-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UR+sd/H+vJokls8EWjxxU0T8TuaYsmnhZBwyABieSLxlCWJmyhS+8WFmugEuMiMM rTIeaBFRckuxC8a85pv5ww== 0001108890-03-000385.txt : 20031106 0001108890-03-000385.hdr.sgml : 20031106 20031106094756 ACCESSION NUMBER: 0001108890-03-000385 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031106 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: 03981126 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 spectrumorganic10q093003.txt PERIOD ENDING 09-30-03 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, 2003. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------------- ---------------- Commission File No. 333-22997 SPECTRUM ORGANIC PRODUCTS, INC. ---------------------------------------------------- (Exact name of Registrant as specified in its Charter) California 94-3076294 ---------------------- ------------------- (State of incorporation) (I.R.S. Employer Identification Number) 5341 Old Redwood Highway, Suite 400 Petaluma, California 94954 -------------------------------------- (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, 45,999,795 shares outstanding as of November 3, 2003. 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, 2003 2002 ------------ ------------ Current Assets: Cash $ 83,200 $ 1,000 Accounts receivable, net 4,293,000 3,075,200 Inventories, net (Note 2) 8,826,600 5,269,600 Prepaid expenses and other current assets 236,800 79,600 ------------ ------------ Total Current Assets 13,439,600 8,425,400 Property and Equipment, net (Note 3) 4,380,200 3,447,400 Other Assets: Intangible assets (Note 5) 588,200 42,000 Other assets, net 203,200 271,900 ------------ ------------ Total Assets $ 18,611,200 $ 12,186,700 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Bank overdraft $ 15,500 $ 589,300 Line of credit (Note 4) 5,423,600 2,479,800 Accounts payable, trade 5,343,400 3,330,000 Accrued expenses (Note 7) 774,000 722,500 Income taxes payable -- 176,000 Current maturities of notes payable and capitalized lease obligations 311,500 256,000 Current maturities of notes payable, former stockholder 187,500 187,500 Current maturities of notes payable, stockholders 94,900 87,600 ------------ ------------ Total Current Liabilities 12,150,400 7,828,700 Notes payable and capitalized lease obligations, less current maturities 1,190,300 278,900 Notes payable, former stockholder, less current maturities 550,500 676,800 Notes payable, stockholders, less current maturities 56,300 128,400 Deferred rent 42,200 -- ------------ ------------ Total Liabilities 13,989,700 8,912,800 ------------ ------------ Stockholders' Equity: Preferred stock, 5,000,000 shares authorized, no shares issued or outstanding -- -- Common stock, without par value, 60,000,000 shares authorized, 45,984,795 and 45,705,571 issued and outstanding at September 30, 2003 and December 31, 2002, respectively 9,500,800 9,430,100 Accumulated deficit (4,879,300) (6,156,200) ------------ ------------ Total Stockholders' Equity 4,621,500 3,273,900 ------------ ------------ Total Liabilities and Stockholders' Equity $ 18,611,200 $ 12,186,700 ============ ============ 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 Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net Sales $ 12,168,900 $ 9,718,200 $ 33,858,000 $ 31,075,200 Cost of Goods Sold 9,069,100 6,972,100 24,719,800 23,059,000 ------------ ------------ ------------ ------------ Gross Profit 3,099,800 2,746,100 9,138,200 8,016,200 ------------ ------------ ------------ ------------ Operating Expenses: Sales and Marketing 1,634,200 1,437,300 4,699,000 4,601,400 General and Administrative 959,300 735,100 2,774,500 2,317,000 ------------ ------------ ------------ ------------ Total Operating Expenses 2,593,500 2,172,400 7,473,500 6,918,400 ------------ ------------ ------------ ------------ Gain on Sales of Product Lines (Note 6) -- 97,700 -- 139,800 ------------ ------------ ------------ ------------ Income from Operations 506,300 671,400 1,664,700 1,237,600 ------------ ------------ ------------ ------------ Other Income (Expense): Interest Expense (164,200) (94,400) (317,200) (391,000) Other -- 10,500 10,600 21,100 ------------ ------------ ------------ ------------ Total Other Expenses (164,200) (83,900) (306,600) (369,900) ------------ ------------ ------------ ------------ Income Before Income Taxes 342,100 587,500 1,358,100 867,700 Provision for Income Taxes 16,800 12,700 81,200 12,700 ------------ ------------ ------------ ------------ Net Income $ 325,300 $ 574,800 $ 1,276,900 $ 855,000 ============ ============ ============ ============ Basic and Fully Diluted Income Per Share $ 0.01 $ 0.01 $ 0.03 $ 0.02 ============ ============ ============ ============ Weighted Average Shares Outstanding 45,911,672 45,698,661 45,775,026 45,698,661 ============ ============ ============ ============ 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, 2003 2002 ------------ ------------ Net Income $ 1,276,900 $ 855,000 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: Depreciation and amortization expense 350,200 319,600 Provision for allowances against receivables 77,900 135,500 Provision for reserves for inventory obsolescence 132,000 167,200 Write-down of bottling equipment due to reconfiguration 53,000 -- (Gain) Loss on sales of product lines -- (139,800) Imputed interest on notes payable 14,200 16,800 Imputed interest on stock warrants issued -- 44,700 Changes in Assets and Liabilities: Accounts receivable (1,295,700) 32,200 Inventories (3,689,000) (122,700) Prepaid expenses and other assets (148,500) (21,300) Accounts payable 1,618,400 23,500 Accrued expenses (82,300) (86,900) ------------ ------------ Net Cash Provided by (Used in) Operating Activities (1,692,900) 1,223,800 ------------ ------------ Cash Flows from Investing Activities: Purchase of property and equipment (1,152,200) (401,300) Purchase of intellectual property (275,000) -- Proceeds from sale of product lines and related inventories -- 3,068,300 Transaction fees on sale of product lines -- (134,000) ------------ ------------ Net Cash Provided by (Used in) Investing Activities (1,427,200) 2,533,000 ------------ ------------ Cash Flows from Financing Activities: Increase (decrease) in checks drawn against future deposits (573,800) (108,700) Proceeds from line of credit 31,762,000 32,838,000 Repayment of line of credit (28,818,000) (35,911,800) Proceeds from notes payable 1,495,200 -- Repayment of notes payable (491,300) (238,100) Repayment of notes payable, former stockholder (140,600) (187,500) Repayment of notes payable to stockholders (65,000) (96,300) Proceeds from common stock warrants exercised 70,700 -- Repayment of capitalized lease obligations (36,900) (52,600) ------------ ------------ Net Cash Provided by (Used in) Financing Activities 3,202,300 (3,757,000) ------------ ------------ Net Increase (Decrease) In Cash 82,200 (200) Cash, beginning of the year 1,000 1,200 ------------ ------------ Cash, end of the period $ 83,200 $ 1,000 ============ ============ Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes $ 311,000 $ 12,700 Cash paid for interest $ 313,900 $ 341,400 Non-Cash Financing Activities: Purchase of intellectual property with debt $ 275,000 $ -- The accompanying notes are an integral part of the financial statements 4
SPECTRUM ORGANIC PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS 1. Basis of Presentation: These are unaudited interim financial statements and include all adjustments that, in the opinion of Management, are necessary in order to make the financial statements not misleading. The financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include certain disclosures required by accounting principles generally accepted in the United States of America. Accordingly, the statements should be read in conjunction with Spectrum Organic Products, Inc. financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Operating results for the nine-month period ended September 30, 2003 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2003 or future periods. Certain reclassifications have been made to the prior year unaudited interim financial statements to be consistent with the presentation at September 30, 2003. These reclassifications had no impact on net income or retained earnings. 2. Inventories: Inventories consisted of the following: September 30, December 31, 2003 2002 ------------ ------------ Finished goods $6,147,300 $4,409,500 Raw materials 1,930,700 1,350,500 Deposits on inventory 990,400 57,600 ------------ ------------ Total Inventories 9,068,400 5,817,600 Less: Reserve for obsolete inventory (241,800) (548,000) ------------ ------------ Net Inventories $8,826,600 $5,269,600 ============ ============ Deposits on inventory consist primarily of flaxseed paid for prior to its receipt at the Company's production facility. 3. Bottling Equipment Relocation and Reconfiguration: On July 14, 2003 the Company disassembled its bottling line at its leased manufacturing facility located at 133 Copeland Street, Petaluma, California and relocated and reconfigured the line at its new co-packer, Interpac Technologies, Inc. ("Interpac"), also located in Petaluma, California. Interpac provides custom bottling services to the Company under contract, utilizing the Company's bottling equipment. As a result, there were thirteen positions eliminated from the Company's bottling and warehouse operation at Copeland Street. Of those thirteen positions, eight people accepted similar positions at Interpac, three accepted severance packages and two people were on a leave of absence at the time. The severance payments were included in cost of sales for the third quarter and were not significant. The bottling line was reconfigured for better efficiency and higher bottling speeds and included a new labeler and new conveying equipment. As a result, there was $30,600 in net book value of equipment at Copeland Street which was scrapped rather than being relocated. Additionally, the Company recorded a writedown of $22,400 to reduce the net book value of two pieces of equipment that are being held for sale down to their estimated market value. The combined amount of $53,000 was included in cost of sales for the third quarter. 4. Change in Primary Banking Relationship: On July 11, 2003 the Company entered into a Loan and Security Agreement (the "Credit Facility") with Comerica Bank-California ("Comerica"). The Credit Facility consists of a $7,000,000 revolving line of credit, a $1,250,000 term loan and a $1,000,000 capital expenditure term loan. The Credit Facility is secured by substantially all assets of the Company and matures on June 30, 2005 unless renewed earlier. The revolving line of credit is subject to a borrowing base consisting of certain eligible accounts receivable and inventory and bears interest at the prime rate or LIBOR plus 2.25%, at the Company's option. As of September 30, 2003 the Company had $1,515,200 in available borrowing capacity under the line of credit. The $1,250,000 term loan is secured by property and equipment, bears interest at the prime rate plus 25 basis points (0.25%) and features a sixty-month amortization schedule. 5 The $1,000,000 capital expenditure term loan will finance the purchase of additional new or used property and equipment, bears interest at the prime rate plus 25 basis points (0.25%) and features a 12 month interest only draw down period, converting to a 48 month amortization schedule thereafter. As of September 30, 2003 the Company had $754,800 available to be drawn down against the capital expenditure term loan. The Credit Facility calls for continued satisfaction of various financial covenants for 2003 and beyond in order to remain in compliance. As of September 30, 2003 the company was in technical default under one of the three financial covenants called for under the Credit Agreement. That covenant was the ratio of total liabilities to effective net worth, which measured 3.06 to one at September 30, 2003 versus a covenant that it not exceed 2.75 to one. The ratio was in excess of the covenant as a result of higher than expected levels of trade accounts payable and borrowings under the line of credit in order to finance the above-normal inventory levels. Inventories were above normal as a result of higher levels of finished goods maintained while the new bottling location comes up to full speed, higher levels of flaxseed inventory as a result of a short crop which necessitated buying and taking seed in advance of production requirements, and higher levels of raw materials as a result of the longer lead times required for the importation of food products as a result of the Bioterrorism Act of 2003. Comerica has granted the Company a waiver of its rights as a result of this covenant violation. The Credit Facility with Comerica replaced a similar arrangement with Wells Fargo Business Credit, Inc. ("WFBC"), the Company's former primary lender. All amounts due to WFBC were retired on July 11, 2003 in the amount of $5,023,600. Included in that amount was an early termination fee of $62,400 paid to WFBC for terminating that credit facility prior to its maturity date of October 6, 2004. The early termination fee and the remaining unamortized loan fee of $8,000 associated with the WFBC agreement were recorded as interest expense in the third quarter. 5. Intellectual Property Purchase: On April 15, 2003 the Company entered into an intellectual property purchase agreement (the "IP Agreement") with Tenere Life Sciences, Inc. ("Tenere") and Mr. Rees Moerman, both unaffiliated third parties. Mr. Moerman is an engineer and lipid scientist who developed proprietary techniques for the benign extraction of oil from oil-bearing vegetable seeds. The Company has utilized Mr. Moerman's techniques under the SpectraVac and LOCET Technology License Agreement (the "License Agreement") for the production of flax oil and other nutritional oils since 1990. Under the License Agreement, the Company paid royalties to Mr. Moerman on its sales of products that were manufactured utilizing the intellectual property. Mr. Moerman assigned his rights to the intellectual property to Tenere on January 21, 2003. In accordance with the IP Agreement, the Company purchased the intellectual property for $550,000 which was paid in two equal installments on April 30, 2003 and October 7, 2003. As a result, the Company is no longer obligated to pay royalties to Tenere effective April 1, 2003. Royalties paid during the years ended December 31, 2002 and 2001 were $162,500 and $152,000, respectively. In accordance with Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), the Company has determined that the IP Agreement has an indefinite useful life since it represents trade secrets utilized in the manufacture of flax oil and other nutritional oils. Accordingly, there is no periodic amortization expense. The Company will evaluate the intangible asset carrying value of $550,000 for impairment in relation to the anticipated future cash flows of its nutritional oils at least annually. 6. Sales of Product Lines: On April 25, 2002 the Company entered into an Asset Purchase Agreement with Acirca, Inc. pursuant to which the Company sold certain product lines from the Company's Aptos, California-based industrial ingredients business. The product lines sold included the Organic Ingredients ("OI") business in fruits, vegetables, concentrates and purees. The Spectrum Ingredients product lines consisting of culinary oils, vinegars and nutritional supplements were not part of the sale. The total consideration was $3,167,000 in cash, which included $1,417,000 for saleable inventory sold to Acirca. Also included in the total consideration received was $250,000 that was deposited into an escrow account to be applied towards indemnity claims of Acirca or, to the extent not utilized for any indemnity claims of Acirca, released to the Company in two equal installments on August 30, 2002 and December 31, 2002. The first 6 installment of $125,000 was received in full on September 3, 2002. The final installment of $124,700 (which was accrued at December 31, 2002) was received on January 31, 2003 and consisted of $125,000 plus interest earned on the escrowed funds less the escrow agent fees. Since the product line sale comprised all of the remaining assets of OI, the remaining net goodwill associated with the reverse acquisition of OI in October 1999 was written off. Accordingly, the Company recorded the following gain on the product line sales for the nine months ended September 30, 2002: Total cash consideration $ 3,167,000 Less escrowed funds included above (125,000) ----------- Net cash proceeds from sale 3,042,000 Assets sold: Inventories (1,417,000) Fixed assets, net of accumulated depreciation (8,600) Goodwill, net of accumulated amortization (1,470,200) Other assets (6,300) Transaction fees (134,000) Reserve for remaining inventories not purchased (39,300) ----------- Loss before collection of other previously escrowed funds (33,400) Collection of escrowed funds from June 2001 sale of product lines 173,200 ----------- Net Gain on Sales of Product Lines $ 139,800 =========== The Company applied the cash proceeds received against the outstanding borrowing under its revolving line of credit. The transaction fees represented investment banking, legal and accounting fees associated with closing the sale. An investment banking fee of $79,000 was paid on the sale of the OI product lines to Moore Consulting, a sole proprietorship owned and operated by Phillip Moore, a non-executive Director of the Company. The fee paid represented 2.5% of the total consideration received from the sale and, in the opinion of Management, was fair, reasonable and consistent with terms the Company could have received from an unaffiliated third party. Included in accounts receivable at September 30, 2002 was $146,900 of the cash consideration for salable OI inventories, which was received on October 11, 2002. The reserve for remaining inventories represented losses incurred or anticipated on inventories previously sold by the Company under the disposed product lines that were not purchased by Acirca. The $173,200 collection of other previously escrowed funds was the final installment of the escrowed funds in connection with the June 2001 sale of the Company's tomato-based consumer product lines, which were also divested in order to raise working capital and focus the Company's resources on its core business in healthy oils, butter substitutes and essential fatty acid nutrition. 7. Commitments and Contingencies: Pending Litigation In October 2000 the Company was notified by counsel for GFA Brands, Inc. ("GFA") that nutritional claims pertaining to Spectrum Naturals(R) Organic Margarine were infringing upon two patents issued in the United States that pertain to particular fat compositions suitable for human consumption. The patent holder exclusively licensed each of these patents to GFA. Management believes that the margarine does not infringe upon either patent, and further, that the patents are unenforceable. Management engaged legal counsel that specializes 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(R) Organic Margarine does not infringe upon the GFA patents, either literally or under the doctrine of equivalents. The Company filed a complaint against GFA 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 be enjoined from threatening or asserting any action for infringement of either patent, and attorney's fees. 7 GFA subsequently filed a motion to transfer venue to the U.S. District Court for New Jersey (the "court"). The Company filed an opposition to that motion; however, the motion to transfer venue was granted in January 2002. A Settlement hearing between GFA, its counsel, the Company and its counsel took place on July 31, 2003. There was discussion amongst the parties regarding a potential resolution of the case without resorting to a trial. As of the date of this report, further negotiations were necessary with GFA before a potential settlement could be reached. Markman briefs, in which each side presents its arguments on how the patent claims should be construed, were submitted by both GFA and Spectrum in July 2003. In most patent infringement cases, the court's determination of how the patent claims should be interpreted is the central issue. A Markman hearing was held by the court on October 16, 2003. The court is expected to issue a ruling on the Markman hearing soon, however, there had been no ruling issued as of the date of this report. Management believes the Company has meritorious defenses and that a loss is not probable on the patent infringement complaint at this time. Accordingly, no provision for loss has been recorded at September 30, 2003. Safety Violations and Worker's Compensation Appeals On April 25, 2002 a tragic industrial accident occurred at the Company's manufacturing facility located in Petaluma, California in which two employees died from asphyxiation during regular routine maintenance of empty oil tanks. An investigation has been completed by the State of California Division of Occupational Safety and Health ("CAL-OSHA") and the Petaluma Police Department. On October 18, 2002 Management met with representatives of CAL-OSHA and received their notice of nine citations for safety violations and total proposed penalties of $137,900. All of the safety violations had been completely abated before the Company's meeting with CAL-OSHA. The Company has retained separate legal counsel that specialize in CAL-OSHA matters and has filed an appeal in the hopes of reducing the citations and proposed penalties. In addition, the estates of the deceased employees have both filed applications to the Workers' Compensation Appeals Board of the State of California for an increased death benefit for serious and willful misconduct by the Company. These two applications are for an additional death benefit of $107,500, to be paid by the Company, should the estates successfully establish that the Company intentionally and willfully allowed unsafe working conditions to exist. The report from CAL-OSHA did not include any willful citations against the Company, therefore, the Company intends to defend itself vigorously and believes it has meritorious defenses. As of September 30, 2003 the Company had an industrial accident reserve remaining of $142,000. Based upon the advice of its attorneys, the Company believes the remaining reserve will be sufficient to cover the anticipated settlement of the CAL-OSHA citations for safety violations, the worker's compensation appeals and the related attorney's fees. Finally, the Sonoma County District Attorney has the right to file criminal charges against the Company and certain employees, asserting violations of the California Labor Code which entail a maximum fine of $3,000,000, for up to three years from the date of the accident. The Company has engaged separate legal counsel that specializes in this area. The remaining industrial accident reserve does not cover the potential fines and expenses associated with criminal charges nor the potential settlement of these issues with the District Attorney. There have been no criminal charges filed against the Company or any of its employees as of the date of this report, and Management is unable to reasonably estimate the potential financial impact of a criminal filing or a negotiated settlement in lieu of a criminal filing. Attorney's fees incurred during the nine months ended September 30, 2003 in connection with the potential criminal charges were $26,900 and were included in general and administrative expenses. 8. Stock-based Compensation: Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), established a fair value method of accounting for stock-based compensation plans and for transactions in which an entity acquires goods or services from non-employees in exchange for equity instruments. As permitted under SFAS 123, the Company has chosen to continue to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation expense for employee stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation expense arising from options granted to non-employees is recorded over the service period at the estimated fair value of the options granted. 8
