999 the Company was in technical default of certain financial covenants specified in its credit facility with its major lender, Wells Fargo Business Credit ("WFBC"). The facility consists of two term notes and a revolving line of credit that is secured by substantially all assets of the Company. The default occurred as a result of operating losses following the Merger which were in excess of the financial projections made by the Company at the time the credit facility was put in place. As a result of the default, WFBC began assessing an additional 100 basis points to the interest rates charged under the credit facility as of July 17, 2000. On October 18, 2001 the Company entered into an amendment (the "Amendment") to the existing Credit and Security Agreement (the "Agreement") with WFBC. The Amendment includes new financial covenants based on the Company's current financial position and latest forecasts of future results, a new term loan for up to $100,000 for new production equipment to be purchased by the Company, 20 incentive targets which, if achieved, will enable the Company to reduce the interest rates charged by WFBC by 100 basis points, and also entails a two year extension through October 2004 under the same terms as the original Agreement. In consideration for the Amendment, the Company will pay WFBC an accommodation fee of $20,000 in two equal installments on November 1, and December 3, 2001. As a result of executing the Amendment, the Company has returned to an in-compliance status with WFBC. Accordingly, the Company reclassified $418,500 of the WFBC term debt from current liabilities to long-term debt at September 30, 2001. Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ None. Item 5. Other Information -------------------------- None. Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) The following documents are filed as exhibits to this Form 10-Q: 2.09 Settlement Agreement dated October 9, 2001 by and between Tevis T. Thompson, Jr., trustee of the Chapter 7 Estate of Sunny Farms Corporation and Spectrum Organic Products, Inc. 10.35 First Amendment to Credit and Security Agreement dated October 18, 2001 by and between Spectrum Organic Products, Inc. and Wells Fargo Business Credit, Inc. (b) None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 5, 2001 SPECTRUM ORGANIC PRODUCTS, INC. By: /s/ Robert B. Fowles ------------------------------- Robert B. Fowles Duly Authorized Officer & Chief Financial Officer 21 EX-99.A4 3 spectrumexhibit2-09.txt SETTLEMENT AGREEMENT Exhibit 2.09 SETTLEMENT AGREEMENT BETWEEN TEVIS T. THOMPSON, Jr, TRUSTEE OF THE CHAPTER 7 ESTATE OF SUNNY FARMS CORPORATION AND SPECTRUM ORGANIC PRODUCTS, INC., A CALIFORNIA CORPORATION, FORMERLY KNOWN AS ORGANIC FOOD PRODUCTS, INC., A CALIFORNIA CORPORATION ---------------------------------------- THIS SETTLEMENT AGREEMENT (the "Agreement") is made by and between Tevis T. Thompson, Jr., trustee of the Chapter 7 bankruptcy estate of Sunny Farms Corporation ("Debtor") the debtor in bankruptcy case number 98-70687-JT ("Trustee"), and Spectrum Organic Products, Inc., a California Corporation, formerly known as Organic Food Products, Inc., a California Corporation ("Defendant") (collectively the "Parties"). RECITALS -------- A. (On October 23, 2000, the Trustee filed with the United States Bankruptcy Court for the Northern District of California, Oakland Division ("Bankruptcy Court") its Complaint For Damages, Turnover, And Declaratory Relief ("Complaint") against Defendant, as Adversary Proceeding No. O0--04445-J ("Adversary Proceeding"). B. In the Complaint, the Trustee seeks to recover from Defendant damages, turnover of estate property, and declaratory relief regarding the number of shares of common stock due to the Trustee pursuant to an asset purchase contract between the Debtor and Organic Food Products, Inc., the name by which the Defendant was formerly known. C. Defendant denies certain material allegations in the Complaint and alleges several affirmative defenses. D. Both Parties wish to resolve the dispute between them to avoid additional litigation expenses, attorneys' fees, and the risks of litigation. AGREEMENTS ---------- 1. Incorporation Of Recitals. The Recitals set forth hereinabove are hereby referred to, incorporated herein, and made a part of this Agreement. The Parties agree that this Agreement has been entered into for and in consideration of the provisions contained in the Recitals as well as those contained in the balance of this Agreement. Each party to this Agreement attests to the truth and accuracy of the Recitals stated hereinabove. 2. Transfer Of Stock From Defendant To Trustee. Upon receipt of a stock assignment separate from certificate in the form attached as Exhibit A duly executed by the Trustee on behalf of Debtor, Defendant shall issue and release from that certain Pledge and Escrow Agreement by and between Debtor and Defendant dated February 10, 1998, a stock certificate(s) representing 117,950 shares of its own common stock to the Trustee (the "Stock Transfer") in full settlement of the Trustee's claims against Defendant as set forth in the Complaint on the eleventh (11th) day following the entry by the Bankruptcy Court of a final, non-appealable order approving Agreement, in a form satisfactory to Defendant ("Bankruptcy Court Approval). The escrow agent, Carr, McClellan, Ingersoll, Thompson and Horn, is hereby directed by the Parties to release Certificate Nos. 169-3 in the amount of 212,500 shares and 199-0 in the amount of 70,834 shares to Cooley Godward LLP, (Attn: Robert L. Eisenbach, III) One Maritime Plaza, 20th Floor; San Francisco, CA 94111, counsel for Defendant, to complete the transfers set forth herein, 3. Approval of the Court and Dismissal Of The Adversary Proceeding. Upon execution of this Agreement by the Parties, the Trustee will file a motion seeking a an order from the Bankruptcy Court (the "Order") that approves the settlement contained in this Agreement and authorizes the Trustee to execute any documents necessary to implement this Agreement. Pursuant to Bankruptcy Local Rule 9014-l(b)(3) of the United States Bankruptcy Court For The Northern District of California, Trustee shall provide notice of this Agreement to the Debtor's creditor; the United States Trustee, and those parties requesting special notice. This Agreement is contingent upon Bankruptcy Court Approval. If Bankruptcy Court Approval is not obtained, this Agreement is null and void and has no evidentiary, or other legal, effect. If Bankruptcy Court Approval is obtained, as the Adversary Proceeding has already been dismissed contingent on settlement of the Adversary Proceeding, then the Trustee will promptly and in no event later than five (5) business days following the Stock Transfer, finalize dismissal of the Adversary Proeeeding with prejudice. 