All stock options issued to employees have an exercise price equal to the fair market value of the Company's common stock on the date of grant. Therefore, in accordance with the accounting for such options utilizing the intrinsic value method, there is no related compensation expense recorded in the Company's financial statements. Had compensation expense for stock-based compensation been determined based on the fair value of the options at the grant dates consistent with SFAS 123, the Company's net income and net income per share for the three and nine-month periods ended September 30, 2003 and 2002 would have been adjusted to the pro-forma amounts presented below: Three Months Ended Nine Months Ended ----------------------- ----------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net income as reported $ 325,300 $ 574,800 $1,276,900 $ 855,000 Less: Total compensation expense under fair value method for all stock-based awards, net of related tax effects 74,300 52,400 226,600 153,900 ---------- ---------- ---------- ---------- Pro-Forma net income $ 251,000 $ 522,400 $1,050,300 $ 701,100 ========== ========== ========== ========== Basic and diluted income per share: As reported $ 0.01 $ 0.01 $ 0.03 $ 0.02 Pro-forma $ 0.01 $ 0.01 $ 0.02 $ 0.02 The fair value of option grants for 2003 was estimated on the date of grant utilizing the Black-Scholes option-pricing model, with the following assumptions: expected life of five years, risk-free interest rate of 2.5%, no dividend yield and volatility of 115%. The fair value of option grants for 2002 was estimated on the date of grant utilizing the Black-Scholes option-pricing model, with the following assumptions: expected life of five years, risk-free interest rate of 2.5%, no dividend yield and volatility of 214%. 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 and availability 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 Company's common stock. Introduction: Spectrum Organic Products, Inc. ("SPOP", the "Company", or the "Registrant") competes primarily in three product categories: natural and organic foods sold under the Spectrum Naturals(R) brand, nutritional supplements sold under the Spectrum Essentials(R) brand, and industrial ingredients sold by the Spectrum Ingredients sales force for use by other manufacturers. The vast majority of the Company's products are oil-based and the Company has positioned itself as "The Good Fats Company". 9
Within the Spectrum Naturals(R) brand, the Company's products include olive oils and other culinary oils, salad dressings, condiments and butter-substitutes such as Spectrum Organic Margarine(R) and Spectrum Spread(R). All of the Company's culinary products feature healthy oils, contain no hydrogenated fats and are offered in a variety of sizes and flavors in both organic and conventional offerings. Within the Spectrum Essentials(R) brand, the Company's products include organic flax oil, borage oil, Norwegian fish oil and other essential fatty acids in both liquid and capsule forms. The Spectrum Essentials(R) products are cold-pressed, nutritionally rich sources of Omega-3 and Omega-6 essential fatty acids and are also offered in a variety of sizes and styles. The Spectrum Ingredients (formerly known as Spectrum Commodities, Inc.) sales force offers organic culinary oils, vinegar and nutritional oils to other manufacturers for use in their products. In addition, they bring incremental purchasing power to the Company resulting in higher margins for the consumer branded product lines. The Company was formed on October 6, 1999 by the four-way reverse merger of Spectrum Naturals, Inc. ("SNI"), its affiliate Spectrum Commodities, Inc. ("SCI"), Organic Ingredients, Inc. ("OI"), with and into Organic Food Products, Inc. ("OFPI"). OFPI was the Registrant prior to the merger, but since a controlling interest in the Company is held by former SNI stockholders, the merger was accounted for as a reverse acquisition, with SNI and SCI as the acquirer and OI and OFPI as acquirees. On June 11, 2001 the Company sold the OFPI tomato-based product lines to Acirca, Inc., an unrelated third party. On April 25, 2002 the Company sold the OI industrial ingredient business in fruits, vegetables, concentrates and purees to Acirca. Accordingly, results for the nine months ended September 30, 2002 include the operating results associated with the OI disposed product lines until the date of sale. The two dispositions have significantly strengthened the Company from a liquidity and working capital standpoint. The Company now plans to focus its resources on its core business in healthy oils, butter substitutes and essential fatty acid nutrition. Critical Accounting Policies and Estimates The following discussion and analysis of the Company's financial condition and results of operations is based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for the carrying values of assets and liabilities that are not readily apparent from other sources. On an on-going basis, the Company re-evaluates all of its estimates, including those related to accounts receivable allowances, inventory reserves, the industrial accident reserve and the deferred tax asset valuation allowance. Actual results may differ materially from these estimates under different assumptions or conditions and as additional information becomes available in future periods. The Company believes the following are the more significant judgments and estimates used in the preparation of its financial statements: Accounts Receivable Allowances - The Company provides allowances against accounts receivable for estimated bad debts, returns and deductions by customers for trade promotions and programs. These allowances are based upon the Company's historical experience with bad debt write-offs and customer deductions, customer creditworthiness, payment trends and general economic conditions. Allowances for bad debts and customer deductions were $493,900 at September 30, 2003 on gross trade accounts receivable of $4,744,900. While this estimate is one of the more significant estimates the Company makes in the preparation of its financial statements, Management does not consider it to be highly uncertain. Inventory Reserves - The Company establishes reserves for obsolete, excess and slow-moving inventories in order to properly value its inventory at the lower of cost or market. The reserve estimates are based upon historical inventory usage, spoilage, current market conditions, and anticipated future demand. Reserves for obsolete inventories were $241,800 at September 30, 2003 on total gross inventories of $9,068,400. While this estimate is one of the more significant estimates the Company makes in the preparation of its financial statements, Management does not consider it to be highly uncertain. 10 Deferred Tax Asset Valuation Allowance - As of December 31, 2002 the Company had net deferred tax assets of $1,997,900 primarily resulting from net operating loss carryforwards ("NOLs"), which consisted of $5,200,000 of Federal NOLs that expire at various times through 2021, and $2,800,000 of state NOLs that expire at various times through 2012. The majority of the NOLs originated from the pre-merger operations of OFPI. As a result of OFPI's acquisition by SNI, OFPI experienced an ownership change in excess of 50% for federal and state income tax purposes. Therefore, an annual limitation is placed by the taxing authorities on the Company's right to realize the benefit of the pre-merger NOLs. Management is unable to determine whether it is more likely than not that the net deferred tax assets will be realized. Accordingly, Management has maintained a 100% valuation allowance against the net deferred tax assets for all periods presented in the financial statements. This valuation allowance is uncertain because its value depends upon the future taxable income of the Company. It will continue to be evaluated during 2003 in light of the Company's operating results to determine whether it should be fully or partially reversed at some future point. Industrial Accident Reserve - During the second quarter of 2002, the Company established a reserve of $200,000 to cover anticipated future expenses associated with an industrial accident that occurred on April 25, 2002 (see Note 7). The reserve was established to cover anticipated citations and fines from CAL-OSHA, applications to the Workers' Compensation Appeals Board of the State of California for serious and willful misconduct penalties levied against the Company, and attorney's fees. As of September 30, 2003 there was $142,000 remaining in the industrial accident reserve. This reserve is highly uncertain because the CAL-OSHA proposed fines of $137,900 have been appealed and the applications to the Workers' Compensation Appeals Board for serious and willful misconduct penalties, if litigated, are an all-or-nothing proposition under which the Company will either be liable for $107,500 in total or nothing. The Company does not anticipate that the Workers' Compensation Appeals will be litigated, based upon the advice of its attorneys. Furthermore, the reserve does not cover potential criminal penalties against the Company which the Sonoma County District Attorney's office can levy for up to three years following the accident. There have been no criminal actions filed against the Company as of the date of this report, however, the possibility does exist and Management is unable to reasonably estimate the potential financial impact of a criminal filing or a negotiated settlement as of the date of this report. - -------------------------------------------------------------------------------- Results of Operations for the Three Month Periods Ending September 30, 2003 and September 30, 2002 - -------------------------------------------------------------------------------- Summary of Results: Management believes that earnings before interest, taxes, depreciation amortization and gains on the sales of product lines ("EBITDA as Adjusted") is an important measure of the Company's operating performance. For the three months ended September 30, 2003 EBITDA as Adjusted was $645,200 compared to $693,000 for the prior year, a decrease of $47,800 or 7%. The decrease in 2003 is discussed in detail below, but was primarily attributable to increased operating expenses partially offset by increased gross profit in 2003. While Management believes that EBITDA as Adjusted is a useful measure of the Company's financial performance, it should not be construed as an alternative to income from operations, net income or cash flows from operating activities as determined in accordance with accounting principles generally accepted in the United States of America. Furthermore, the Company's calculation of EBITDA as Adjusted, which is detailed in the following table, may be different from the calculation used by other companies, thereby limiting comparability: Three Months Ended Sept. 30, -------------------------- 2003 2002 --------- --------- Net income $ 325,300 $ 574,800 Add back: Provision for income taxes 16,800 12,700 Interest expense 164,200 94,400 Depreciation and amortization 138,900 108,800 Subtract: Gain on sales of product lines -- (97,700) --------- --------- EBITDA as Adjusted $ 645,200 $ 693,000 ========= ========= 11
Revenues: SPOP's net sales for the three months ended September 30, 2003 were $12,168,900 compared to $9,718,200 for 2002, an increase of $2,450,700 or 25%. The increase in net sales was primarily volume-related and was driven by increases in the Spectrum Naturals(R) and Spectrum Ingredients product lines, as detailed in the following table: Three Months Ended September 30, ---------------------------------------- 2003 2002 % Change ----------- ----------- --------- Spectrum Naturals(R)Culinary Products $ 5,796,500 $ 4,607,900 +26% Spectrum Essentials(R)Nutritional Supplements 2,761,100 2,640,100 +5% Spectrum Ingredients/Private Label Products 3,492,300 2,348,600 +49% Disposed/Discontinued Product Lines 119,000 121,600 -2% ----------- ----------- ------- Total Net Sales $12,168,900 $ 9,718,200 +25% =========== =========== ======= Within the Spectrum Naturals(R) culinary products, sales were significantly higher than prior year in consumer packaged oils (+42%), institutional and food service oils (+34%) olive oils (+22%) and mayonnaise (+28%). The Company's culinary oils continued to benefit from increased consumer awareness of the dangers of hydrogenated oils with regards to obesity and cardiovascular disease. Spectrum Essentials(R) nutritional supplement sales increased 5% versus the prior year, primarily as a result of increased demand for organic flaxseed sold as a dry supplement and refined coconut oil sold as a health and beauty aid. Liquid supplement sales, which represented approximately 60% of the Spectrum Essentials(R) sales during the third quarter, were flat versus the prior year. However, the prior year sales were an all-time quarterly record for liquid supplements. The Spectrum Ingredients sales increased 49% versus the prior year on the strength of increased customer demand for non-hydrogenated culinary oils. During the third quarter there was additional media coverage of commitments by several Fortune 500 companies to eliminate or sharply reduce hydrogenated oils from their products. Cost of Goods Sold: The Company's cost of goods sold increased sharply as a percent of net sales for the three-month period ended September 30, 2003 to 74.5% compared to 71.7% for the same period in 2002. The increase was due primarily to the $53,000 write-down incurred for the bottling line equipment that was not relocated to Interpac, increased raw material costs in the Company's flax oil, olive oil and mayonnaise product lines, and an unfavorable sales mix. Gross Profit: Gross profit for 2003 was $3,099,800 versus $2,746,100 for 2002, an increase of $353,700 or 13%. Gross profit as a percentage of net sales (gross margin) was 25.5% for 2003 versus 28.3% for 2002, primarily as a result of the bottling line relocation and the increased raw material costs in the Company's flax oil, olive oil and mayonnaise product lines. Sales and Marketing Expenses: The Company's sales and marketing expenses for 2003 were $1,634,200 or 13.4% of net sales, versus $1,437,400 or 14.8% of net sales for 2002. The increase in spending of $196,800 in 2003 was primarily attributable to increased broker commissions during 2003 of $90,800, increased compensation and benefits of $55,000, increased trade show expenses of $32,700 and increased market research of $27,900, partially offset by reduced levels of advertising of $64,800 as a result of improvements currently being made to the Company's advertising message and its overall consistency. General and Administrative Expenses: The Company's general and administrative expenses for 2003 were $959,300 or 7.9% of net sales, versus $735,100 or 7.6% of net sales for 2002. The increase in spending of $224,200 was primarily attributable to increased compensation and benefits of $117,400, increased rent of $33,900 associated with the move to the Company's new headquarters facility, and increased legal fees of $35,300 primarily associated with the industrial accident and an S-8 filing with the SEC. 12
Gain on Sales of Product Lines: Since both product line sales comprised all of the remaining assets of OI and OFPI, the remaining net goodwill associated with the reverse acquisition of both companies in October 1999 was written-off as a result of the sales. Accordingly, the Company recorded a net gain from the sales of product lines during the nine months ended September 30, 2002 of $97,700 which consisted primarily of the collection of the first installment of the escrowed funds from the sale of OI for $125,000 collected on September 3, 2002. Interest Expense: The Company's interest expense for 2003 was $164,200 versus $94,400 for 2002. The increase of $69,800 or 74% was primarily attributable to the early termination fee of $62,400 paid to the Company's former primary lender (see Note 4 to the financial statements). Provision for Income Taxes: During the three months ended September 30, 2003 the Company recorded a provision for state income taxes of $16,800 versus $12,700 for 2002. The Company has federal net operating loss carryovers sufficient to offset all federal income taxes due on its estimated taxable income for 2003. However, the State of California has imposed a two-year moratorium on the use of net operating loss carryovers, as a result of a budget crisis, effective January 1, 2002. Consequently, the Company paid $176,000 in estimated state income taxes due for 2002 during the first quarter of 2003 and will owe state income taxes for 2003 estimated at approximately 9% of its taxable income. The Company estimates that its taxable income for the third quarter of 2003 was approximately $180,000. Due to continued uncertainty regarding the Company's realization of its deferred tax assets, the Company maintained a 100% reserve at September 30, 2003 against the net deferred tax assets. In light of the Company's operating results, this reserve will continue to be evaluated during 2003 to determine whether it should be fully or partially reversed at some future point. - -------------------------------------------------------------------------------- Results of Operations for the Nine-Month Periods Ending September 30, 2003 and September 30, 2002 - -------------------------------------------------------------------------------- Summary of Results: Management believes that earnings before interest, taxes, depreciation amortization and gains on the sale of product lines ("EBITDA as Adjusted") is an important measure of the Company's operating performance. For the nine months ended September 30, 2003 EBITDA as Adjusted was $2,025,500 compared to $1,438,500 for the prior year, an increase of $587,000 or 41%. The improved performance in 2003 is discussed in detail below, but was primarily attributable to increased sales and gross profit, partially offset by increased operating expenses. While Management believes that EBITDA as Adjusted is a useful measure of the Company's financial performance, it should not be construed as an alternative to income from operations, net income or cash flows from operating activities as determined in accordance with accounting principles generally accepted in the United States of America. Furthermore, the Company's calculation of EBITDA as Adjusted which is detailed in the following table, may be different from the calculation used by other companies, thereby limiting comparability: Nine Months Ended Sept. 30, --------------------------- 2003 2002 ----------- ----------- Net income $ 1,276,900 $ 855,000 Add back: Provision for income taxes 81,200 12,700 Interest expense 317,200 391,000 Depreciation and amortization 350,200 319,600 Subtract: Gain on sales of product lines -- (139,800) ----------- ----------- EBITDA as Adjusted $ 2,025,500 $ 1,438,500 =========== =========== 13
Revenues: SPOP's net sales for the nine months ended September 30, 2003 were $33,858,000 compared to $31,075,200 for 2002, an increase of $2,782,800 or 9%. The increase was attributable to strong sales growth in all three of the Company's primary product categories, partially offset by the lost sales associated with the disposed product lines. Comparable net sales (after eliminating the sales of disposed or discontinued product lines from both periods) increased by 20%, as detailed in the following table: Nine Months Ended September 30, ----------------------------------------- 2003 2002 % Change ------------ ------------ -------- Spectrum Naturals(R)Culinary Products $ 15,453,600 $ 12,771,200 +21% Spectrum Essentials(R)Nutritional Supplements 7,737,700 7,089,800 +9% Spectrum Ingredients(R)/Private Label Products 10,458,000 8,113,900 +29% ------------ ------------ ----- Comparable Net Sales 33,649,300 27,974,900 +20% Disposed/Discontinued Product Lines 208,700 3,100,300 -93% ------------ ------------ ----- Total Net Sales $ 33,858,000 $ 31,075,200 +9% ============ ============ ===== Within the Spectrum Naturals(R) culinary products, sales were significantly higher in consumer packaged oils (+45%), institutional and food service oils (+26%), consumer and institutional sizes of mayonnaise (+17%) and olive oils (+10%). All of the Spectrum Naturals(R) products contain no hydrogenated oils and continue to benefit from increased consumer awareness of the dangers of hydrogenated oils with regards to obesity and cardiovascular disease. Spectrum Essentials(R) nutritional supplement sales increased 9% versus the prior year as a result of continued strong demand for flax oil and other nutritionally rich sources of Omega 3 and 6 essential fatty acids. The Spectrum Essentials(R) product line continues to benefit from increased consumer awareness of the importance of Omega 3 and 6 EFAs to brain and other organ functions. The Spectrum Ingredients sales increase of 29% versus the prior year was primarily attributable to increased demand by other food manufacturers for non-hydrogenated culinary oils for use in their products. Cost of Goods Sold: The Company's cost of goods sold decreased as a percent of net sales for the nine-month period ended September 30, 2003 to 73.0% compared to 74.2% for the same period in 2002. The decrease was primarily due to the direct effects of the industrial accident during the prior year of $254,100. Partially offsetting the impact of the industrial accident was the $53,000 write-down incurred for the bottling line equipment that was not relocated to Interpac and higher raw material costs during 2003 in the Company's flax oil, olive oil and mayonnaise product lines. Gross Profit: Gross profit as a percent of net sales (gross margin) was 27.0% for 2003 versus 25.8% for the prior year. The increase was primarily due to the effects of the industrial accident on the prior year, partially offset by the bottling line write-down and increased raw material costs during 2003. Sales and Marketing Expenses: The Company's sales and marketing expenses for the nine months ended September 30, 2003 were $4,699,000 or 13.9% of net sales, versus $4,601,400 or 14.8% of net sales for 2002. The increase in spending of $97,600 was primarily attributable to increased compensation and benefits of $146,200 and increased broker commissions of $372,500, partially offset by the elimination of $408,600 of expenses associated with the OI business disposed of on April 25, 2002. General and Administrative Expenses: The Company's general and administrative expenses for the nine months ended September 30, 2003 were $2,774,500 or 8.2% of net sales, versus $2,317,000 or 7.5% of net sales for 2002. The increase in spending of $457,500 was primarily attributable to increased compensation and benefits of $243,500, increased rent of $106,900 associated with the move to the Company's new headquarters in December 2002, increased board fees for non-executive Directors in 2003 of $66,700 and increased legal expenses of $49,700 primarily attributable to the industrial accident and an S-8 filing with the SEC. 14
Gain on Sales of Product Lines: Since both product line sales comprised all of the remaining assets of OI and OFPI, the remaining net goodwill associated with the reverse acquisition of both companies in October 1999 was written-off as a result of the sales. Accordingly, the Company recorded a net gain from the sales of product lines during the nine months ended September 30, 2002 of $139,800, which consisted primarily of the collection of the final escrowed funds from the sale of OFPI of $173,200 (see Note 6 to the financial statements). Interest Expense: The Company's interest expense for the nine months ended September 30, 2003 was $317,200 versus $391,000 for 2002. The reduction of $73,800 or 19% was primarily attributable to lower borrowing levels under the line of credit as a result of the sale of the OI product lines on April 25, 2002. Also contributing to the reduced interest expense was the early retirement of the private placement notes on December 31, 2002 and the reduction in the interest rate paid to the Company's second largest creditor from 12% per annum to 9% per annum effective November 1, 2002. These favorable items were partially offset by the early termination fee of $62,400 paid to the Company's former primary creditor on July 11, 2003. Provision for Income Taxes: During the nine months ended September 30, 2003 the Company recorded a provision for state income taxes of $81,200 versus $12,700 for 2002. The Company has federal net operating loss carryovers sufficient to offset all federal income taxes due on its estimated taxable income for 2003. However, the State of California has imposed a two-year moratorium on the use of net operating loss carryovers, as a result of a budget crisis, effective January 1, 2002. Consequently, the Company paid $176,000 in estimated state income taxes due for 2002 during the first quarter of 2003 and will incur state income tax expense for 2003 estimated at approximately 9% of its taxable income. The Company estimates that its taxable income for the first nine months of 2003 was approximately $900,000. Due to continued uncertainty regarding the Company's realization of its deferred tax assets, the Company maintained a 100% reserve at September 30, 2003 against the net deferred tax assets. In light of the Company's operating results, this reserve will continue to be evaluated during 2003 to determine whether it should be fully or partially reversed at some future point. Seasonality: Historically, the Company has experienced little seasonal fluctuation in revenues. With regards to product purchasing, the Company will seasonally contract for certain raw materials for the entire year at harvest time or at planting time. These purchases take place annually from early spring to mid-summer and are effected to reduce the risk of price swings due to demand fluctuations. These annual purchases can create overages and shortages in inventory. Liquidity and Capital Resources: As disclosed in Note 4 to the financial statements, the Company entered into a new Credit Facility with Comerica Bank-California ("Comerica") that expires on June 30, 2005 unless renewed earlier. The new Credit Facility includes a revolving line of credit up to a maximum of $7,000,000, a term loan for $1,250,000 and a capital expenditure term loan of $1,000,000. The new Credit Facility is secured by substantially all assets of the Company and enables the Company to borrow below prime, using a LIBOR rate option. The new Credit Facility with Comerica substantially enhanced the Company's available borrowing capacity during July 2003 as a result of refinancing the existing term debt and more liberal definitions of eligible inventory to secure the borrowing base under the revolving line of credit. The Company could not operate its business without the Credit Facility with Comerica or one similar to it. The Credit Facility calls for continued satisfaction of various financial covenants for 2003 and beyond related to profitability levels, debt service coverage, and the ratio of total liabilities to tangible net worth. As of September 30, 2003 the Company was in technical default under one of the three financial covenants called for under the Credit Agreement. That covenant was the ratio of total liabilities to tangible net worth, which measured 3.06 to one at September 30, 2003 versus a covenant that it not exceed 2.75 to one. The ratio was in excess of the covenant as a result of higher than expected levels of trade accounts payable and borrowings under the line of credit in order to finance the above-normal inventory levels. Inventories are above normal as a result of higher levels of safety stock maintained while the new bottling location comes up to full speed, higher levels of flaxseed inventory as a result of a short crop which necessitated buying and taking seed in advance of production requirements, and higher levels of raw materials as a result of the longer lead times required for the importation of food products as a result of the Bioterrorism Act of 2003. Comerica has granted the Company a waiver of its rights as a result of this covenant violation. 15 During 2003 the Company used $1,692,900 in cash from operating activities, compared to generating $1,223,800 in cash in 2002. The increase in cash used was primarily due to increased inventory levels as the Company rebuilt its safety stock of flax oil products in the wake of the flaxseed shortage during late 2002 and higher levels of trade accounts receivable due to increased sales. Flaxseed inventories were sharply higher as a result of higher costs and the requirement to pay for seed in advance prior to shipment due to intense competition. Partially offsetting the increased inventories were higher levels of accounts payable associated with the same issues. Cash used in investing activities was $1,427,200 in 2003 compared to cash provided of 2,533,000 in 2002. The cash was invested by the Company in machinery and equipment (primarily for a new rotary labeler, new conveying equipment and six used expeller presses) and the purchase of the intellectual property (see Note 5 to the financial statements). The cash provided during the prior year was primarily attributable to the sale of the OI product lines and related inventories in April 2002. Cash provided by financing activities was $3,202,300 in 2003 compared to cash used of $3,757,000 in 2002. The funds provided by financing activities during 2003 primarily reflected the proceeds from the new term debt with Comerica and increased borrowing under the revolving line of credit to finance the equipment and intellectual property purchases and the cash used for operating activities. The cash used in financing activities during 2002 was primarily attributable to payments against outstanding borrowings under the Company's line of credit with the cash proceeds from the sale of the OI product lines and related inventories in April 2002. Management believes that future cash flows from operations and available borrowing capacity under the revolving line of credit should provide adequate funds to meet the Company's estimated cash requirements for the foreseeable future. Available borrowing capacity under the revolving line of credit was $1,515,200 and $2,872,200 at September 30, 2003 and 2002, respectively. The reduction in available borrowing capacity versus 2002 is primarily attributable to higher borrowings in 2003 to finance the increased levels of inventory. The Company relocated to a new leased headquarters facility in December 2002 which represented a significant upgrade to the Company's office facilities. The new office is rented under a five year fixed operating lease. Rental payments for the year ended December 31, 2003 are expected to be $185,600. Effective June 2, 2003 the Company relocated its third-party warehousing and distribution facility from Rancho Cucamongo, California to a new facility in Woodland, California operated by Interpac Technologies, Inc. ("Interpac"). Additionally, the Company outsourced its bottling operation effective July 14, 2003 to another Interpac facility in Petaluma, California. As a result, there were thirteen positions eliminated from the Company's bottling and warehousing operation at its Copeland Street, Petaluma facility during July. The Company continues to own its bottling equipment, which has been moved and reassembled in a more efficient configuration at the Interpac Petaluma facility. The Company does not utilize off-balance sheet financing arrangements. There were no transactions with special purpose entities that give the Company access to assets or additional financing or carry debt that is secured by the Company. There was one significant transaction with a related party during the nine months ended September 30, 2003. The Company paid consulting fees of $74,300, plus expenses incurred, to Running Stream Food and Beverage, Inc. ("RSFB"). RSFB provides private label consulting and management services to the Company and is owned and operated by John R. Battendieri, a non-executive Director of the Company. In the opinion of Management, the consulting fees paid to RSFB were fair, reasonable and consistent with terms the Company could have obtained from an unaffiliated third party. Mr. Thomas Simone is one of the Company's non-executive Directors and also sits on the Board of Directors of United Natural Foods, Inc ("UNFI"). UNFI is the Company's largest customer, representing approximately 50% of the Company's net sales for the nine months ended September 30, 2003. 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 and availability 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. 16
New Applicable Accounting Pronouncements: In July 2002 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 requires that a liability for expenses associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS 146, in many cases, would be recognized over time rather than up front. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company's relocation and outsourcing of its bottling operation to the Interpac Petaluma facility became effective on July 14, 2003. Exit and disposal costs associated with the bottling operation relocation and outsourcing of $53,000 were recognized during the third quarter in accordance with SFAS 146. In November 2002 the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", which is effective for financial statements issued after December 15, 2002. Under FIN 45, a guarantor is required to measure and recognize the fair value of certain guarantees at inception. Additionally, a guarantor must provide new disclosures regarding the nature of any guarantees, potential amount of future guarantee payments, the current carrying amount of the guarantee liability, and the nature of any recourse provisions or assets held as collateral. The initial recognition and measurement provisions under FIN 45 are effective for guarantees issued or modified on or after January 1, 2003 for the Company. The disclosure requirements are effective as of December 31, 2002 for the Company. There have been no new guaranties entered into during 2003 and therefore no valuation necessary under FIN 45. However, the Company is the continuing guarantor for a portion of a line of credit for The Olive Press, LLC, an unrelated third party, in the amount of $25,000. In December 2002 the FASB issued SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", which provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as prescribed in SFAS 123, "Accounting for Stock-Based Compensation". Additionally, SFAS 148 requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002 with early application permitted in certain circumstances. Management has evaluated the benefits of changing to the fair value method of accounting for stock-based compensation and has elected to continue to use the intrinsic value method. Accordingly, the adoption of SFAS 148 did not have a material impact on the Company's financial condition or results of operations. The additional interim disclosures required under SFAS 148 are included in Note 8 to the financial statements. In January 2003 the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements". Interpretation 46 establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. Interpretation 46 applies to any business enterprise, both public and private, that has a controlling interest, contractual relationship or other business relationship with a variable interest entity. The Company has no investment in or contractual or other business relationship with a variable interest entity. However, if the Company were to enter into any such arrangement with a variable interest entity in the future, its consolidated financial position or results of operations may be adversely impacted. 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. 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, 2003 the average outstanding balance under the line of credit was approximately $4,504,400 with a weighted average effective interest rate of 4.8% per annum. For the nine months ended September 30, 2002 the average outstanding balance under the line of credit was approximately $3,614,100 with a weighted average effective interest rate of 6.6% per annum. The increased average borrowing levels in 2003 reflect the funds necessary to finance the increased inventory levels and increased level of operations in general. The reduction in the weighted average effective interest rate reflects the lower interest rates available under the new banking relationship with Comerica. 17 Certain other debt items are also sensitive to changes in interest rates. The following table summarizes principal cash flows and related weighted average interest rates by expected maturity date for long-term debt, excluding capital leases ($ thousands): Expected Principal Payments (Periods Ended December 31) Outstanding ----------------------------------------------------- Sept.30, 2003 2003 2004 2005 2006 2007 2008+ ------------- ---- ---- ---- ---- ---- ----- Long Term Debt: Fixed Rate $ 588.7 $ 69.6 $ 275.2 $ 228.2 $ 15.6 -- -- Avg. Int. Rate 9.3% 9.3% 9.3% 9.2% 9.0% -- -- Variable Rate $ 1,432.7 $ 62.5 $ 280.7 $ 311.3 $ 311.3 $ 311.3 $ 155.6 Avg. Int. Rate 4.3% var. var. var. var. var. var. Imputed Rate $ 300.5 -- -- -- -- -- $ 300.5 Avg. Int. Rate 6.5% -- -- -- -- -- 6.5% As discussed in Note 3 to the financial statements, the Company entered into a new Loan and Security Agreement with Comerica Bank-California effective July 11, 2003. As a result, all of the Company's variable rate long-term debt outstanding was retired on July 11 and replaced with new variable rate long-term debt provided by Comerica. The Company's fixed rate and imputed rate long-term debt outstanding were not affected by the change to Comerica. 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, 2003 these future commitments were not at prices in excess of current market, nor in quantities in excess of normal requirements. The Company does not utilize derivative contracts either to hedge existing risks or for speculative purposes. Item 4. DISCLOSURE CONTROLS AND PROCEDURES - ------------------------------------------- The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of both the design and the operation of its disclosure controls and procedures and have found them to be adequate. The Company has formed a Disclosure Review Committee (the "DRC") which consists of various senior managers from each functional area of the Company. The DRC considers the materiality of new information and reports to the Company's Chief Financial Officer. There were no material changes in the Company's internal control system during the nine months ended September 30, 2003. Management is not aware of any significant deficiencies in the design or operation of internal controls. PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings In October 2000 the Company was notified by counsel for GFA Brands, Inc. ("GFA") that nutritional claims pertaining to Spectrum Naturals(R) Organic Margarine were infringing upon two patents issued in the United States that pertain to particular fat compositions suitable for human consumption. The patent holder exclusively licensed each of these patents to GFA. Management believes that the margarine does not infringe upon either patent, and further, that the patents are unenforceable. Management engaged legal counsel that specialize in this area and received an opinion letter in February 2001 confirming that, in the opinion of counsel, the manufacture or sale of Spectrum Naturals(R) Organic Margarine does not infringe upon the GFA patents, either literally or under the doctrine of equivalents. The Company filed a complaint against GFA 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 be enjoined from threatening or asserting any action for infringement of either patent, and attorney's fees. GFA subsequently filed a motion to transfer venue to the U.S. District Court for New Jersey (the "court"). The Company filed an opposition to that motion; however, the motion to transfer venue was granted in January 2002. A Settlement hearing between GFA, its counsel, the Company and its counsel took place on July 31, 2003. There was discussion amongst the parties regarding a potential resolution of the case without resorting to a trial. As of the date of this report, further negotiations were necessary with GFA before a potential settlement could be reached. 18
Markman briefs, in which each side presents its arguments on how the patent claims should be construed, were submitted by both GFA and Spectrum in July 2003. In most patent infringement cases, the court's determination of how the patent claims should be interpreted is the central issue. A Markman hearing was held by the court on October 16, 2003. The court is expected to issue a ruling on the Markman hearing soon, however, there had been no ruling issued as of the date of this report. Management believes the Company has meritorious defenses and that a loss is not probable on the patent infringement complaint at this time. Accordingly, no provision for loss has been recorded at September 30, 2003. Item 2. Changes in Securities and Use of Proceeds - -------------------------------------------------- During the three months ended September 30, 2003 the Company issued 279,224 shares of its common stock for the exercise of 301,950 common stock purchase warrants issued under the private placement notes that were retired on December 31, 2002. Of the total warrants exercised, 258,100 were exercised in cash with total proceeds to the Company of $70,700 and the remaining 43,850 warrants were exercised via the cash-less exercise feature under which the net equity in the warrants are exchanged into common stock of the Company. The Company applied the proceeds received of $70,700 against its outstanding borrowings under the line of credit. The Company has not in the past nor does it intend to pay cash dividends on its common stock in the foreseeable future. The Company intends to retain earnings, if any, for use in the operation and expansion of its business. Item 3. Defaults Upon Senior Securities - ---------------------------------------- As disclosed in Note 4 to the financial statements, the Company entered into a new Credit Facility with Comerica Bank-California on July 11, 2003. As of September 30, 2003 the company was in technical default under one of the three financial covenants called for under the Credit Agreement. That covenant was the ratio of total liabilities to tangible net worth, which measured 3.06 to one at September 30, 2003 versus a covenant that it not exceed 2.75 to one. The ratio was in excess of the covenant as a result of higher than expected levels of trade accounts payable and borrowings under the line of credit in order to finance the above-normal inventory levels. Inventories were above normal as a result of higher levels of finished goods maintained while the new bottling location comes up to full speed, higher levels of flaxseed inventory as a result of a short crop which necessitated buying and taking seed in advance of production requirements, and higher levels of raw materials as a result of the longer lead times required for the importation of food products as a result of the Bioterrorism Act of 2003. As a result of the technical default Comerica has certain rights under the Credit Agreement, including the right to raise the interest rates levied on the Company's indebtedness to Comerica by 3%. Comerica has granted the Company a waiver of its rights as a result of this covenant violation. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None. Item 5. Other Information - -------------------------- None. 20 Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits: Description 10.44 Loan and Security Agreement dated June 12, 2003 effective as of July 11, 2003 by and between Spectrum Organic Products, Inc. and Comerica Bank-California. 10.45 LIBOR Addendum to Loan and Security Agreement dated June 12, 2003 effective as of July 11, 2003 by and between Spectrum Organic Products, Inc. and Comerica Bank-California. 