4. Defendant Release. In consideration of the Trustee Release, as that term is defined in Paragraph 5 herein and the obligations of the Trustee set forth in Paragraph 3 herein: Defendant hereby forever releases and discharges the Trustee and his agents, employees, servants, representatives, parent and subsidiary organizations, affiliates, partners, stockholders and attorneys and their respective assigns and successors, jointly and individually, of and from, and covenants not to sue, or commence or prosecute, or aid in the commencement or prosecution, for any and all rights, claims, demands, damages, actions, and causes of action of every kind and nature, arising from or relating to the claims or facts alleged in the Complaint or which could have been so alleged, with the exception of the rights and obligations expressly retained or granted by, or set forth in this Agreement (the "Defendant Re1ease"). The foregoing paragraph and the releases and covenants contained therein, shall not and do not apply to the rights and claims expressly retained or granted by this Agreement. 2 5. Trustee Release. In consideration of the Stock Transfer and the Defendant Release, the Trustee hereby forever releases and discharges Defendant and its agents, employees, officers, directors, servants, representatives, parent and subsidiary corporations and organizations, affiliates, partners, stockholders and attorneys and their respective assigns and successors, jointly and individually, of and from, and covenants not to sue, or commence or prosecute, or aid in the commencement or prosecution, for any and all rights, claims, demands, damages, actions, and causes of action of every kind and nature, arising from or relating to the claims or facts alleged in the Complaint, or which could have been so alleged with the exception of the rights and obligations expressly retained or granted by, or set forth in, this Agreement (the "Trustee Release"). In connection with the Defendant Release and the Trustee Release, the Parties waive the requirements of California Civil Code ss. 1542, which states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." 6. No Admission Of Liability. The Parties so released deny the liability of each party to the other for all matters that are the subject of the foregoing releases, and this Agreement, which constitutes a final compromise and settlement thereof, will never be treated as an admission of liability or responsibility at any time for any purpose whatsoever. 7. Cost. Except as provided in Paragraph 8 below, the Parties shall each bear their own respective attorneys' fees and costs in connection with the matters referenced in this Agreement, the investigation preceding this Agreement, and the negotiation and review of this Agreement. 8. Enforcement. Should any litigation be commenced between the Parties to this Agreement concerning the enforcement or interpretation of this Agreement, or any rights and duties hereunder, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees and costs in such litigation, which shall be determined by the Bankruptcy Court in such litigation or in a separate action brought for that purpose. The Bankruptcy Court shall retain exclusive jurisdiction over any disputes regarding the enforcement of this Agreement. 9. Modification. The term "Agreement," as used herein, will include any future written amendments, modifications, or supplements made hereto; provided, however, that this Agreement may be modified or amended only by a writing signed by the parties hereto and approved by the Bankruptcy Court. 10. Meaning Of Terms. The term "Paragraph" or "Paragraphs" refers to the paragraph or paragraphs of this Agreement. The titles and subtitles used herein are not a part of this Agreement, and are included solely for convenient reference to the Paragraphs hereof. 3 11. Controlling Law. The validity, interpretation, and performance of this Agreement will be controlled by and construed under the laws of the State of California, as well as any applicable U.S. bankruptcy law. 12. Interpretation. If any provision of this Agreement is invalid under any applicable statute or rule of law, it is to that extent to be deemed omitted. This Agreement may be executed in counterpart, and may be executed in duplicate original, each of which is equally admissible as evidence. 13. Integration Clause. Any and all prior agreements among the Parties hereto with respect to the matters that are the subject of this Agreement are superseded by the terms of this Agreement. The terms of this Agreement are intended by the Parties hereto as a final, complete and exclusive expression of their agreement with respect to such matters, and may not be controverted or contradicted by evidence or any prior or contemporaneous oral or written agreement. 14. Advice Of Attorney. Each party warrants and represents that in executing this Agreement, such party has either (I) relied upon legal advice from the attorney of that party's choosing and that the terms of this Agreement have been read and its consequences (including risks, complications, and costs) have been completely explained to that party by its attorney; or (ii) has voluntarily declined to seek such legal advice, and that such party fully understands the terms of this Agreement. Each party further acknowledges and represents that, in executing that party's release, it has not relied on any inducements, promises, or representations made by the other party or any party representing or serving the other party. Each party hereto represents and warrants that this Agreement is being voluntarily executed by such party without any duress or undue influence of any kind on the part of any person, firm, or entity. 15. Effect On Successors. This Agreement will inure to the benefit of and be binding upon the Parties hereto and their respective heirs, successors, assigns, and legal representatives. 16. Effective Date. This Agreement shall become effective immediately upon Bankruptcy Court Approval. 17. Notice. Any notice, request, demand, or other communication required or permitted hereunder will be given in writing by first class mail, postage prepaid, to the party (ies) to be notified. All communications will be deemed given when received. The addresses of the Parties for the purposes of such communication are: 4 Trustee: Tevis T. Thompson, Jr., Trustee c/o: Daniel M. Linchey, Esq. Goldberg, Stinnett, Meyers & Davis 44 Montgomery Street, Ste. 2900 San Francisco, CA 94104 Defendant: Spectrum Organic Products, Inc. c/o Robert L. Eisenbach III, Esq. Cooley Godward LLP One Maritime Plaza, 20th Floor San Francisco, CA 94111-3580 A party may change his or her address only upon written notice to the other party as provided hereinabove. TEVIS T. THOMPSON, JR. Trustee of the Chapter 7 Estate of Sunny Farms Corporation By: /s/ Tevis T. Thompson ------------------------------- Tevis T. Thompson, Jr., Trustee Spectrum Organic Products, Inc., a California Corporation formerly known as Organic Food Products, Inc., a California Corporation By: /s/ Robert B. Fowles ------------------------------- Robert B. Fowles Chief Financial Officer APPROVED AS TO FORM AND CONTENT; COOLEY GODWARD LLP By: /s/ Robert L. Eisenbach III, Esq. -------------------------------------- Robert L. Eisenbach III, Esq. Attorneys for Defendant Spectrum Organic Products, Inc. GOLDBERG, STINNETT, MEYERS & DAVIS A Professional Corporation By: /s/ Daniel M. Linchey, Esq. -------------------------------------- Daniel M. Linchey, Esq. Attorneys for Trustee Tevis T. Thompson, Jr. 5 Exhibit A STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, SUNNY FARMS CORP. hereby sells assigns and transfers unto SPECTRUM ORGANIC PRODUCTS, INC. a California corporation (the "Company"), for cancellation pursuant to that Settlement Agreement between Tevis T. Thompson., Jr., Trustee of the Chapter 7 Estate of Sunny Farms Corporation and Spectrum Organic Products, Inc., a California Corporation, Formerly Known as Organic Foods Products, Inc., a California Corporation, by and between the undersigned and the Company, 165,384 shares of Common Stock of the Company standing in the undersigned's name on the books of the Company represented by Certificate No 169-3 and does hereby irrevocably constitute and appoint the Company's Secretary attorney to transfer said stock on the books of the Company with full power of substitution in the premises. Dated: 10-9-01 By: /s/ Tevis T. Thompson, Jr. ------------------------------- Tevis T. Thompson, Jr. EX-99.A4 4 spectrumexhibit10-35.txt 1ST AMENDMENT TO CREDIT AND SECURITY AGREEMENT Exhibit 10.35 FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of October 18, 2001, (this "Amendment") is made by and between SPECTRUM ORGANIC PRODUCTS, INC, a California corporation (the "Borrower") and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals -------- A. The Borrower and the Lender have entered into a Credit and Security Agreement dated as of October 6, 1999 (the "Credit Agreement"). B. The Borrower has requested that certain amendments be made to the Credit Agreement. C. The Lender is willing to amend the Credit Agreement pursuant to the terms and conditions set forth herein. The Borrower is entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of the Lender's rights or remedies as set forth in the Credit Agreement is being waived or modified by the terms of this Amendment. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Defined Terms. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. Amendments to Article I. (a) The following definitions are hereby added to Section 1.1 in respective alphabetical order: "Issuer" means the issuer of any Letter of Credit. "L/C Amount" means the sum of (i) the aggregate face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement. "L/C Application" means an application and agreement for letters of credit in a form acceptable to the Issuer and the Lender. "Letter of Credit" has the meaning specified in Section 2.18. "Obligation of Reimbursement" has the meaning given in Section 2.19. "Special Account" means a specified cash collateral account maintained by a financial institution acceptable to Lender in connection with Letters of Credit, as contemplated by Section 2.20. (b) The definition of "Availability Reserve" as set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Availability Reserve" means as of any date of determination, such amount or amounts as Lender may from time to time establish and revise in good faith reducing the amount of Revolving Advances which would otherwise be available to Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may affect (i) the Collateral or its value, (ii) the assets, business or prospects of Borrower, or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof), or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower to Lender is or may have been incomplete, inaccurate or misleading in any material respect, or (c) to reflect the L/C Amount, or (d) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. Availability Reserves will include, without limitation, the Dilution Reserve and the Grower Reserve. (c) The following is hereby added to the end of the definition of "Collateral" set forth in Section 1.1 of the Credit Agreement: ";and (vii) all sums on deposit in the Special Account." (d) The definition of "Commitment" set forth in Section 1.1 of the Credit and Security Agreement is hereby amended and restated in its entirety to read as follows: ""Commitment' means the Lender's commitment to make Advances and to cause the Issuer to issue Letters of Credit to or for the Borrower's account pursuant to Article II." (e) The first sentence of the definition of "Eligible Inventory" as set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: ""Eligible Inventory' means all Inventory of the Borrower, including inventory obtained using a Letter of Credit, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory:" (f) The definition of "Obligations" set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: -2- ""Obligations' means the Note and each and every other debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, the Obligation of Reimbursement and all indebtedness of the Borrower arising under this Agreement, the Note, any L/C Application completed by the Borrower, or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into." (g) The definition of "Revolving Floating Rate" as set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: ""Revolving Floating Rate' means, beginning August 1, 2000, an annual rate equal to the Base Rate plus two percent (2.0%), which annual rate shall change when and as the Base Rate changes. If, however, the Borrower's CPA audited financial statements for the period ending December 31, 2001 reflect a net profit of a least Five Hundred Thousand Dollars ($500,000) the Revolving Floating Rate shall be decreased by one percent (1.0%). Such decrease, if applicable, shall take effect on the first day of the month following Lender's receipt of the CPA audited financial statements for the period ending December 31, 2001, reflecting a net profit of at least Five Hundred Thousand Dollars ($500,000). Borrower's net profit for the purposes of this definition shall not include any losses associated with the sale of Borrower's tomato based business to Acirca, Inc. or other non-cash losses as a result of restructuring charges, adjustments to reflect the impairment of assets or sale of significant assets. (h) The definition of "Term Floating Rate" as set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: ""Term Floating Rate' means, beginning August 1, 2000, an annual rate equal to the sum of the Base Rate plus two and two-quarter percent (2.25%), which annual rate shall change when and as the Base Rate changes. If, however, the Borrower's CPA audited financial statements for the period ending December 31, 2001 reflect a net profit of a least Five Hundred Thousand Dollars ($500,000) the Term Floating Rate shall be decreased by one percent (1.0%). Such -3- decrease, if applicable, shall take effect on the first day of the month following Lender's receipt of the CPA audited financial statements for the period ending December 31, 2001, reflecting a net profit of at least Five Hundred Thousand Dollars ($500,000). Borrower's net profit for the purposes of this definition shall not include any losses associated with the sale of Borrower's tomato based business to Acirca, Inc. or other non-cash losses as a result of restructuring charges, adjustments to reflect the impairment of assets or sale of significant assets. 3. Amendments to Article II (a) The second sentence of Section 2.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "The Lender shall have no obligation to make a Revolving Advance if, after giving effect to such requested Revolving Advance, the sum of the outstanding and unpaid Revolving Advances under this Section 2.1 or otherwise would exceed the Borrowing Base less the L/C Amount." (b) Section 2.3(a)(i) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(i) Beginning on October 1, 2001, and on the first day of each month thereafter, in thirty seven (37) substantially equal monthly installments equal to Ten Thousand Two Hundred Ninety Eight and 52/100 Dollars ($10,298.52); and" (c) Section 2.9(b) is hereby amended and restated in its entirety to read as follows: ""Return', for any period, means the return as determined by such Related Lender on the Advances and Letters of Credit based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules then in effect and costs of issuing or maintaining any Letter of Credit. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement." (d) Section 2.9(c) is hereby amended and restated in its entirety to read as follows: ""Rule Change', means any change in any Capital Adequacy Rule or L/C Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Closing Date are scheduled to take place under the existing Capital Adequacy Rules or L/C Rules or any increases in the capital that any Related Lender is -4- required to maintain to the extent that the increases are required due to a regulatory authority's assessment of the financial condition of such Related Lender." (e) Section 2.9(d) is hereby amended and restated in its entirety to read as follows: ""Related Lender', includes (but is not limited to) the Lender, the Issuer, any parent corporation of the Lender or the Issuer and any assignee of any interest of the Lender hereunder and any participant in the loans made hereunder." (f) Section 2.10 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Section 2.10 Maturity' Date. This Agreement and the other Loan Documents shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on October 5, 2004 (the "Maturity Date"), unless earlier terminated by Lender or Borrower pursuant to the terms hereof. Upon the Termination Date, Borrower shall immediately pay to Lender, in full, all outstanding and unpaid Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent Obligations, including checks and other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment." (g) Section 2J2(a) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(a) Termination and Line Reduction Fees. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date, or the Borrower reduces the Maximum Line, the Borrower shall pay to the Lender a fee in an amount equal to a percentage of the Maximum Line (or the reduction, as the case may be) as follows: (i) 1.0% if the termination or reduction occurs on or before the third anniversary of the Funding Date; (ii) 0.67% if the termination or reduction occurs after the third anniversary of the Funding Date but on or before the fourth anniversary of the Funding Date; and (iii) 0.5% if the termination or reduction occurs after the fourth anniversary of the Funding Date." (h) Section 2.12(b) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: -5- "(b) Prepayment Fees. If the Term Note is prepaid for any reason except in accordance with 2.3 or any Capital Expenditure Note is prepaid for any reason except in accordance with 2.5, the Borrower shall pay to the Lender a fee in an amount equal to a percentage of the amount prepaid as follows: (i) 1.0% if the prepayment occurs on or before the third anniversary of the