10.46 Variable Rate-Installment Note dated June 12, 2003 effective as of July 11, 2003 by and between Spectrum Organic Products, Inc. and Comerica Bank-California 10.47 Variable Rate-Single Payment Note dated June 12, 2003 effective as of July 11, 2003 by and between Spectrum Organic Products, Inc. and Comerica Bank-California 10.48 Subordination Agreement dated June 12, 2003 effective as of July 11, 2003 by and between Debora Bainbridge Phillips Trust, Spectrum Organic Products, Inc. and Comerica Bank-California 10.49 Subordination Agreement dated June 12, 2003 effective as of July 11, 2003 by and between Steven Reedy, Spectrum Organic Products, Inc. and Comerica Bank-California 31.01 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.02 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.01 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.02 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K during the quarter ended September 30, 2003: None. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 3, 2003 SPECTRUM ORGANIC PRODUCTS, INC. By: /s/ Robert B. Fowles -------------------------------- Robert B. Fowles Duly Authorized Officer & Chief Financial Officer 22 EX-10.44 3 spectrumexhib1044-093003.txt LOAN AND SECURITY AGREEMENT LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY - -------------------------------------------------------------------------------- OBLIGOR # NOTE # AGREEMENT DATE June 12, 2003 - -------------------------------------------------------------------------------- CREDIT LIMIT INTEREST RATE OFFICER NO./INITIALS $7,000,000 Base Rate + 0%/ LIBOR + 2.25 49571 / MN - -------------------------------------------------------------------------------- THIS AGREEMENT is entered into as of June 12, 2003, between COMERICA BANK-CALIFORNIA ("Bank") as secured party, whose Western Division headquarters office is 333 West Santa Clara Street, San Jose, California and SPECTRUM ORGANIC PRODUCTS, INC., a California corporation ("Borrower"), whose sole place of business (if it has only one), chief executive office (if it has more than one place of business) or residence (if an individual) is located at the address set forth below its name on the signature page to this Agreement. The parties agree as follows: 1. DEFINITIONS. ------------ 1.1 "Accounts" shall mean and includes all presently existing and hereafter arising accounts, including without limitation all accounts receivable, contract rights and other forms of right to payment for monetary obligations or receivables for property sold or to be sold, leased, licensed, assigned or otherwise disposed of, or for services rendered or to be rendered (including without limitation all health-care-insurance receivables) owing to Borrower, and any supporting obligations, credit insurance, guaranties or security therefor, irrespective of whether earned by performance. 1.2 "Affiliate" shall mean, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, is under common control with, or is a director or officer of such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to vote 5% or more of the Stock having ordinary voting power for the election of directors (or comparable managers) or the direct or indirect power to direct the management and policies of a Person. 1.3 "Agreement" shall mean and includes this Loan and Security Agreement (Accounts and Inventory), any concurrent or subsequent rider to this Loan and Security Agreement (Accounts and Inventory) and any extensions, supplements, amendments or modifications to this Loan and Security Agreement (Accounts and Inventory) and/or to any such rider. 1.4 "Bank Expenses" shall mean and includes: all costs or expenses required to be paid by Borrower under this Agreement which are paid or advanced by Bank; taxes and insurance premiums of every nature and kind of Borrower paid by Bank; filing, recording, publication and search fees, appraiser fees, auditor fees and costs, and title insurance premiums paid or incurred by Bank in connection with Bank's transactions with Borrower; costs and expenses incurred by Bank in collecting the Accounts (with or without suit) to correct any default or enforce any provision of this Agreement, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, disposing of, preparing for sale and/or advertising to sell the Collateral, whether or not a sale is consummated; costs and expenses of suit incurred by Bank in enforcing or defending this Agreement or any portion hereof, including, but not limited to, expenses incurred by Bank in attempting to obtain relief from any stay, restraining order, injunction or similar process which prohibits Bank from exercising any of its rights or remedies; and reasonable attorneys' fees and expenses incurred by Bank in advising, structuring, drafting, reviewing, amending, terminating, enforcing, defending or concerning this Agreement, or any portion hereof or any agreement related hereto, whether or not suit is brought. Bank Expenses shall include Bank's in-house legal charges at reasonable rates. 1.5 "Base Rate" shall mean that variable rate of interest so announced by Bank at its headquarters office in Detroit, Michigan as its "Base Rate" from time to time and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. 1.6 "Borrower's Books" shall mean and includes all of Borrower's books and records including but not limited to minute books; ledgers; records indicating, summarizing or evidencing Borrower's assets (including, without limitation, the Accounts), liabilities, business operations or financial condition, and all information relating thereto, computer programs; computer disk or tape files; computer printouts; computer runs; and other computer prepared information and equipment of any kind. 1.7 "Borrowing Base" shall mean the sum of: (1) eighty percent (80%) of the net amount of Eligible Accounts after deducting therefrom all payments, adjustments and credits applicable thereto; and (2) the lesser of (i) sixty percent (60%) of the net amount of Eligible Inventory after deducting therefrom all applicable Growers' Payables incurred in connection with the acquisition of such Eligible Inventory and after all adjustments for age and seasonality or other factors affecting the value of such Inventory, or (ii) One Million Five Hundred Thousand Dollars ($1,500,000) in excess of the aggregate amount of all outstanding Indebtedness consisting of that portion of the Credit advanced to Borrower on the basis of Eligible Accounts. Anything contained in the foregoing LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) to the contrary notwithstanding, that at all times that the aggregate amount of all Dilution (as calculated by Bank on the basis of Bank's most recent audit of Borrower's Books conducted under Section 6.25 hereof), as a percentage of all Accounts, is five percent (5%) or less, then the percentage of Eligible Accounts that shall be included in the Borrowing Base shall be increased to eighty five percent (85%) of the net amount of Eligible Accounts after deducting therefrom all payments, adjustments and credits applicable thereto. 1.8 "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close. 1.9 "Cash Flow" shall mean, for any applicable period of determination, the Net Income (after deduction for income taxes and other taxes of such Person, or its subsidiaries, determined by reference to income or profits of such Person, or its subsidiaries) for such period, plus, to the extent deducted in computation of such Net Income, the amount of depreciation and amortization expense and the amount of deferred tax liability during such period, together with such other non-cash expenses as are determined appropriate for inclusion in the "Cash Flow" of such Person by Bank from time to time, in its sole discretion, all as determined in accordance with GAAP. 1.10 "Cash Flow Coverage Ratio" shall mean the ratio, as of any applicable period of determination, the ratio of Cash Flow to Current Maturities of Long Term Indebtedness determined on the basis of the four fiscal quarters immediately preceding the date of determination. 1.11 "Collateral" shall mean and includes all personal property of Borrower, including without limitation each and all of the following: the Accounts; the Inventory; the Equipment; the Farm Products, the General Intangibles; the Negotiable Collateral; Borrower's Books; all Borrower's deposit accounts; all Borrower's investment property (including without limitation securities and securities entitlements); all goods, instruments, documents, policies and certificates of insurance, deposits, money or other personal property of Borrower in which Bank receives a security interest and which now or later come into the possession, custody or control of Bank; all Borrower's Equipment and fixtures; all additions, accessions, attachments, parts, replacements, substitutions, renewals, interest, dividends, distributions or rights of any kind for or with respect to any of the foregoing (including without limitation any stock splits, stock rights, voting rights and preferential rights); any supporting obligations for any of the foregoing; and the products and proceeds of any of the foregoing, including, but not limited to, proceeds of insurance covering the Collateral, and any and all Accounts, General Intangibles, Negotiable Collateral, Inventory, Equipment, Farm Products, money, deposit accounts, investment property, fixtures or other tangible and intangible property of Borrower resulting from the sale or other disposition of the Collateral and the proceeds thereof and any supporting obligations or security therefor and any right to payment thereunder, and including, without limitation, cash or other property which were proceeds and are recovered by a bankruptcy trustee or otherwise as a preferential transfer by Borrower. Notwithstanding anything to the contrary contained herein, Collateral shall not include any waste or other materials which have been or may be designated as toxic or hazardous by Bank. 1.12 "Credit" shall mean all Indebtedness, except that Indebtedness arising pursuant to any other separate contract, instrument, note, or other separate agreement which, by its terms, provides for a specified interest rate and term. 1.13 "Credit Limit" shall mean Seven Million Dollars ($7,000,000). 1.14 "Current Assets" shall mean, in respect of a Person and as of any applicable date of determination, all current assets of such Person determined in accordance with GAAP. 1.15 "Current Liabilities" shall mean, in respect of a Person and as of any applicable date of determination, all liabilities of such Person that should be classified as current in accordance with GAAP. 1.16 "Current Maturities of Long Term Indebtedness" shall mean, in respect of a Person and as of any applicable date of determination thereof, that portion of Long Term Indebtedness that should be classified as current in accordance with GAAP. 1.17 "Current Ratio" shall mean, in respect of a Person and as of any applicable date of determination, Current Assets divided by Current Liabilities. 1.18 "Daily Balance" shall mean the amount determined by taking the amount of the Credit owed at the beginning of a given day, adding any new Credit advanced or incurred on such date, and subtracting any payments or collections which are deemed to be paid and are applied by Bank in reduction of the Credit on that date under the provisions of this Agreement. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 1.19 "Debt" shall mean, as of any applicable date of determination, all items of indebtedness, obligation or liability of a Person, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, that should be classified as liabilities in accordance with GAAP. In the case of Borrower, the term "Debt" shall include, without limitation, the Indebtedness. 1.20 "Dilution" shall mean, as of any applicable date of determination, all amounts and circumstances which have or may result in a reduction to the amount collected on the Accounts, includes but is not limited to all returns, charge-backs, trade allowances, concentrations, slow pays, bad debts and other similar factors. 1.21 "Eligible Accounts" shall mean and includes those Accounts of Borrower which are due and payable within thirty (30) days, or less, from the date of invoice, have been validly assigned to Bank and strictly comply with all of Borrower's warranties and representations to Bank; but Eligible Accounts shall not include the following: (a) Accounts with respect to which the account debtor is an officer, employee, partner, joint venturer or agent of Borrower; (b) Accounts with respect to which goods are placed on consignment, guaranteed sale or other terms by reason of which the payment by the account debtor may be conditional; (c) Accounts with respect to which the account debtor is not a resident of the United States; (d) Accounts with respect to which the account debtor is the United States or any department, agency or instrumentality of the United States; (e) Accounts with respect to which the account debtor is any State of the United States or any city, county, town, municipality or division thereof; (f) Accounts with respect to which the account debtor is a Subsidiary or an Affiliate of Borrower, provided, however, that with respect to any Accounts due to Borrower from United Natural Food, Inc., the existence of any common shareholders or a common directorship with Borrower shall not exclude any such Accounts from the Eligible Accounts; (g) Accounts with respect to which Borrower is or may become liable to the account debtor for goods sold or services rendered by the account debtor to Borrower; (h) Accounts not paid by an account debtor within ninety (90) days from the date of the invoice; (i) Accounts with respect to which account debtors dispute liability or make any claim, or have any defense, crossclaim, counterclaim, or offset (other than Growers' Liens or Production Liens); (j) Accounts with respect to which any Insolvency Proceeding is filed by or against the account debtor, or if an account debtor becomes insolvent, fails or goes out of business; and (k) Accounts owed by any single account debtor which exceed twenty percent (20%) of all of the Eligible Accounts, provided, that with respect to Accounts due to Borrower from United Natural Food, Inc., that portion in excess of fifty percent (50%) of all Eligible Accounts shall be ineligible, and provided, further, that with respect to Accounts due to Borrower from Tree of Life, Inc., that portion in excess of thirty percent (30%) of all Eligible Accounts shall be ineligible; and (I) Accounts with a particular account debtor on which over twenty-five percent (25%) of the aggregate amount owing is greater than ninety (90) days from the date of the invoice. 1.22 "Eligible Inventory" shall mean Borrower's raw materials and Farm Products, packaging materials and all finished goods or processed Inventory, as may be adjusted by Bank, in Bank's discretion, for age and seasonality or other factors affecting the value of such Inventory or Farm Products (including without limitation all private label goods), and that have been validly pledged to Bank and strictly comply with all of Borrower's warranties and representations to Bank; but Eligible Inventory shall not include the following: (a) supplies; (b) raw materials or purchased parts not in saleable form; (c) work in process; (d) Inventory or Farm Products consigned to sales representatives or consigned to Borrower by a vendor; (e) obsolete, stale or spoiled Inventory or Farm Products; (f) Inventory reserve amounts; (g) finished goods with no/low liquidation value; (h) Inventory or Farm Products located or stored with a bailee, warehouseman or other third party without Bank's prior written consent and unless a bailment agreement in form and substance satisfactory to Bank and any documents required in accordance with Section 6.5 of this Agreement are in place; (i) defective Inventory or Farm Products or Inventory under repair; (j) Inventory or Farm Products not insured naming Bank as loss payee; (k) Inventory or Farm Products not located at an address set forth in Section 6.5 of this Agreement or any schedule provided in connection therewith; and (l) all other Inventory or Farm Products deemed ineligible by Bank. 1.23 "Equipment" shall mean and includes all of Borrower's machinery, machine tools, apparatus, motors, equipment, fittings, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods (including software imbedded in such goods) and other tangible personal property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower or in which Borrower has an interest, whether now owned or hereafter acquired by Borrower and wherever located, and all parts, accessories, and special tools, and all increases and accessions thereto and substitutions and replacements therefor. 1.24 "Event of Default" shall mean one or more of those events described in Section 7 contained herein below. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 1.25 "Farm Products" means any and all of any Debtor's farm products, as such term is defined in Section 9-102 of the UCC. 1.26 "GAAP" shall mean, as of any applicable period, generally accepted accounting principles in effect in the United States during such period. 1.27 "General Intangibles" shall mean and includes all of Borrower's present and future general intangibles and other personal property (including without limitation all payment intangibles, electronic chattel paper, contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, plans, diagrams, schematics, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment (including without limitation, rights to payment evidenced by chattel paper, documents or instruments) and other rights under any royalty or licensing agreements, infringement claims, software (including without limitation any computer program that is embedded in goods that consist solely of the medium in which the program is embedded), information contained on computer disks or tapes, literature, reports, catalogs, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, Inventory, Equipment, Farm Products, Negotiable Collateral, and Borrowers Books. 1.28 "Grower Payables" means the aggregate amount due from Borrower to any other Person on account of any crops, produce, or other farm products supplied by such Person to Borrower as to which crops, produce or other farm products such Person has statutory lien rights. 1.29 "Growers' Liens" means statutory Liens securing the payment of amounts due from Borrower to any other Person on account of any crops, produce or other farm products supplied by such Person to Borrower, including but not limited to, Liens in favor of growers arising pursuant to Article 9 (commencing with Section 55631), Chapter 6, Division 20 of the California Food and Agricultural Code, or under the Perishable Agricultural Commodities Act (7 United States Code, commencing with Section 499a-499t), in each case as now in effect or hereafter amended. 1.30 "Indebtedness" shall mean and includes any and all loans, advances, Letter of Credit Obligations, overdrafts, debts, liabilities (including, without limitation, any and all amounts charged to Borrower's loan account pursuant to any agreement authorizing Bank to charge Borrower's loan account), obligations, lease payments, guaranties, covenants and duties owing by Borrower to Bank of any kind and description whether advanced pursuant to or evidenced by this Agreement; by any note or other Instrument; or by any other agreement between Bank and Borrower and whether or not for the payment of money, whether direct or indirect, absolute or contingent, due or to become due now existing or hereafter arising, including, without limitation, any interest, fees, expenses, costs and other amounts owed to Bank that but for the provisions of the United States Bankruptcy Code would have accrued after the commencement of any Insolvency Proceeding, and including, without limitation, any debt, liability, or obligations owing from Borrower to others which Bank may have obtained by assignment, participation, purchase or otherwise, and further including, without limitation, all interest not paid when due and all Bank Expenses which Borrower is required to pay or reimburse by this Agreement, by law, or otherwise. 1.31 "Insolvency Proceeding" shall mean and includes any proceeding or case commenced by or against Borrower, or any guarantor of Borrower's Indebtedness, or any of Borrower's account debtors, under any provisions of the Bankruptcy Code, as amended, or any other bankruptcy or insolvency law, including, but not limited to assignments for the benefit of creditors, formal or informal moratoriums, composition or extensions with some or all creditors, any proceeding seeking a reorganization, arrangement or any other relief under the Bankruptcy Code, as amended, or any other bankruptcy or insolvency law. 1.32 "Inventory" shall mean and includes all present and future inventory in which Borrower has any interest, including, but not limited to, goods held by Borrower for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods (including without limitation any computer program embedded in any of the foregoing goods and any supporting information provided in connection therewith that (i) is associated with the goods in such a manner that the program customarily is considered part of the goods or that (ii) by becoming the owner of the goods, a person acquires a right to use the program in connection with the goods), together with any advertising materials and packing and shipping materials, wherever located and any documents of title representing any of the above, and any equipment, fixtures or other property used in the storing, moving, preserving, identifying, accounting for and shipping or preparing for the shipping of inventory, and any and all other items hereafter acquired by Borrower by way of substitution, replacement, return, repossession or otherwise, and all additions and accessions thereto, and the resulting product or mass, and any documents of title respecting any of the above. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 1.33 "Judicial Officer or Assignee" shall mean and includes any trustee, receiver, controller, custodian, assignee for the benefit of creditors or any other person or entity having powers or duties like or similar to the powers and duties of trustee, receiver, controller, custodian or assignee for the benefit of creditors. 1.34 "Letter of Credit Obligations" shall mean, as of any applicable date of determination, the sum of the undrawn amount of any letter(s) of credit issued by Bank upon the application of and/or for the account of Borrower, plus any unpaid reimbursement obligations owing by Borrower to Bank in respect of any such letter(s) of credit. 1.35 "Lien" means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting real property. 1.36 "Long Term Indebtedness" shall mean, in respect of a Person and as of any applicable date of determination thereof, all Debt which should be classified as "funded indebtedness" or "long term indebtedness" on a balance sheet of such Person as of such date in accordance with GAAP. 1.37 "Material Adverse Change" shall mean a material adverse effect on: (a) the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, or any Subsidiary or Affiliate of Borrower (other than any director or officer of Borrower), or any guarantor of the Indebtedness; (b) the ability of Borrower, or any Subsidiary or Affiliate of Borrower, or any guarantor of the Indebtedness, to perform its obligations under this Agreement or any other document, instrument or agreement entered into in connection herewith to which it is a party or of Bank to enforce the Indebtedness or realize upon the Collateral; (c) the value of the Collateral or the amount that Bank would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral; (d) the validity or enforceability of this Agreement or any other document, instrument or agreement entered into in connection herewith, or the rights and remedies of Bank hereunder or thereunder; or (e) the priority of Bank's liens with respect to the Collateral. 1.38 "Maturity Date" shall mean June 30, 2005. 1.39 "Net Income" shall mean the net income (or loss) of a person for any period of determination, determined in accordance with GAAP but excluding in any event: a. any gains or losses on the sale or other disposition, not in the ordinary course of business, of investments or fixed or capital assets, and any taxes on the excluded gains and any tax deductions or credits on account on any excluded losses; and b. in the case of Borrower, net earnings of any Person in which Borrower has an ownership interest, unless such net earnings shall have actually been received by Borrower in the form of cash distributions. 1.40 "Negotiable Collateral" shall mean and include all of Borrower's present and future letters of credit, advises of credit, letter-of-credit rights, certificates of deposit, notes, drafts, money, documents (including without limitation all negotiable documents), instruments (including without limitation all promissory notes), tangible chattel paper or any other similar property. 1.41 "Person" or "person" shall mean and includes any individual, corporation, partnership, joint venture, firm, association, trust, unincorporated association, joint stock company, government, municipality, political subdivision or agency or other entity. 1.42 "Production Liens" means statutory liens securing the right of Persons who have rendered services for the storage, protection, improvement, safekeeping, carriage, alteration, repair, harvest or crushing of any Inventory or Farm Products, including without limitation any grapes, and other related liens including without limitation artisans and service liens under California Civil Code Section 3051, thresher's liens under California Civil Code Section 3061, and harvesters liens under California Civil Code Section 3061.5. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 1.43 "Permitted Indebtedness" means and includes all (a) Debt to trade creditors incurred in the ordinary course of Borrower's business; (b) Indebtedness of Borrower in favor of Bank arising under this Agreement, any document, instrument or agreement entered into in connection herewith or otherwise; (c) Debt existing on the date of this Agreement and disclosed in Schedule 1.42; (d) operating facility leases entered into in the ordinary course of Borrower's business; (e) Debt to any other Person secured by a lien described in clause (c) of the defined term "Permitted Liens," provided such Debt does not exceed the lesser of the cost or fair market value of the equipment financed with such Debt; and (f) Subordinated Debt. 1.44 "Permitted Investments" means and includes all (a) (i) marketable securities or other direct obligations issued or unconditionally guaranteed by the United States government or its agencies maturing within one (1) year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit issued by Bank or by any other United States commercial bank with capital, surplus and undivided profits in excess of One Hundred Million Dollars ($100,000,000) maturing no more than one (1) year after issue; (b) investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower's business; (c) loans, advances or extensions of credit permitted by Section 6.7(k); (d) investments by Borrower in the Stock of any Subsidiaries owned by Borrower on the date of this Agreement; (e) investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (f) investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (f) shall not apply to investments of Borrower in any Subsidiary. 1.45 "Permitted Liens" means and includes any: (a) Liens existing on the date of this Agreement and disclosed in Schedule 1.44 or arising under this Agreement, any document, instrument or agreement entered into in connection herewith or otherwise in favor of Bank; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or Debt incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the equipment so acquired and improvements and additions thereto, and the proceeds of such equipment to the extent that the acquisition of such equipment is otherwise permitted under this Agreement; (d) Liens incurred in connection with the extension, renewal or refinancing of the Debt secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the Debt being extended, renewed or refinanced does not increase, (e) Grower's Liens; and (f) Production Liens. 1.46 "Quick Assets" shall mean, as of any applicable date of determination, unrestricted cash, certificates of deposit or marketable securities and net accounts receivable arising from the sale of goods and services, and United States government securities and/or claims against the United States government of Borrower and its Subsidiaries. 1.47 "Quick Ratio" shall mean, as of an applicable date of determination, Quick Assets divided by Current Liabilities, excluding Subordinated Debt. 1.48 "Stock" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). 1.49 "Subordinated Debt" shall mean indebtedness of Borrower set forth on Schedule 1.48 to this Agreement, attached hereto and incorporated herein by this reference, as such may be modified, amended, supplemented or replaced from time to time with the prior written consent of Bank which has been subordinated to the Indebtedness pursuant to a subordination agreement in form and content satisfactory to Bank, and each other Person that enters into any such subordination agreement in favor of Bank from time after the date of this Agreement. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 1.50 "Subordination Agreement" shall mean a subordination agreement in form satisfactory to Bank making all present and future indebtedness of Borrower to each of the Persons set forth on Schedule 1.48 to this Agreement, attached hereto and incorporated herein by this reference, as such may be modified, amended, supplemented or replaced from time to time with the prior written consent of Bank, and each other Person that enters into any such subordination agreement in favor of Bank from time to time after the date of this Agreement, subordinate to the Indebtedness. 1.51 "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. 1.52 "Tangible Effective Net Worth" shall mean, with respect to any Person and as of any applicable date of determination, Tangible Net Worth plus Subordinated Debt. 1.53 "Tangible Net Worth" shall mean, with respect to any Person and as of any applicable date of determination, the excess of: a. the net book value of all assets of such Person (excluding Subsidiary and Affiliate receivables, patents, patent rights, trademarks, trade names, franchises, copyrights, licenses, goodwill, and all other intangible assets of such Person) after all appropriate deductions in accordance with GAAP (including, without limitation, reserves for doubtful receivables, obsolescence, depreciation and amortization), over b. all Debt of such Person at such time. 1.54 "Working Capital" shall mean, as of any applicable date of determination, Current Assets less Current Liabilities. Any and all terms used in the foregoing definitions and elsewhere in this Agreement shall be construed and defined in accordance with the meaning and definition of such terms under and pursuant to the California Uniform Commercial Code (hereinafter referred to as the "Uniform Commercial Code") as amended, revised or replaced from time to time. Notwithstanding the foregoing, the parties intend that the terms used herein which are defined in the Uniform Commercial Code have, at all times, the broadest and most inclusive meanings possible. Accordingly, if the Uniform Commercial Code shall in the future be amended or held by a court to define any term used herein more broadly or inclusively than the Uniform Commercial Code in effect on the date of this Agreement, then such term, as used herein, shall be given such broadened meaning. If the Uniform Commercial Code shall in the future be amended or held by a court to define any term used herein more narrowly, or less inclusively, than the Uniform Commercial Code in effect on the date of this Agreement, such amendment or holding shall be disregarded in defining terms used in this Agreement. 2. LOAN AND TERMS OF PAYMENT. -------------------------- For value received, Borrower promises to pay to the order of Bank such amount, as provided for below, together with interest, as provided for below. 2.1 Upon the request of Borrower, made at any time and from time to time prior to the Maturity Date, and so long as no Event of Default has occurred and is continuing, Bank shall lend to Borrower an amount equal to the Borrowing Base; provided, however, that the Daily Balance shall not exceed the lesser of either the Credit Limit or the Borrowing Base, minus all Letter of Credit Obligations. If at any time for any reason, the amount of Indebtedness owed by Borrower to Bank pursuant to this Section 2.1 and Section 2.3 of this Agreement is greater than the aggregate amount available to be drawn under this Section 2.1, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.2 Except as hereinbelow provided, the Credit shall bear interest, on the Daily Balance owing, at a fluctuating rate of interest equal to the Base Rate plus zero ( 0.00%) percentage points per annum, or at the rate of interest set forth in the LIBOR Addendum to this Agreement, attached hereto and incorporated herein by this reference. All interest chargeable under this Agreement that is based upon a per annum calculation shall be computed on the basis of a three hundred sixty (360) day year for actual days elapsed. The Base Rate as of the date of this Agreement is four and one quarter (4.25%) per annum. In the event that the Base Rate announced is, from time to time hereafter, changed, adjustment in the Base Rate shall be made and based on the Base Rate in effect on the date of such change. The Base Rate, as adjusted, shall apply to the Credit until the Base Rate is adjusted again. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) Except as hereinbelow provided, all interest payable by Borrower under the Credit shall be due and payable on the first day of each calendar month during the term of this Agreement. A late payment charge equal to five percent (5%) of each late payment may be charged on any payment not received by Bank within ten (10) calendar days after the payment due date, but acceptance of payment of this charge shall not waive any Event of Default under this Agreement. Upon the occurrence of an Event of Default hereunder, and without constituting a waiver of any such Event of Default, then during the continuation thereof, at Bank's option, the Credit shall bear interest, on the Daily Balance owing, at a rate equal to three percent (3%) per year in excess of the rate applicable immediately prior to the occurrence of the Event of Default, and such rate of interest shall fluctuate thereafter from time to time at the same time and in the same amount as any fluctuation in the rate of interest applicable immediately prior to any such occurrence. 2.3 Subject to the terms and conditions of this Agreement, upon request of Borrower, made at any time and from time to time prior to the Maturity Date, and so long as no Event of Default has occurred and is continuing, Bank agrees to issue or cause to be issued letters of credit for the account of Borrower during the term of this Agreement in the aggregate outstanding face amount not to exceed (i) the lesser of the Credit Limit or the Borrowing Base, minus (ii) the then outstanding Daily Balance, provided that the Letter of Credit Obligations shall not in any case exceed Two Hundred Fifty Thousand Dollars ($250,000). All letters of credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of standard Letter of Credit Application and Agreement. The obligation of Borrower to immediately reimburse Bank for drawings made under letters of credit shall be absolute, unconditional and irrevocable in accordance with the terms of this Agreement and the Letter of Credit Application and Agreement with respect to each such letter of credit. Borrower shall indemnify, defend, protect and hold Bank harmless from any loss, cost, expense, or liability, including, without limitation, reasonable attorney's fees incurred by Bank, whether in-house or outside counsel is used, arising out of or in connection with any letters of credit, other than as a result of its gross negligence or willful misconduct. 2.4 Subject to the terms and conditions of this Agreement, Bank shall make available to Borrower a term loan in the amount of One Million Two Hundred Fifty Thousand Dollars ($1,250,000 ) (the "Term Loan"), and the outstanding balance due thereunder from time to time shall at all times be included in the Indebtedness. a. The proceeds of the Term Loan shall be used solely for the repayment in full of Borrower's existing Debt owing to Wells Fargo Bank. b. The principal amount of the Term Loan shall be payable in sixty (60) fully amortizing payments plus interest, due and payable on the last day of each month. The interest rate, payment terms, maturity date and certain other terms of the Term Loan shall be contained in a promissory note dated the date of this Agreement, as such may be amended or replaced from time to time. c. Anything contained in the foregoing to the contrary notwithstanding, the maximum amount of the Term Loan shall not exceed eighty percent (80%) of the appraised orderly liquidation value for all Borrower's existing equipment (such value determined by the appraisal performed by Loeb Equipment & Appraisal Company, dated October 2, 2002) or other fixed assets approved by Bank purchased on or before December 31, 2002, and (90%) of the invoice amount for all Borrower's existing equipment or other fixed assets approved by Bank purchased between January 1, 2003 and the date of this Agreement. 2.5 Subject to the terms and conditions of this Agreement, Bank shall make available to Borrower a converting non-revolving loan in the amount of One Million Dollars ($1,000,000 ) (the "Non-Revolving Loan"), and the outstanding balance due thereunder from time to time shall at all times be included in the Indebtedness. a. The proceeds of Non-Revolving Loan shall be used solely for capital expenditures, including without limit the purchase of equipment or other fixed assets. b. Subject to all of the limitations, terms and conditions contained herein or in the promissory note representing the Non-Revolving Loan, Borrower may, from time to time through the term of this Agreement, repay its outstanding borrowings in part or in whole; provided, however, that any amount of the Non-Revolving Loan so repaid may not be reborrowed. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) c. Drawings under Non-Revolving Loan shall be available from the date of this Agreement through June 30, 2004, at which time the entire outstanding principal amount of all such drawings shall be repaid in forty eight (48) fully amortizing payments plus interest, due and payable on the last day of each month through June 30, 2008. The interest rate, payment terms, maturity date and certain other terms of Non-Revolving Loan shall be contained in a promissory note dated the date of this Agreement, as such may be amended or replaced from time to time. d. Each request for a drawing under Non-Revolving Loan shall be in writing, duly executed by Borrower in form satisfactory to Bank, and shall be irrevocable upon receipt by Bank. Each such notice shall be received by Bank no later than 3:00 p.m. Pacific time three (3) business days prior to the date on which the requested drawing is to be made. The notice shall include a copy of the invoice for the equipment or other fixed assets to be financed. Drawings under Non-Revolving Loan shall only be used to purchase new and used equipment and other fixed assets approved by Bank from time to time, and shall be limited to ninety percent (90%) of the invoice amount for such equipment or other fixed assets approved by Bank (inclusive of any taxes, freight or installation costs included in the invoice amount). 2.6 In addition to any other amounts due or to become due under this Agreement concurrent with the execution hereof, Borrower shall pay to Bank the following fees: a. In connection with the financial accommodations provided under Section 2.1 of this Agreement, an unused commitment fee in an amount equal to one eighth percent (0.125%) per annum shall be due and payable on the last day of each quarter. The unused commitment fee shall be calculated on the difference between the average Daily Balance of the Credit consisting of advances under Section 2.1 and the Credit Limit and shall be fully earned and non-refundable on the date of payment thereof. b. In connection with the financial accommodations provided under Section 2.5 of this Agreement, an unused commitment fee in an amount equal to one eighth percent (0.125%) per annum shall be due and payable on the last day of each quarter through the quarter ending June 30, 2004. The unused commitment fee shall be calculated on the difference between the average Daily Balance of the Credit consisting of loans Non-Revolving Loans made under Section 2.1 and One Million Dollars ($1,000,000) and shall be fully earned and non-refundable on the date of payment thereof. c. In addition to any other amounts due, or to become due, concurrently with the execution hereof, Borrower agrees to pay to Bank a legal documentation fee in the amount of One Thousand Five Hundred Dollars ($1,500) and all other costs and expenses incurred by Bank in the preparation of this Agreement, the other documents, instruments and agreements entered into in connection herewith, and the perfection of any security interest granted to Bank by Borrower. 3. TERM. ----- 3.1 This Agreement shall remain in full force and effect until the Maturity Date or until terminated by notice by Borrower. Notice of such termination by Borrower shall be effectuated by mailing of a registered or certified letter not less than fifteen (15) Business Days prior to the effective date of such termination, addressed to Bank at the address set forth herein and the termination shall be effective as of the date so fixed in such notice. 3.2 Notwithstanding the foregoing, should Borrower be in default of one or more of the provisions of this Agreement, Bank may terminate this Agreement at any time without notice. Notwithstanding the foregoing, should either Bank or Borrower become insolvent or unable to meet its debts as they mature, or fail, suspend, or go out of business, the other party shall have the right to terminate this Agreement at any time without notice. On the date of termination all Indebtedness shall become immediately due and payable without notice or demand; provided, however, that no such notice of termination by Borrower shall be effective until the payment in full in cash of all Indebtedness to Bank (including without limitation the expiration or cash collateralization of all Letter of Credit Obligations in accordance with the terms and conditions of this Agreement). Any notice of termination given by Borrower shall be irrevocable unless Bank otherwise agrees in writing, and Bank shall have no obligation to make any loans or issue any letters of credit on or after the termination date stated in such notice. Borrower may elect to terminate this Agreement in its entirety only. No section of this Agreement or type of loan available hereunder may be terminated singly. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 3.3 All undertakings, agreements, covenants, warranties, and representations of Borrower contained in this Agreement or any other document, instrument or agreement entered into with or in favor of Bank in connection herewith shall survive any such termination, and Bank shall retain its security interest in and to all existing Collateral and Collateral arising thereafter, any and all liens thereon, and all of its rights and remedies under this Agreement or any other document, instrument or agreement entered into with or in favor of Bank in connection herewith notwithstanding such termination until the payment in full in cash of all Indebtedness to Bank (including, without limitation, the expiration or cash collateralization of all Letter of Credit Obligations in accordance with the terms and conditions of this Agreement and the payment in full of all applicable termination charges, if any). Notwithstanding the satisfaction in full of the Indebtedness, Bank shall not be required to terminate its security interests in the Collateral unless, with respect to any loss or damage Bank may incur as a result of dishonored checks or other items of payment received by Bank and applied to the Indebtedness, Bank shall, at its option, (a) have received a written agreement, executed by Borrower and by any Person whose loans or other advances to Borrower are used in whole or in part to satisfy the Indebtedness, indemnifying Bank from any such loss or damage, or (b) have retained such monetary reserves and liens on the Collateral for such period of time as Bank, in its reasonable discretion, may deem necessary to protect Bank from any such loss or damage. 