Funding Date; (ii) 0.67% if prepayment occur; after the third anniversary of the Funding Date but on or before the fourth anniversary of the Funding Date; and (iii> 0.5% if prepayment occurs after the fourth anniversary of the Funding Date." (i) Section 2.13 is hereby amended and restated in its entirety to read as follows: "Mandatory Prepayment. Without notice or demand, if the sum of the outstanding principal balance of the Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the Borrower shall (i) first, immediately prepay the Revolving Advances to the extent necessary to eliminate such excess; and (ii) if prepayment in full of the Revolving Advances is insufficient to eliminate such excess, pay to the Lender in immediately available funds for deposit in the Special Account an amount equal to the remaining excess. Any payment received by the Lender under this Section 2.13 or under Section 2.11 may be applied to the Obligations, in such order and in such amounts as the Lender; in its discretion, may from time to time determine; provided that any prepayment under Section 2.11 which the Borrower designates as a partial prepayment of the Term Note shall be applied to principal installments of the Term Note in inverse order of maturity." (j) Section 2.16 is hereby amended and restated in its entirety as follows: "Use of Proceeds. The Borrower shall use the proceeds of Advances, and each Letter of Credit, if any, for ordinary working capital purposes." (k) The following sections are hereby added to Article II: "Section 2.7(c) Letter of Credit Fees. The Borrower agrees to pay the Lender a fee with respect to each Letter of Credit, if any, accruing on a daily basis and computed at the annual rate of one and one half percent (130%) of the aggregate amount that may then be drawn on all issued and outstanding Letters of Credit assuming compliance with all conditions for drawing thereunder (the "Aggregate Face Amount"), from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit -6- shall terminate by its terms or be returned to the Lender, due and payable monthly in arrears on the first day of each month and on the Termination Date; provided, however that during Default Periods, in the Lender's sole discretion and without waiving any of its other rights and remedies, such fee shall increase to four and one half percent (4.50%) of the Aggregate Face Amount. The foregoing fee shall be in addition to any and all fees, commissions and charges of any Issuer of a Letter of Credit with respect to or in connection with such Letter of Credit." "2.7(d) Letter of Credit Administrative Fees. The Borrower agrees to pay the Lender, on written demand, the administrative fees charged by the Issuer in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Issuer for such services rendered on behalf of customers of the Issuer generally." "2.9(e)L/C Rule' means any law, rule, regulation, guideline, directive, requirement or request regarding letters of credit, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules imposing taxes, duties or other similar charges, or mandating reserves, special deposit or similar requirements against assets of, deposits with or for the account of, or credit extended by any Related Lender, on letters of credits" "Section 2.18 Letters of Credit. (a) The Lender agrees, on the terms and subject to the conditions herein set forth, to cause an Issuer to issue, from the Funding Date to the Termination Date, one or more irrevocable standby or documentary letters of credit (each, a "Letter of Credit") for the Borrower's account to be drawn at sight for the importation of organic foods and ingredients. The Lender shall have no obligation to cause an Issuer to issue any Letter of Credit if the face amount of the Letter of Credit to be issued, would exceed the lesser of: (i) $500,000 less the L/C Amount, or (ii) the Borrowing Base less the sum of (A) all outstanding and unpaid Revolving Advances and (B) the L/C Amount. -7- Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into by the Borrower and the Lender for the benefit of the Issuer, completed in a manner satisfactory to the Lender and the Issuer. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control. (b) No Letter of Credit shall be issued more than ninety (90) days prior to the negotiating date or have an expiry date later than the Termination Date in effect as of the date of issuance. (c) Any request to cause an Issuer to issue a Letter of Credit under this Section 2.18 shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the date of the request" "Section 2.19 Payment of Amounts Drawn Under Letters of Credit. The Borrower acknowledges that the Lender will be liable to the Issuer for reimbursement of any and all draws under Letters of Credit and for all other amounts required to be paid under the applicable tiC Application. Accordingly, the Borrower agrees to pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated: (a) The Borrower hereby agrees to pay the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Issuer or the Lender may pay or incur relative to such draw and the applicable L/C Application, plus interest on all such amounts, charges and expenses as set forth below (the Borrower's obligation to pay all such amounts is herein referred to as the "Obligation of Reimbursement"). (b) Whenever a draft is submitted under a Letter of Credit, the Lender shall debit the amount of the draft against the Borrower's operating account. If there are insufficient funds in the operating account to meet the full amount of the draft, the Lender shall make a Revolving Advance in the amount of the Obligation of Reimbursement and shall apply the proceeds of such Revolving Advance thereto. Such Revolving Advance shall be repayable in accordance with and, be treated in all other respects as a Revolving Advance hereunder. -8- (c) If a draft is submitted under a Letter of Credit when the Borrower is unable, because a Default Period then exists or for any other reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement, the Borrower shall pay to the Lender on demand and in immediately available funds, the amount of the Obligation of Reimbursement together with interest, accrued from the date of the draft until payment in full at the Default Rate. Notwithstanding the Borrower's inability to obtain a Revolving Advance for any reason, the Lender is irrevocably authorized, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement and all accrued but unpaid interest thereon. The Borrower's obligation to pay any Revolving Advance made under this Section 2.19, shall be evidenced by the Revolving Note and shall bear interest as provided in Section 2.6." "Section 2.20 Special Account. If the Credit Facility is terminated for any reason whatsoever while any Letter of Credit is outstanding, the Borrower shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the L/C Amount. The Special Account shall be an interest bearing account maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account may be applied by the Lender at any time or from time to time to the Obligations in the Lender's sole discretion, and shall not be subject to withdrawal by the Borrower so long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to the Borrower at such time as the Lender is required to release its security interest in the Special Account under applicable law." "Section 2.21 Obligations Absolute. The Borrower's obligations arising under Section 2.19 shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of Section 2.19, under all circumstances whatsoever, including (without limitation) the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the "Related Documents"); (b) any amendment or waiver of or any consent to departure from all or any of the Related Documents; -9- (c) the existence of any claim, setoff, defense or other right which the Borrower may have at any time, against any beneficiary `or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions; (d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever, (e) payment by or on behalf of the Issuer or the Lender under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; or (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing." 4. Amendments to Article VI. ------------------------- (a) Reporting Requirements. Section 6.1(e) of the Credit Agreement is hereby amended and restated to read as follows; "(e) on or before December 31 of each year, the projected balance sheets and income statements for each month of the successive year, each in reasonable detail, representing the Borrower's good faith projections and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrower for internal planning purposes, together with such supporting schedules and information as the Lender may in its discretion require;" (b) Minimum Book Net Worth. Section 6.15 of the Credit Agreement is hereby amended and restated to read as follows: "The Borrower will maintain its Book Net Worth, determined as at the end of each month, at an amount not less than the amount set forth below. Any non-cash losses incurred, as a result of restructuring charges, adjustments to reflect the impairment of assets or sale of significant assets and any income recorded by Borrower from escrow proceeds of the sale of Borrower's tomato based business to Acirca, Inc. shall not be included in determining whether or not Borrower has met the covenant set forth in this Section 6.15, so long as at the end of each month Borrower maintains a Book Net Worth of at least One Million Dollars ($1,000,000) before taking such exclusions into consideration. -10- At the End of: Minimum Book Net Worth -------------- ---------------------- August 2001 $2,120,000 September 2001 $2,236,000 October 2001 $2,325,000 November 2001 $2,398,000 December 2001, $2,501,000 And each month end thereafter (c) Minimum Senior Debt Service Coverage Ratio. Section 6.13 of the Credit Agreement is hereby amended and restated to read as follows: "The Borrower will maintain, for each period described below, its Senior Debt Coverage Ratio, determined as at the end of each period, at not less than the ratio set forth opposite such period: Period Minimum Senior Debt ------ Service Coverage Ratio ---------------------- Nine Months Ending September 1.20 to 1.00 30, 2001 Twelve Months Ending December 1.25 to 1.00 31, 2001 Thereafter, the Borrower will maintain its Senior Debt Service Coverage Ratio at not less than 1.30 to 1.00, measured at the end of each fiscal quarter, calculated for the prior four (4) quarters as of March 31, 2002 and for the prior four (4) quarters at the end of each successive fiscal quarter." (d) Minimum Total Debt Service Coverage Ratio. Section 6.14 of the Credit Agreement is hereby amended and restated to read as follows: "The Borrower will maintain, for each period described below, its, Total Debt Service Coverage Ratio, determined as at the end of each period, at an amount not less than the amount set forth opposite such period: Period Minimum Senior Debt ------ Service Coverage Ratio ---------------------- Nine Months Ending September 1.00 to 1.00 30, 2001 Twelve Months Ending December 1.10 to 1.00 31, 2001 -11- Thereafter, the Borrower will maintain its Total Debt Service Coverage Ratio at not less than 1.10 to 1.00, measured at the end of each fiscal quarter, calculated for the prior four (4) quarters as of March 31, 2002 and for the prior four (4) quarters at the end of each successive fiscal quarter." (e) New Covenants, Section 6.16 of the Credit Agreement is hereby amended restated in its entirety to read as follows: "6.16 New Covenants. On or before June 30, 2002, Lender shall set new covenant levels for Sections 6.13, 6.14 and 6,15 for periods after such date. The new covenant levels will be based on the Borrow's projections for such periods received by Lender pursuant to Section 6.1(e) and shall be no less stringent than the present levels." 5. Amendment to Article VII (a) Section 7.10 is hereby amended and restated in its entirety to read as follows: "Section 7.10 Capital Expenditures. Commencing with the fiscal year ending December 31, 2001, Borrower may incur Capital Expenditures provided that the portion of any Capital Expenditures that is not financed by a lender shall not exceed Two Hundred Thousand Dollars ($200,000) in the aggregate for any fiscal year. 6. Amendments to Article VIII. (a) The following is hereby added to the Credit Agreement as Section 8.1(s) entirety as follows: "(s) Failure to pay when due any amount specified in Section 2.19 relating to the Borrower's Obligation of Reimbursement, or failure to pay immediately when due or upon termination of the Credit Facility any amount required to be paid for deposit in. the Special Account under Section 2.20." (b The following is hereby added to the Credit Agreement as Section 8.1 (s) and reads in its entirety as follows: -12- "the Lender may make demand upon the Borrower and, forthwith upon such demand, the Borrower will pay to the Lender in immediately available funds for deposit in the Special Account pursuant to Section 2.20 an amount equal to the aggregate maximum amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder." 7. Amendments to Article X. (a) Section 10.6 is hereby amended and restated in its entirety to read as follows: "10.6 Cost and Expenses. The Borrower agrees to pay on demand all costs and expenses, including (without limitation) attorneys' fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, any Letters of Credit and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including without limitation all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest" 8. Amendments to Schedu1es. (a) Trade Names, Chief Executive Office and Other Locations. Schedule 5.1 is hereby amended and restated in its entirety to read as set forth in Exhibit B, attached hereto. (b) Subsidiaries. Schedule 5.4 is hereby amended and restated in its entirety to read as set forth in Exhibit C, attached hereto. (c) Permitted Liens. Schedule 7.1 is hereby amended and restated in its entirety to read as set forth in Exhibit D, attached hereto. (d) Permitted Indebtedness and Guaranties. Schedule 7.2 is hereby amended and restated in its entirety to read as set forth in Exhibit E, attached hereto. 9. Capital Expenditure Advance. No further Capital Expenditure Advances will be made by Lender pursuant to Section 2.4 of the Credit Agreement. 10. Guaranty of Jethren Phillips. Lender agrees that upon Lender's receipt of Borrower's December 31, 2001 unqualified financial statement reflecting that Borrower has satisfied all financial covenants and that no Events of Default exist, the Guaranty of Jethren Phillips shall be released. -13- 11. Inventory Appraisal. Borrower agrees to allow an appraisal of its Inventory to be conducted by an appraiser chosen by Lender within forty-five (45) days of the date of the approval of the terms of this Amendment by lender's senior credit management. The cost of such appraisal shall be paid by Borrower. 12. Term Loan C. The Lender agrees, on the terms and subject to the conditions set forth in the Credit Agreement to make a one time advance in an amount not to exceed the lesser of (A) One Hundred Thousand Dollars ($100,000), or (B) eighty-five percent (85%) of the invoiced purchase price of new Equipment (exclusive of installation and other soft costs) ("Term C Advances") (the definition of "Term Advances" as set forth in the Credit Agreement shall include the Term C Advances). The Borrower's obligation to pay the Term C Advances shall be evidenced by the Term Note C, a form of which is attached hereto as Exhibit A ("Term Note Q") (the definition of "Note" as set forth in the Credit Agreement shall include Term Note C) and shall be secured by the Collateral. The Lender will make advances to the Borrower under this paragraph upon Borrower presenting to Lender, in form and substance reasonably satisfactory to Lender, (i) invoices for the specific items of Equipment to be acquired and financed hereunder, which Equipment shall be acceptable to Lender and the purchase price thereof may, at Lender's option, be confirmed by Lender, and (ii) evidence satisfactory to the Lender of delivery of such Equipment to the Borrower. Generally, to be eligible, Equipment must be subject to Lender's perfected security interest and must be used or usable in the ordinary course of Borrower's business, and must constitute collateral acceptable for lending purposes pursuant to criteria established by Lender. (a.) The outstanding principal balance of the Term Note C shall be due and payable as follows: (i) Beginning on January 1, 2002, and on the first day of each month thereafter, in thirty-six (36) substantially equal monthly installments; and (ii) On the Termination Date, the entire unpaid principal balance of the Term Note C, and all unpaid interest accrued thereon, shall in any event be due and payable. (b) Except as set forth in Sections 2.6 (d) and 2.6(e) of the Credit Agreement, the outstanding principal balance of the Tenn Note C shall bear interest at the Term Floating Rate, and interest shall be payable monthly in arrears. (c) Term Note C shall be subject to the prepayment fees set forth in Section 2.12 of the Credit Agreement. -14- 13. Consent to Payment of Various Notes. Lender hereby consents to the full repayment of the indebtedness to Theodore Wright as evidenced by that certain Unsecured Subordinated Promissory Note dated as of January 1, 2001 in the face amount of $25,000 Lender Further consents to Borrower's payment of interest only through December 31, 2001 and quarterly payments of principal and interest thereafter on the promissory notes set forth below: Note Holder Face Amount Dated ----------- ----------- ----- Douglas A. Larson $105,000.00 January 1, 2001 Joanne M. Gluck-IRA $26,250 January 1, 2001 Jordan Widdes-IRA $26,250 January 1, 2001 Mark Voss $13,125 January 1, 2001 Steven M. Nelson $13,125 January 1, 2001 Dean Rivet-IRA $26,250 January 1, 2001 Mishawn Nelson-IRA $26,250 January 1, 2001 Borrower may make such payments so long as no Event of Default has occurred and is continuing or will occur as a result of such payments and Lender has notified Borrower in writing that such payments are not permitted. 14. Amendment Fee. The Borrower shall pay Lender an amendment fee in the amount of Twenty Thousand Dollars ($20,000) for the preparation and execution of this Amendment. Such fee shall be fully earned and non-refundable upon the execution of this Amendment and shall be paid in two equal installments of Ten Thousand Dollars ($10,000) with the first installment due a November 1, 2001 and the second due on December 1, 2001. 15. No Other Changes. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 16. Conditions Precedent. This Amendment, shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) A Certificate of Authority of the Borrower certifying as to (i) the resolutions directors of the Borrower approving the execution and delivery of this Amendment (ii) the fact that the articles of incorporation and bylaws of the Borrower, which were delivered to the Lender pursuant to the Certificate of Authority of the Borrow's Secretary or assistant secretary dated as of October 5, 1999 in connection with the delivery of the Credit Agreement continue in full force and effect and have not been amemded or otherwise modified except as necessary for the Merger as set forth in the Certificate of Authority to be -15- delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender) pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of October 5, 1999, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (b) The amendment fee set forth in Paragraph 14 above. (c) Such other matters as the Lender may require. 17. Representations and Warranties. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment has been duly authorized by all necessary corporate action and do not (1) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 18. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 19. No Other Waiver. The execution of this Amendment and any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 20. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including -16- without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required hereunder. 21. Miscellaneous. This Amendment and the Acknowledgment and Agreement of Guarantor may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. -17- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, SPECTRUM ORGANIC PRODUCTS, INC. Inc. By: /s/ Angelo Samperisi By: /s/ Jethren P. Phillips --------------------------- ------------------------------- Angelo Samperisi Jethren P. Phillips Vice President CEO/Chairman -18- EXHIBIT A TERM NOTE C $_______________ Pasadena, California October_, 2001 For value received, the undersigned, SPECTRUM ORGANIC PRODUCTS, INC., a California corporation (the "Borrower"), hereby promises to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Pasadena, California, or at any other place designated at any time by the holder hereof;, in lawful money of the United States of America and in immediately available funds, the principal sum of_________________ ($_____________________) or, if less, the aggregate unpaid principal amount of the Term Advance made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement by and between the Lender and the Borrower, dated as of October 6, 1999 as amended by that certain First Amendment to Credit and Security Agreement of even date herewith and as may hereafter be amended, supplemented or restated from time to time (the "Credit Agreement"). The principal hereof and interest accruing thereon shall be due and payable as provided ill the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Term Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. - SPECTRUM ORGANIC PRODUCTS, INC., a California corporation By: /s/_________________________ Name:____________________________ Title:___________________________ -19- EXHIBIT B Schedule 5.1 to Credit and Security Agreement TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS, AND LOCATIONS OF COLLATERAL Trade Names ----------- Cinagro Napa Valley Springs Water Spectrum Naturals Spectrum Essentials Community Mayonnaise Veg-Omega3 Blue Banner World Cuisine Spectrum Spread Chief Executive Office/Principal Place of Business -------------------------------------------------- 1304 South Point Boulevard Suite 280 Petaluma, California 94954 Other Inventory and Equipment Locations Inventory --------- [per attached Listing] Equipment --------- 1) Organic Ingredients, Inc., 335 Spreckles Drive, Suite F, Aptos, California 95003 2) OI R&D Lab, 804 Estates Drive, Suite 200, Aptos, California 95003 3) Spectrum Organic Products, Inc., 133 Copeland St., Petaluma CA 94952 -20- EXHIBIT C Schedule 5.4 to Credit and Security Agreement SUBSIDIARIES None -21-
EXHIBIT D Schedule 7.1 to Credit and Security Agreement PERMITTED LIENS Creditor Collateral Jurisdiction Filing Date Filing No. -------- ---------- ------------ ----------- ---------- Safeco Credit Co., Inc Leased Forklift California 12/09/96 9634561027 Colonial Pacific Leased Equipment California 01/13/97 9701460821 Leaseing specified in UCC Heritage Financial Leased Equipment California 10/14/97 9729360015 Services specified in UCC Heritage Financial Leased Equipment California 02/05/98 9804260357 Services specified in UCC Safeco Credit Co. Leased Forklift California 03/26/98 9808660068 Green Tree Vendor Leased Telephone California 09/30/99 9928060784 Services Corporation System Debora Phillips Trans America California Insurance Policy # 41880210 Spectrum Organic Products, Inc. ------------------------------- Creditor Collateral Jurisdiction Filing Date Filing No. -------- ---------- ------------ ----------- ---------- Trinity Capital Leased Equipment California 01/04/00 0001160618 Corporation specified in UCC GE Capital Colonial Leased Equipment California 03/28/01 0109360528 Pacific Leasing specified in UCC SFC Capital Group Leased Equipment California 10/03/00 0028861033 Corporation specified in UCC -22-
EXHIBIT E Schedule 7.2 to Credit and Security Agreement PERMITTED INDEBTEDNESS AND GUARANTEES Indebtedness Creditor Original Amt. Maturity Date Monthly Payment Collateral John R. Battendieri $ 102,243.47 10/01/01 $2,170.35 None Joseph J. Stern $ 110,423.32 10/01/04 $2,343.99 None Debora B. Term Life Phillips $1,621,716.00 03/20/04 Varies Ins. Policy Debora B. Phillips $ 613,284.00 12/31/09 None None Dean Nicholson $ 190,000.00 10/06/02 $4,374.14 None Steve Reedy $ 265,000.00 10/06/05 $4,259.04 None Douglas A. Larson $ 105,000.00 12/31/03 Varies None Joanne M. Gluck-IRA $ 26,250.00 12/31/03 Varies None Jordan Widdes-IRA $ 26,250.00 12/31/03 Varies None Dean Rivet- IRA $ 26,250.00 12/31/03 Varies None Mishawn Nelson-IRA $ 26,250.00 12/31/03 Varies None Steven M. Nelson $ 13,125.00 12/31/03 Varies None Mark Voss $ 13,125.00 12/31/03 Varies None Guaranties Primary Obligor Amt & Desc. of Guarantee Beneficiary of Guaranty Working capital guaranty, not Sonoma Valley Bank The Olive Press, LLC to exceed $30,000 at any time Sonoma, CA -23-