3.4 After termination and when Bank has received payment in full of Borrower's Indebtedness to Bank, Bank shall reassign to Borrower all Collateral held by Bank, and shall promptly (a) execute a termination of all security agreements and security interests given by Borrower to Bank and (b) file or authorize the filing of by Borrower, at Borrower's expense, any UCC Financing Statement Amendment(s) (Form UCC3) and any other documents or instruments reasonably necessary to evidence the termination and release of Bank's security interest in the Collateral. 4. CREATION OF SECURITY INTEREST. ------------------------------ 4.1 Borrower hereby grants to Bank a continuing security interest in all presently existing and hereafter arising Collateral in order to secure prompt repayment of any and all Indebtedness owed by Borrower to Bank and in order to secure prompt performance by Borrower of each and all of its covenants and obligations under this Agreement and otherwise created. Bank's security interest in the Collateral shall attach to all Collateral without further act on the part of Bank or Borrower. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrower, promptly upon the request of Bank, shall (a) endorse or assign such Negotiable Collateral to Bank, (b) deliver actual physical possession of such Negotiable Collateral to Bank, and (c) mark conspicuously all of its records pertaining to such Negotiable Collateral with a legend, in form and substance satisfactory to Bank (and in the case of Negotiable Collateral consisting of tangible chattel paper, immediately mark all such tangible chattel paper with a conspicuous legend in form and substance satisfactory to Bank), indicating that the Negotiable Collateral is subject to the security interest granted to Bank hereunder. 4.2 Bank's security interest in the Accounts shall attach to all Accounts without further act on the part of Bank or Borrower. Upon request from Bank, Borrower shall provide Bank with schedules describing all Accounts created or acquired by Borrower (including without limitation agings listing the names and addresses of, and amounts owing by date by account debtors), and shall execute and deliver written assignments of all Accounts to Bank all in a form acceptable to Bank; provided, however, Borrower's failure to execute and deliver such schedules and/or assignments shall not affect or limit Bank's security interest and other rights in and to the Accounts. Together with each schedule, Borrower shall furnish Bank with copies of Borrower's customers' invoices or the equivalent, and original shipping or delivery receipts for all merchandise sold, and Borrower warrants the genuineness thereof. Upon the occurrence and during the continuation of an Event of Default, Bank or Bank's designee may notify customers or account debtors of Bank's security interest in the Collateral and direct such customers or account debtors to make payments directly to Bank, but unless and until Bank does so or gives Borrower other written instructions, Borrower shall collect all Accounts for Bank, receive in trust all payments thereon as Bank's trustee, and, if so requested to do so from Bank, Borrower shall immediately deliver said payments to Bank in their original form as received from the account debtor and all letters of credit, advices of credit, instruments, documents, chattel paper or any similar property evidencing or constituting Collateral. Notwithstanding anything to the contrary contained herein, if sales of Inventory and or Equipment are made for cash, Borrower shall promptly deliver to Bank, in identical form, all such cash, checks, or other forms of payment which Borrower receives. The receipt of any check or other item of payment by Bank shall not be considered a payment on account until such check or other item of payment is honored when presented for payment, in which event, said check or other item of payment shall be deemed to have been paid to Bank two (2) calendar days after the date Bank actually receives such check or other item of payment. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 4.3 Bank's security interest in Inventory and Farm Products shall attach to all Inventory and Farm Products without further act on the part of Bank or Borrower. Borrower will at Borrower's expense pledge, assemble and deliver such Inventory and Farm Products to Bank or to a third party as Bank's bailee; or hold the same in trust for Bank's account or store the same in a warehouse in Bank's name; or deliver to Bank documents of title representing said Inventory; or evidence of Bank's security interest in some other manner acceptable to Bank. Until the occurrence and during the continuation of an Event of Default, Borrower may, subject to the provisions hereof and consistent herewith, sell the Inventory and Farm Products, but only in the ordinary course of Borrower's business. A sale of Inventory or Farm Products in Borrower's ordinary course of business does not include an exchange or a transfer in partial or total satisfaction of a debt owing by Borrower. 4.4 Concurrently with Borrower's execution of this Agreement, and at any time or times hereafter at the request of Bank, Borrower shall (a) execute and deliver to Bank security agreements, mortgages, assignments, certificates of title, affidavits, reports, notices, schedules of accounts, letters of authority and all other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and maintain perfected Bank's security interest in the Collateral and in order to fully consummate all of the transactions contemplated under this Agreement, (b) cooperate with Bank in obtaining a control agreement in form and substance satisfactory to Bank with respect to all deposit accounts, electronic chattel paper, investment property, and letter-of-credit rights, and (c) in the event that any Collateral is in the possession of a third party, Borrower shall join with Bank in notifying such third party of Bank's security interest and obtaining an acknowledgment from such third party that it is holding such Collateral for the benefit of Bank. By authenticating or becoming bound by this Agreement, Borrower authorizes the filing of initial financing statement(s), and any amendment(s) covering the Collateral to perfect and maintain perfected Bank's security interest in the Collateral. Upon the occurrence and during the continuation of an Event of Default, and until full and final payment of the Indebtedness in cash and the termination of any and all obligations of Bank to make loans or otherwise extend financial accommodations to Borrower, Borrower hereby irrevocably makes, constitutes and appoints Bank (and any of Bank's officers, employees or agents designated by Bank) as Borrower's true and lawful attorney-in-fact with power to sign the name of Borrower on any security agreement, mortgage, assignment, certificate of title, affidavit, letter of authority, notice of other similar documents which must be executed and/or filed in order to perfect or continue perfected Bank's security interest in the Collateral, and to take such actions in its own name or in Borrower's name as Bank, in its sole discretion, deems necessary or appropriate to establish exclusive possession or control (as defined in the Uniform Commercial Code) over any Collateral of such nature that perfection of Bank's security interest may be accomplished by possession or control. 4.5 Borrower shall make appropriate entries in Borrower's Books disclosing Bank's security interest in the Accounts. Bank (through any of its officers, employees or agents) shall have the right at any time or times hereafter, provided that reasonable notice is provided, during Borrower's usual business hours, or during the usual business hours of any third party having control over the records of Borrower, to inspect and verify Borrower's Books in order to verify the amount or condition of, or any other matter, relating to, said Collateral and Borrower's financial condition; provided, however, that, so long as no Event of Default has occurred and is continuing, any such inspections shall occur no more than two (2) times in each calendar year. 4.6 Effective only upon the occurrence and during the continuation of an Event of Default, and until full and final payment of the Indebtedness in cash and the termination of any and all obligations of Bank to make loans or otherwise extend financial accommodations to Borrower, Borrower appoints Bank or any other person whom Bank may designate as Borrower's attorney-in-fact, with power: to endorse Borrower's name on any checks, notes, acceptances, money order, drafts or other forms of payment or security that may come into Bank's possession; to sign Borrower's name on any invoice or bill of lading relating to any Accounts, on drafts against account debtors, on schedules and assignments of Accounts, on verifications of Accounts and on notices to account debtors; to establish a lock box arrangement and/or to notify the post office authorities to change the address for delivery of Borrower's mail addressed to Borrower to an address designated by Bank, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower; to send, whether in writing or by telephone, requests for verification of Accounts; and to do all things necessary to carry out this Agreement. Borrower ratifies and approves all acts of the attorney-in-fact. Neither Bank nor its attorney-in-fact will be liable for any acts or omissions or for any error of judgement or mistake of fact or law. This power being coupled with an interest, is irrevocable so long as any Accounts in which Bank has a security interest remain unpaid and until the Indebtedness has been fully satisfied. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 4.7 In order to protect or perfect any security interest which Bank is granted hereunder, Bank may, in its sole discretion, discharge any lien or encumbrance or bond the same, pay any insurance, maintain guards, warehousemen, or any personnel to protect the Collateral, pay any service bureau, or, obtain any records, and all costs for the same shall be added to the Indebtedness and shall be payable on demand. 4.8 Borrower agrees that Bank may provide information relating to this Agreement or relating to Borrower to Bank's parent, affiliates, subsidiaries and service providers. 5. CONDITIONS PRECEDENT. --------------------- 5.1 Conditions precedent to the making of the loans and the extension of the financial accommodations hereunder, Borrower shall execute, or cause to be executed, and deliver to Bank, in form and substance satisfactory to Bank and its counsel, the following: a. This Agreement and other documents, instruments and agreements required by Bank; b. If Borrower is a corporation, limited liability company, limited partnership or other such entity, certified copies of all actions taken by Borrower, any grantor of a security interest to Bank to secure the Indebtedness, and any guarantor of the Indebtedness, authorizing the execution, delivery and performance of this Agreement and any other documents, instruments or agreements entered into in connection herewith, and authorizing specific officers to execute and deliver any such documents, instruments and agreements; c. If Borrower is a corporation, limited liability company, limited partnership or other such entity, then a certificate of good standing showing that Borrower is in good standing under the laws of the state of its incorporation or formation and certificates indicating that Borrower is qualified to transact business and is in good standing in any other state in which it conducts business; d. UCC searches and financing statements, tax lien and litigation searches, fictitious business statement filings, insurance certificates, notices or other similar documents which Bank may require and in such form as Bank may require, in order to reflect, perfect or protect Bank's first priority security interest in the Collateral (subject to any Permitted Liens) and in order to fully consummate all of the transactions contemplated under this Agreement; e. Evidence that Borrower has obtained insurance and acceptable endorsements; f. Such control agreements from each Person as Bank may require; g. Duly executed certificates of title with respect to that portion of the Collateral that is subject to certificates of title; h. Such collateral access agreements from each lessor, warehouseman, bailee, and other Person as Bank may require, duly executed by each such Person; and i. Warranties and representations of officers. 6. WARRANTIES. REPRESENTATIONS AND COVENANTS. ------------------------------------------ 6.1 If so requested by Bank, Borrower shall, at such intervals designated by Bank, during the term hereof execute and deliver a Report of Accounts Receivable or similar report, in form customarily used by Bank. The aggregate amount of the Borrowing Base at all times during the effectiveness of this Agreement shall not be less than the advances made hereunder. Bank shall have the right to recompute the Borrowing Base in conformity with this Agreement, Agreement and shall provide the Borrower with notice of any such recomputations that result in a change in the amount of the Borrowing Base. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 6.2 If any warranty is breached as to any Account, or any Account is not paid in full by an account debtor within ninety (90) days from the date of invoice, or an account debtor disputes liability or makes any claim with respect thereto, or a petition in bankruptcy or other application for relief under the Bankruptcy Code or any other insolvency law is filed by or against an account debtor, or an account debtor makes an assignment for the benefit of creditors, becomes insolvent, fails or goes out of business, then Bank may deem ineligible any and all Accounts owing by that account debtor, and reduce the Borrowing Base by the amount thereof. Bank shall retain its security interest in all Accounts, whether eligible or ineligible, until all Indebtedness has been fully paid and satisfied. Returns and allowances, if any, as between Borrower and its customers, will be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at this time. Any merchandise which is returned by an account debtor or otherwise recovered shall be set aside and identified as the property of Bank, and Bank shall retain a security interest therein. Borrower shall promptly notify Bank of all disputes and claims and settle or adjust them on terms approved by Bank. After the occurrence and during the continuation of an Event of Default, no discount, credit or allowance shall be granted to any account debtor by Borrower and no return of merchandise shall be accepted by Borrower without Bank's consent. Bank may, after the occurrence and during the continuation of an Event of Default, settle or adjust disputes and claims directly with account debtors for amounts and upon terms which Bank considers advisable, and in such cases Bank will credit Borrower's loan account with only the net amounts received by Bank in payment of the Accounts, after deducting all Bank Expenses in connection therewith. 6.3 Borrower warrants, represents, covenants and agrees that: a. Borrower has good and marketable title to the Collateral. Bank has and shall continue to have a first priority perfected security interest in and to the Collateral, subject to any Permitted Liens. The Collateral shall at all times remain free and clear of all liens, encumbrances and security interests (except for any Permitted Liens); b. All Accounts are and will, at all times pertinent hereto, be bona fide existing obligations created by the sale and delivery of merchandise or the rendition of services to account debtors in the ordinary course of business, free of liens, claims, encumbrances and security interests (except Permitted Liens and except as may be consented to, in writing, by Bank) and are unconditionally owed to Borrower without defenses, disputes, offsets counterclaims, rights of return or cancellation, and Borrower shall have received no notice of actual or imminent bankruptcy or insolvency of any account debtor at the time an Account due from such account debtor is assigned to Bank; and c. At the time each Account is assigned to Bank, all property giving rise to such Account shall have been delivered to the account debtor or to the agent for the account debtor for immediate shipment to, and unconditional acceptance by, the account debtor. Borrower shall deliver to Bank, as Bank may from time to time reasonably require, delivery receipts, customer's purchase orders, shipping instructions, bills of lading and any other evidence of shipping arrangements. Absent such a request by Bank, copies of all such documentation shall be held by Borrower as custodian for Bank. 6.4 At the time each eligible Account is assigned to Bank, all such Eligible Accounts will be due and payable on terms set forth in Section 1.21, or on such other terms approved in writing by Bank in advance of the creation of such Accounts and which are expressly set forth on the face of all invoices, copies of which shall be held by Borrower as custodian for Bank, and no such Eligible Account will then be past due. 6.5 Borrower shall keep the Inventory only at the locations set forth on Schedule 6.5 to this Agreement, attached hereto and incorporated herein by this reference, or in any replacement schedule submitted to Bank by Borrower from time to time after the date of this Agreement and approved by Bank in its sole discretion. The owner or mortgagees of the respective locations are as set forth in Schedule 6.5. a. Borrower, promptly upon request by Bank therefor, shall now and from time to time hereafter, at such intervals as are reasonably requested by Bank, deliver to Bank, designations of Inventory specifying Borrower's cost of Inventory, the wholesale market value thereof and such other matters and information relating to the Inventory as Bank may request; b. All of the Inventory and Farm Products are and shall remain free from all purchase money or other security interests, liens or encumbrances (other than Permitted Liens); LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) c. Borrower does now keep and hereafter at all times shall keep correct and accurate records itemizing and describing the kind, type, quality and quantity of the Inventory, its cost therefor and selling price thereof, and the daily withdrawals therefrom and additions thereto, all of which records shall be available to any of Bank's officers, agents and employees for inspection and copying upon receipt of reasonable notice to Borrower, provided, however, that, so long as no Event of Default has occurred and is continuing, any such inspections or copying shall occur no more than two (2) times in each calendar year; d. All Inventory, now and hereafter at all times, shall be new Inventory of good and merchantable quality free from material defects; e. Inventory and Farm Products are not now and shall not at any time or times hereafter be located or stored with a bailee, warehouseman or other third party without Bank's prior written consent, and, in such event, Borrower will concurrently therewith cause any such bailee, warehouseman or other third party to issue and deliver to Bank, warehouse receipts in Bank's name evidencing the storage of Inventory and/or Farm Products and/or an acknowledgment by such bailee of Bank's prior rights in the Inventory and Farm Products, in each case in form and substance reasonably acceptable to Bank, and in any event, Borrower shall instruct any third party to hold all such Inventory or Farm Products for Bank's account subject to Bank's security interests and its instructions; f. Bank shall have the right upon demand now and/or at all times hereafter, during Borrower's usual business hours, after reasonable notice, to inspect and examine the Inventory and Farm Products and to check and test the same as to quality, quantity, value and condition and Borrower agrees to reimburse Bank for Bank's reasonable costs and expenses in so doing, provided, however, that, so long as no Event of Default has occurred and is continuing, any such inspections, examination or testing shall occur no more than two (2) times in each calendar year; g. All Eligible Inventory is in all material respects of good and merchantable quality, free from all material defects; and h. All advances made and to be made pursuant to this Agreement with respect to the Eligible Inventory are solely and exclusively to enable Borrower to acquire rights in and purchase new Inventory and Farm Products, and Borrower represents and warrants that all advances by Bank pursuant to this Agreement with respect to the Eligible Inventory will be used solely and exclusively for such purpose; and since such advances will be used for the foregoing purposes, Bank's security interest in Borrower's Inventory and Farm Products is and shall be at all times a purchase-money security interest as that term is described in Section 9103 of the California Uniform Commercial Code. 6.6 Borrower warrants, represents, covenants and agrees that: a. All of the Equipment is used or held for use in Borrower's business and is fit for such purposes; b. it has good and indefeasible title to the Equipment (except for Permitted Liens); c. the Equipment is and will be free and clear of all liens, security interests, encumbrances and claims, except for Permitted Liens; d. other than temporary relocations of Equipment that is by its nature mobile, including, but not limited to, laptop computers, cell phones, test equipment and samples, Borrower shall keep the Equipment only at the locations set forth on Schedule 6.5 to this Agreement, attached hereto and incorporated herein by this reference. The owner or mortgagees of the respective locations are as set forth in Schedule 6.5; e. Bank shall have the right upon reasonable notice now and/or at all times hereafter, during Borrower's usual business hours to inspect and examine the Equipment and Borrower agrees to reimburse Bank for its reasonable costs and expenses in so doing, provided, however, that, so long as no Event of Default has occurred and is continuing, any such inspections and examinations shall occur no more than two (2) times in each calendar year; and f. Borrower shall keep and maintain the Equipment in good operating condition and repair except for normal wear and tear, make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Borrower shall not permit any items of Equipment to become a fixture to real estate or accession to other property, and the Equipment is now and shall at all times remain and be personal property. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 6.7 Borrower represents, warrants and covenants with Bank that Borrower will not, without Bank's prior written consent: a. Grant a security interest in or permit a lien, claim or encumbrance upon any of the Collateral to any person, association, firm, corporation, entity or governmental agency or instrumentality (other than Permitted Liens); b. Permit any levy, attachment or restraint to be made affecting any of Borrower's assets; c. Permit any Judicial Officer or Assignee to be appointed or to take possession of any or all of Borrower's assets; d. Sell, lease, or otherwise dispose of, move, or transfer, whether by sale or otherwise, any of Borrower's properties or assets, (i) other than sales of Inventory and Farm Products in the ordinary course of Borrower's business, and (ii) sales or other dispositions of worn-out, surplus or obsolete Equipment in the ordinary course of Borrower's business; e. Change its name, the location of its sole place of business, chief executive office or residence, business structure, corporate identity or structure, form of organization or the state in which it has been formed or organized; add any new fictitious names, liquidate, merge or consolidate with or into any other business organization; f. Except as may be permitted pursuant to Section 6.7 d., move or relocate any Collateral to any location not set forth on Schedule 6.5; g. Acquire any other business organization; h. Enter into any transaction not in the usual course of Borrower's business; i. Make any change in Borrower's financial structure or in any of its business objectives, purposes or operations which would materially adversely affect the ability of Borrower to repay Borrower's Indebtedness; j. Incur any Debts except for Permitted Indebtedness; k. Make loans, advances or extensions of credit to any Person, except for Permitted Investments; l. Guarantee or otherwise, directly or indirectly, in any way be or become responsible for obligations of any other Person, whether by agreement to purchase the indebtedness of any other Person, agreement for the furnishing of funds to any other Person through the furnishing of goods, supplies or services, by way of stock purchase, capital contribution, advance or loan, for the purpose of paying or discharging (or causing the payment or discharge of) the indebtedness of any other Person, or otherwise, except as may be permitted under the definition of Permitted Indebtedness; m. Make any payment on account of any Subordinated Debt except for regularly scheduled payments of interest and principal in accordance with the provisions of any Subordination Agreement executed by Bank and the subordinated debt holder, or amend any provision contained in any documentation relating to any such Subordinated Debt without Bank's prior written consent; n. Change its name, consolidate with or merge into any other corporation, permit another corporation to merge into it, acquire all or substantially all the properties or assets of any other Person, enter into any reorganization or recapitalization or reclassify its capital stock, or enter into any sale-leaseback transaction; o. Purchase or hold beneficially any stock or other securities of, or make any investment or acquire any securities or other interest whatsoever in, any other Person, except for Permitted Investments; p. Allow any fact, condition or event to occur or exist with respect to any employee pension or profit sharing plans established or maintained by it which might constitute grounds for termination of any such plan or for the court appointment of a trustee to administer any such plan; and LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) q. Use any loan or other extension of credit under this Agreement or any other document, instrument or agreement entered into by Borrower with or in favor of Bank in connection with this Agreement for any purpose other than to refinance existing revolving debt, to provide working capital for its operations and for other general business purposes. In no event shall the funds from any such loan or other extension of credit be used directly or indirectly by any Person for personal, family, household or agricultural purposes or for the purpose, whether immediate, incidental or ultimate, of purchasing, acquiring or carrying any "margin stock" or any "margin securities" (as such terms are defined respectively in Regulation U and Regulation G promulgated by the Board of Governors of the Federal Reserve System) or to extend credit to others directly or indirectly for the purpose of purchasing or carrying any such margin stock or margin securities. Borrower hereby represents and warrants that Borrower is not engaged principally, or as one of Borrower's important activities, in the business of extending credit to others for the purpose of purchasing or carrying such margin stock or margin securities. 6.8 Borrower represents, warrants, covenants and agrees that: a. Borrower's true and correct legal name is that set forth on the signature page to this Agreement. Except as disclosed in writing to Bank on or before the date of this Agreement, Borrower has not done business under any name other than that set forth on the signature page to this Agreement; and b. Borrower's form of organization and the state in which it has been organized are those set forth immediately following Borrower's name on the signature page to this Agreement. 6.9 Borrower represents, warrants and covenants as follows: a. Borrower will not make any distribution or declare or pay any dividend (in stock or in cash) to any shareholder or on any of its capital stock, of any class, whether now or hereafter outstanding, or purchase, acquire, repurchase, or redeem or retire any such capital stock; provided, however, (i) Borrower may pay dividends payable solely in Stock consisting of Borrower common stock; (ii) Borrower may make repurchases of Stock pursuant to the terms of employee stock purchase plans, employee restricted stock agreements or similar agreements; and (iii) to the extent that and so long as Borrower is an entity that is not directly subject to Federal income taxation and with respect to which any earnings are attributable ratably to each Person with an ownership interest in Borrower, Borrower may make distributions to each such Person in an amount necessary to pay each such Person's income tax resulting from such ownership interest in Borrower, provided, further, that, promptly upon request of Bank, Borrower shall cause each such Person to provide Bank with copies of its tax return to substantiate any such distribution; b. Borrower is and shall at all times hereafter be a corporation duly organized and existing in good standing under the laws of the state of its incorporation and qualified and licensed to do business in California or any other state in which it conducts its business; c. Borrower has the right and power and is duly authorized to enter into this Agreement; and d. The execution by Borrower of this Agreement shall not constitute a breach of any provision contained in Borrower's articles of incorporation or by-laws. 6.10 The execution of and performance by Borrower of all of the terms and provisions contained in this Agreement shall not result in a breach of or constitute an event of default under any agreement to which Borrower is now or hereafter becomes a party which could reasonably be expected to cause a Material Adverse Change. 6.11 Borrower shall promptly notify Bank in writing of its acquisition by purchase, lease or otherwise of any after acquired property of the type included in the Collateral, with the exception of purchases of Inventory and Farm Products in the ordinary course of business. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 6.12 All assessments and taxes, whether real, personal or otherwise, due or payable by, or imposed, levied or assessed against, Borrower or any of its property have been paid, and shall hereafter be paid in full, before delinquency, except as may be contested in good faith by the appropriate procedures, provided that if so contested, the same shall not or could not result in a Lien which would have priority over any of Bank's security interests in the Collateral. Borrower shall make due and timely payment or deposit of all federal, state and local taxes, assessments or contributions required of it by law, except as may be contested in good faith by the appropriate procedures, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof, provided that if so contested, the same shall not or could not result in a Lien which would have priority over any of Bank's security interests in the Collateral. Borrower will make timely payment or deposit of all F.I.C.A. payments and withholding taxes required of it by applicable laws, except as may be contested in good faith by the appropriate procedures, and will upon request furnish Bank with proof satisfactory to it that Borrower has made such payments or deposit, provided that if so contested, the same shall not or could not result in a Lien which would have priority over any of Bank's security interests in the Collateral. If Borrower fails to pay any such assessment, tax, contribution, or make such deposit, or furnish the required proof, Bank may, in its sole and absolute discretion and without notice to Borrower, (i) make payment of the same or any part thereof, or (ii) set up such reserves in Borrower's loan account as Bank deems necessary to satisfy the liability therefor, or both. Bank may conclusively rely on the usual statements of the amount owing or other official statements issued by the appropriate governmental agency. Each amount so paid or deposited by Bank shall constitute a Bank Expense and an additional advance to Borrower. 6.13 There are no actions or proceedings pending by or against Borrower or any guarantor of Borrower before any court or administrative agency and Borrower has no knowledge of any pending, threatened or imminent litigation, governmental investigations or claims, complaints, actions or prosecutions involving Borrower or any guarantor of Borrower in which the granting of the relief requested could reasonably be expected to cause a Material Adverse Change, except as heretofore specifically disclosed in writing to Bank. If any of the foregoing arise during the term of the Agreement, Borrower shall immediately notify Bank in writing. 6.14 Insurance. a. Borrower, at its expense, shall keep and maintain its assets insured against loss or damage by fire, theft, explosion, sprinklers and all other hazards and risks ordinarily insured against by other owners who use such properties in similar businesses for the full insurable value thereof. Borrower shall also keep and maintain business interruption insurance and public liability and property damage insurance relating to Borrower's ownership and use of the Collateral and its other assets. All such policies of insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to Bank. Borrower shall deliver to Bank certified copies of such policies of insurance and satisfactory evidence of the payments of all premiums therefor. All such policies of insurance (except those of public liability and property damage) shall contain an endorsement in a form reasonably satisfactory to Bank showing Bank as a loss payee thereof, with a waiver of warranties satisfactory to Bank, and all proceeds payable thereunder shall be payable to Bank and, upon receipt by Bank, shall be applied on account of the Indebtedness owing to Bank. To secure the payment of the Indebtedness, Borrower grants Bank a security interest in and to all such policies of insurance (except those of public liability and property damage) and the proceeds thereof, and Borrower shall direct all insurers under such policies of insurance to pay all proceeds thereof directly to Bank; provided, however, that so long as no Event of Default has occurred and is continuing, proceeds payable under any casualty policy shall, at Bank's option, be payable to Borrower to replace the property subject to the claim, provided, further, that any such replacement property shall included in the Collateral. b. Borrower hereby irrevocably appoints Bank (and any of Bank's officers, employees or agents designated by Bank), until the full and final payment of the Indebtedness in cash and the termination of any and all obligations of Bank to make loans or otherwise extend financial accommodations to Borrower, as Borrower's attorney for the purpose of making, selling and adjusting claims under such policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect to such policies of insurance. Borrower will not cancel any of such policies without Bank's prior written consent. Each such insurer shall agree by endorsement upon the policy or policies of insurance issued by it to Borrower as required above, or by independent instruments furnished to Bank, that it will give Bank at least ten (10) days written notice before any such policy or policies of insurance shall be altered or canceled, and that no act or default of Borrower, or any other person, shall affect the right of Bank to recover under such policy or policies of insurance required above or to pay any premium in whole or in part relating thereto. Bank, without waiving or releasing LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) any Indebtedness or any Event of Default, may, but shall have no obligation to do so, obtain and maintain such policies of insurance and pay such premiums and take any other action with respect to such policies which Bank deems advisable. All sums so disbursed by Bank, as well as reasonable attorneys' fees incurred by Bank, whether in-house or outside counsel is used, court costs, expenses and other charges relating thereto, shall constitute Bank Expenses and are payable on demand. 6.15 All (i) interim financial statements and information relating to Borrower which have been or may hereafter be delivered by Borrower to Bank are true and correct in all material respects for the period reflected in such financial statements or information, (ii) annual financial statements and information relating to Borrower which have been or may hereafter be delivered by Borrower to Bank are true and correct in all respects for the period reflected in such financial statements or information, and (iii) such financial statements have been prepared in accordance with GAAP consistently applied and there has been no Material Adverse Change since the submission of such financial information to Bank. 6.16 Financial Reporting. a. Borrower at all times hereafter shall maintain a standard and modern system of accounting in accordance with GAAP consistently applied and keep such books and records and accounts (which shall be true and correct in all material respects) as may be required or as may be necessary to permit the preparation of financial statements in accordance with GAAP consistently applied and in compliance with the regulations of any governmental authority having jurisdiction over it or any of its assets or properties, and not modify or change its method of accounting or reporting practices unless required by GAAP, or enter into, or terminate any agreement presently existing, or at any time hereafter entered into with any third party accounting firm for the preparation of Borrower's accounting records without the prior written consent of Bank, and shall permit Bank and any of its employees, officers or agents, upon demand, during Borrower's usual business hours, or the usual business hour of third persons having control thereof, to have access to and examine all of Borrower's Books relating to the Collateral, Borrower's Indebtedness to Bank, Borrower's financial condition and the results of Borrower's operations and in connection therewith, permit Bank or any of its agents, employees or officers to copy and make extracts therefrom, provided, however, that, so long as no Event of Default has occurred and is continuing, any such inspections, examinations and copying shall occur no more than two (2) times in each calendar year. b. Borrower shall deliver to Bank within thirty (30) days after the end of each month, a company prepared balance sheet and profit and loss statement covering Borrower's operations and deliver to Bank within ninety (90) days after the end of each of Borrower's fiscal years an audited statement of the financial condition of Borrower for each such fiscal year, including but not limited to, a balance sheet and profit and loss statement and any other report requested by Bank relating to the Collateral and the financial condition of Borrower, audited by a certified public accountant satisfactory to Bank, together with a certificate signed by an authorized employee of Borrower to the effect that all reports, statements, computer disk or tape files, computer printouts, computer runs, or other computer prepared information of any kind or nature relating to the foregoing or documents delivered or caused to be delivered to Bank under this subparagraph are complete, correct and thoroughly present the financial condition of Borrower for the periods covered in such financial statements or documents and that there exists on the date of delivery to Bank no condition or event which constitutes a breach or Event of Default under this Agreement. c. In addition to the financial statements requested above, Borrower agrees to provide Bank with the following schedules: (1) Accounts Receivable Agings on a monthly basis, within twenty (20) days of the end of each month; (2) Accounts Payable Agings on a monthly basis (including a separate aging of all Grower Payables and amounts due to any Persons who have rendered services for the storage, protection, improvement, safekeeping, carriage, alteration, repair, harvest or processing of any Inventory or Farm Products) within twenty (20) days of the end of each month; (3) Inventory Reports on a monthly basis, within twenty (20) days of the end of each month; (4) Borrowing Base Certificate on a monthly basis, within twenty (20) days of the end of each month; and (5) Compliance Certifications on a monthly basis, within thirty (30) days of the end of each month. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) d. Promptly after the same are available (i) copies of all reports on Forms 10-K, 10-Q, and 8-K or otherwise filed by Borrower with the Securities and Exchange Commission or any governmental authority at any time substituted therefor, and (ii) promptly upon request by Bank, copies of all proxy statements, financial statements and reports as Borrower shall send to its members or stockholders or to any holders of Subordinated Debt as applicable, if any, that have not otherwise previously been provided to Bank under the terms and conditions of this Agreement. 6.17 Borrower shall maintain the following financial ratios and covenants on a consolidated and non-consolidated basis, which shall be monitored on a monthly basis, except as noted below: a. a ratio of Debt to Tangible Effective Net Worth of not more than 2.75:1.00; b. Cash Flow Coverage Ratio of not less than 1.25:1.00, measured on an annualized basis as of the end of each fiscal quarter; and c. Minimum Net Income of not less than One Dollar ($1), measured on a quarterly basis as of the end of each fiscal quarter. All financial covenants shall be computed in accordance with GAAP consistently applied except as otherwise specifically set forth in this Agreement. All monies due from any Subsidiaries or Affiliates (including officers, directors and shareholders) shall be excluded from Borrower's assets for all purposes hereunder. 6.18 Borrower shall promptly supply Bank (and cause any guarantor to supply Bank) with such other information (including tax returns) concerning its financial affairs (or that of any guarantor) as Bank may reasonably request from time to time hereafter, and shall promptly notify Bank of any Material Adverse Change and of any condition or event which constitutes a breach of or an event which constitutes an Event of Default under this Agreement. 6.19 Borrower is now and shall be at all times hereafter solvent and able to pay its debts (including trade debts) as they mature. 6.20 Borrower shall promptly and without demand reimburse Bank for all sums expended by Bank in connection with any action brought by Bank to correct any default or enforce any provision of this Agreement, including all Bank Expenses; Borrower authorizes and approves all advances and payments by Bank for items described in this Agreement as Bank Expenses. 6.21 Each warranty, representation and agreement contained in this Agreement shall be automatically deemed repeated with each advance and shall be conclusively presumed to have been relied on by Bank regardless of any investigation made or information possessed by Bank. The warranties, representations and agreements set forth herein shall be cumulative and in addition to any and all other warranties, representations and agreements which Borrower shall give, or cause to be given, to Bank, either now or hereafter. 6.22 Borrower shall keep all of its principal bank accounts with Bank and shall notify Bank immediately in writing of the existence of any other bank account, deposit account, or any other account into which money can be deposited. 6.23 Borrower shall furnish to Bank: (a) as soon as possible, but in no event later than thirty (30) days after Borrower knows or has reason to know that any reportable event with respect to any deferred compensation plan has occurred, a statement of the chief financial officer of Borrower setting forth the details concerning such reportable event and the action which Borrower proposes to take with respect thereto, together with a copy of the notice of such reportable event given to the Pension Benefit Guaranty Corporation, if a copy of such notice is available to Borrower; (b) promptly after the filing thereof with the United States Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of each annual report with respect to each deferred compensation plan; (c) promptly after receipt thereof, a copy of any notice Borrower may receive from the Pension Benefit Guaranty Corporation or the Internal Revenue Service with respect to any deferred compensation plan; provided, however, this subparagraph shall not apply to notice of general application issued by the Pension Benefit Guaranty Corporation or the Internal Revenue Service; and (d) when the same is made available to participants in the deferred compensation plan, all notices and other forms of information from time to time disseminated to the participants by the administrator of the deferred compensation plan. 6.24 Borrower is now and shall at all times hereafter remain in compliance with all applicable federal, state and municipal laws, regulations and ordinances relating to the handling, treatment and disposal of toxic substances, wastes and hazardous material and shall maintain all necessary authorizations and permits. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 6.25 Upon reasonable notice Borrower shall permit representatives of Bank to conduct audits of Borrower's Books relating to the Accounts and other Collateral and make extracts therefrom, with results satisfactory to Bank, provided that Bank shall use its best efforts to not interfere with the conduct of Borrower's business, and to the extent possible to arrange for verification of the Accounts directly with the account debtors obligated thereon or otherwise, all under reasonable procedures acceptable to Bank and at Borrower's sole expense; provided, however, that, unless an Event of Default has occurred and is continuing, Borrower shall not be responsible for more than two (2) such audits in each calendar year. Notwithstanding any of the provisions contained in Sections 1.7, 1.21, 1.22, or 2.1 of this Agreement or otherwise, Borrower hereby acknowledges and agrees that upon completion of any such audit Bank shall have the right to adjust the Borrowing Base percentage or the definition of Eligible Accounts or Eligible Inventory, in its sole and reasonable discretion, based on its review of the results of such collateral audit. 7. EVENTS OF DEFAULT. ------------------ Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: a. If Borrower fails or neglects to perform, keep or observe any term, provision, condition, covenant, agreement, warranty or representation contained in this Agreement, or any other present or future document, instrument or agreement between Borrower and Bank; b. If any representation, statement, report or certificate made or delivered by Borrower, or any of its officers, employees or agents to Bank is not true and correct in all material respects on and as of the date made or delivered (except to the extent that any such representations statements, reports or certificates are made on a continuing basis); c. If Borrower fails to pay within five (5) days after when due and payable or declared due and payable, all or any portion of Borrower's Indebtedness (whether of principal, interest, taxes, reimbursement of Bank Expenses, or otherwise); d. Any change that, in the opinion of Bank, has resulted or could result in a Material Adverse Change; e. If all or any of Borrower's assets are attached, seized, subject to a writ or distress warrant, or are levied upon, or come into the possession of any Judicial Officer or Assignee and the same are not released, discharged or bonded against within ten (10) Business Days thereafter; f. If any Insolvency Proceeding is filed or commenced by or against Borrower without being dismissed within ten (10) Business Days thereafter; g. If any proceeding is filed or commenced by or against Borrower for its dissolution or liquidation; h. If Borrower is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; i. If a notice of lien, levy or assessment is filed of record with respect to any or all of Borrower's assets by the United States Government, or any department, agency or instrumentality thereof, or by any state, county, municipal or other government agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a lien, whether inchoate or otherwise, upon any or all of Borrower's assets and the same is not paid within five (5) Business Days of the payment date thereof; j. If a judgment or other claim becomes a lien or encumbrance upon any or all of Borrower's assets and the same is not satisfied, dismissed or bonded against within ten (10) Business Days thereafter; k. If Borrower permits a default in any material agreement to which Borrower is a party with third parties so as to result in an acceleration of the maturity of Borrower's indebtedness to others in excess of One Hundred Thousand Dollars ($100,000), whether under any indenture, agreement or otherwise; l. If Borrower makes any payment on account of indebtedness which has been subordinated to Borrower's Indebtedness to Bank except as otherwise permitted under the terms of this Agreement; m. If any material misrepresentation exists now or hereafter in any warranty or representation made to Bank by any officer or director of Borrower, or if any such warranty or representation is withdrawn by any officer or director on and as of the date made (except to the extent that any such representation is made on a continuing basis); LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) n. If any party subordinating its claims to that of Bank's or any guarantor of Borrower's Indebtedness dies, terminates its subordination or guaranty, violates the terms of the subordination or guaranty, becomes insolvent, or an Insolvency Proceeding is commenced by or against any such subordinating party or guarantor; o. Until the initial offer and sale of Borrower's equity securities to the public, enter into any transaction where any Person or two or more Persons, who are not shareholders of Borrower prior to such transaction, acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission) of more than fifty percent (50%) of the outstanding shares of voting Stock of Borrower immediately after giving effect to such transaction; or p. If any reportable event, which Bank determines constitutes grounds for the termination of any deferred compensation plan by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer any such plan, shall have occurred and be continuing thirty (30) days after written notice of such determination shall have been given to Borrower by Bank, or any such Plan shall be terminated within the meaning of Title IV of the Employment Retirement Income Security Act ("ERISA"), or a trustee shall be appointed by the appropriate United States District Court to administer any such plan, or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any plan and in case of any event described in this Section 7, the aggregate amount of Borrower's liability to the Pension Benefit Guaranty Corporation under Sections 4062, 4063 or 4064 of ERISA shall exceed five percent (5%) of Borrower's Tangible Effective Net Worth. 7.2 An Event of Default under this Agreement shall "continue" or be "continuing" until such Event of Default has been waived in writing by Bank. 7.3 Notwithstanding anything contained in Section 7 to the contrary, Bank shall refrain from exercising its rights and remedies and Event of Default shall thereafter not be deemed to have occurred by reason of the occurrence of any of the events set forth in Sections 7.e, 7.f or 7.j of this Agreement if, within ten (10) Business Days from the date thereof, the same is released, discharged, dismissed, bonded against or satisfied; provided, however, if the event is the institution of Insolvency Proceedings against Borrower, Bank shall not be obligated to make advances to Borrower during such cure period. 8. BANK'S RIGHTS AND REMEDIES. --------------------------- 8.1 Upon the occurrence of an Event of Default by Borrower under this Agreement, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: a. Declare Borrower's Indebtedness, whether evidenced by this Agreement, installment notes, demand notes or otherwise, immediately due and payable to Bank; b. Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, or any other agreement between Borrower and Bank; c. Terminate this Agreement as to any future liability or obligation of Bank, but without affecting Bank's rights and security interests in the Collateral, and the Indebtedness of Borrower to Bank; d. Without notice to or demand upon Borrower or any guarantor, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires and to make the Collateral available to Bank at a location that is reasonably convenient to Borrower and Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, take and maintain possession of the Collateral and the premises (and Borrower shall pay any and all expenses of Bank incurred in connection therewith), or any part thereof, and to pay, purchase, contest or compromise any encumbrance, charge or lien which in the opinion of Bank appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith; e. Without limiting Bank's rights under any security interest, Bank is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral and Borrower's rights under all licenses and all franchise agreement shall inure to Bank's benefit, and Bank shall have the right and power to enter into sublicense agreements with respect to all such rights with third parties on terms acceptable to Bank; LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) f. Promptly upon demand by Bank, Borrower shall immediately deliver to Bank and properly endorse, any and all evidences of ownership, certificates of title or applications for title to any and all items of Equipment; g. Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sales and sell (in the manner provided for herein) the Inventory and the Equipment; h. Sell or dispose the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as is commercially reasonable in the opinion of Bank. It is not necessary that the Collateral be present at any such sale. At any sale or other disposition of the Collateral pursuant to this Section, Bank disclaims all warranties which would otherwise be given under the Uniform Commercial Code, including without limitation a disclaimer of any warranty relating to title, possession, quiet enjoyment or the like, and Bank may communicate these disclaimers to a purchaser at such disposition. This disclaimer of warranties will not render the sale commercially unreasonable; i. Bank shall give notice of the disposition of the Collateral as follows: (1) Bank shall give Borrower and each holder of a security interest in the Collateral who has filed with Bank a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some disposition other than a public sale is to be made of the Collateral, the time on or after which the private sale or other disposition is to be made; (2) The notice shall be personally delivered or mailed, postage prepaid, to Borrower's address appearing in this Agreement, at least ten (10) calendar days before the date fixed for the sale, or at least ten (10) calendar days before the date on or after which the private sale or other disposition is to be made, unless the Collateral is perishable or threatens to decline speedily in value. Notice to persons other than Borrower claiming an interest in the Collateral shall be sent to such addresses as have been furnished to Bank or as otherwise determined in accordance with Section 9611 of the Uniform Commercial Code; and (3) If the sale is to be a public sale, Bank shall also give notice of the time and place by publishing a notice one time at least ten (10) calendar days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; and (4) Bank may credit bid and purchase at any public sale. j. Borrower shall pay all Bank Expenses incurred in connection with Bank's enforcement and exercise of any of its rights and remedies as herein provided, whether or not suit is commenced by Bank; k. Any deficiency which exists after disposition of the Collateral as provided above will be paid promptly by Borrower. Any excess will be returned, without interest and subject to the rights of third parties, to Borrower by Bank, or, in Bank's discretion, to any party who Bank believes, in good faith, is entitled to the excess; l. Without constituting a retention of Collateral in satisfaction of an obligation within the meaning of 9620 of the Uniform Commercial Code or an action under California Code of Civil Procedure 726, apply any and all amounts maintained by Borrower as deposit accounts (as that term is defined under 9102 of the Uniform Commercial Code) or other accounts that Borrower maintains with Bank against the Indebtedness; m. The proceeds of any sale or other disposition of Collateral authorized by this Agreement shall be applied by Bank first upon all expenses authorized by the Uniform Commercial Code and all reasonable attorneys' fees and legal expenses incurred by Bank, whether in-house or outside counsel is used, the balance of the proceeds of the sale or other disposition shall be applied in the payment of the Indebtedness, first to interest, then to principal, then to remaining Indebtedness and the surplus, if any, shall be paid over to Borrower or to such other person(s) as may be entitled to it under applicable law. Borrower shall remain liable for any deficiency, which it shall pay to Bank immediately upon demand. Borrower agrees that Bank shall be under no obligation to accept any noncash proceeds in connection with any sale or disposition of Collateral unless failure to do so would be commercially unreasonable. If Bank agrees in its sole discretion to accept noncash proceeds (unless the failure to do so would be commercially unreasonable), Bank may ascribe any commercially reasonable value to such proceeds. Without limiting the foregoing, Bank may apply any discount factor in determining the present value of proceeds to be received in the future or may elect to apply proceeds to be received in the future only as and when such proceeds are actually received in cash by Bank; and LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) n. The following shall be the basis for any finder of fact's determination of the value of any Collateral which is the subject matter of a disposition giving rise to a calculation of any surplus or deficiency under Section 9615(f) of the Uniform Commercial Code: (i) The Collateral which is the subject matter of the disposition shall be valued in an "as is" condition as of the date of the disposition, without any assumption or expectation that such Collateral will be repaired or improved in any manner; (ii) the valuation shall be based upon an assumption that the transferee of such Collateral desires a resale of the Collateral for cash promptly (but no later than 30 days) following the disposition; (iii) all reasonable closing costs customarily borne by the seller in commercial sales transactions relating to property similar to such Collateral shall be deducted including, without limitation, brokerage commissions, tax prorations, attorney's fees, whether in-house or outside counsel is used, and marketing costs; (iv) the value of the Collateral which is the subject matter of the disposition shall be further discounted to account for any estimated holding costs associated with maintaining such Collateral pending sale (to the extent not accounted for in (iii) above), and other maintenance, operational and ownership expenses; and (v) any expert opinion testimony given or considered in connection with a determination of the value of such Collateral must be given by persons having at least 5 years experience in appraising property similar to the Collateral and who have conducted and prepared a complete written appraisal of such Collateral taking into consideration the factors set forth above. The "value" of any such Collateral shall be a factor in determining the amount of proceeds which would have been realized in a disposition to a transferee other than a secured party, a person related to a secured party or a secondary obligor under Section 9615(f) of the Uniform Commercial Code. 8.2 In addition to any and all other rights and remedies available to Bank under or pursuant to this Agreement or any other documents, instrument or agreement contemplated hereby, Borrower acknowledges and agrees that (i) at any time following the occurrence and during the continuance of any Event of Default, and/or (ii) termination of Bank's commitment or obligation to make loans or advances or otherwise extend credit to or in favor of Borrower hereunder, in the event that and to the extent that there are any Letter of Credit Obligations outstanding at such time, upon demand of Bank, Borrower shall deliver to Bank, or cause to be delivered to Bank, cash collateral in an amount not less than such Letter of Credit Obligations, which cash collateral shall be held and retained by Bank as cash collateral for the repayment of such Letter of Credit Obligations, together with any and all other Indebtedness of Borrower to Bank remaining unpaid, and Borrower pledges to Bank and grants to Bank a continuing first priority security interest in such cash collateral so delivered to Bank. Alternatively, Borrower shall cause to be delivered to Bank an irrevocable standby letter of credit issued in favor of Bank by a bank acceptable to Bank, in its sole discretion, in an amount not less than such Letter of Credit Obligations, and upon terms acceptable to Bank, in its sole discretion. 8.3 Bank's rights and remedies under this Agreement and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided by law or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election or acquiescence by Bank. 9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY. ------------------------------------------------- If Borrower fails to pay promptly when due to another person or entity, monies which Borrower is required to pay by reason of any provision in this Agreement, Bank may, but need not, pay the same and charge Borrower's loan account therefor, and Borrower shall promptly reimburse Bank therefor upon notice of the amount thereof. All such sums shall become additional Indebtedness owing to Bank, shall bear interest at the rate hereinabove provided, and shall be secured by all Collateral. Any payments made by Bank shall not constitute (i) an agreement by it to make similar payments in the future, or (ii) a waiver by Bank of any default under this Agreement. Bank need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance or lien and the receipt of the usual official notice of the payment thereof shall be conclusive evidence that the same was validly due and owing. Such payments shall constitute Bank Expenses and additional advances to Borrower. 10. WAIVERS. -------- 10.1 Borrower agrees that checks and other instruments received by Bank in payment or on account of Borrower's Indebtedness constitute only conditional payment until such items are actually paid to Bank and Borrower waives the right to direct the application of any and all payments at any time or times hereafter received by Bank on account of Borrower's Indebtedness and Borrower agrees that Bank shall have the continuing exclusive right to apply and reapply such payments in any manner as Bank may deem advisable, notwithstanding any entry by Bank upon its books. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 10.2 Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10.3 Bank shall not in any way or manner be liable or responsible for (a) the safekeeping of the Inventory or the Equipment; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency or other person whomsoever. All risk of loss, damage or destruction of Inventory and the Equipment shall be borne by Borrower. 10.4 Borrower waives the right and the right to assert a confidential relationship, if any, it may have with any accountant, accounting firm and/or service bureau or consultant in connection with any information requested by Bank pursuant to or in accordance with this Agreement, and agrees that a Bank may contact directly any such accountants, accounting firm and/or service bureau or consultant in order to obtain such information. 10.5 Co-Borrowers. Each Borrower agrees as follows: a. Each Borrower agrees that it is jointly and severally, directly, and primarily liable to Bank for payment in full of the Indebtedness and that such liability is independent of the duties, obligations and liabilities of the other Borrower. The Agreement and each other document, instrument and agreement entered into by any one or more of the Borrowers in connection therewith (collectively, hereinafter, the "Loan Documents") are a primary and original obligation of each Borrower, are not the creation of a surety relationship, and are an absolute, unconditional, and continuing promise of payment and performance which shall remain in full force and effect without respect to future changes in conditions, including any change of law or any invalidity or irregularity with respect to the Loan Documents. Each Borrower acknowledges that the obligations of such Borrower undertaken herein might be construed to consist, at least in part, of the guaranty of obligations of persons or entities other than such Borrower (including any other Borrower party hereto) and, in full recognition of that fact, each Borrower consents and agrees that Bank may, at any time and from time to time, without notice or demand, whether before or after any actual or purported termination, repudiation, or revocation of the Agreement and the other Loan Documents by any one or more Borrowers, and without affecting the enforceability or continuing effectiveness hereof as to each Borrower: (a) supplement, restate, modify, amend, increase, decrease, extend, renew, accelerate, or otherwise change the time for payment or the terms of the Indebtedness or any part thereof, including any increase or decrease of the rate(s) of interest thereon; (b) supplement, restate, modify, amend, increase, decrease or waive, or enter into or give any agreement, approval, or consent with respect to, the Indebtedness or any part thereof, or any of the Loan Documents or any additional security or guaranties, or any condition, covenant, default, remedy, right, representation or term thereof or thereunder; (c) accept new or additional instruments, documents or agreements in exchange for or relative to any of the Loan Documents or the Indebtedness or any part thereof; (d) accept partial payments on the Indebtedness; (e) receive and hold additional security or guaranties for the Indebtedness or any part thereof; (f) release, reconvey, terminate, waive, abandon, fail to perfect, subordinate, exchange, substitute, transfer, or enforce any security or guaranties, and apply any security and direct the order or manner of sale thereof as Bank in its sole and absolute discretion may determine; (g) release any Person from any personal liability with respect to the Indebtedness or any part thereof; (h) settle, release on terms satisfactory to Bank or by operation of applicable laws, or otherwise liquidate or enforce any Indebtedness and any security therefor or guaranty thereof in any manner, consent to the transfer of any security and bid and purchase at any sale; or (i) consent to the merger, change, or any other restructuring or termination of the corporate or partnership existence of any Borrower or any other Person, and correspondingly restructure the Indebtedness, and any such merger, change, restructuring, or termination shall not affect the liability of any Borrower or the continuing effectiveness hereof, or the enforceability hereof with respect to all or any part of the Indebtedness. b. Upon the occurrence and during the continuance of any Event of Default, Bank may enforce the Agreement and the other Loan Documents independently as to each Borrower and independently of any other remedy or security Bank at any time may have or hold in connection with the Indebtedness, and it shall not be necessary for Bank to marshal assets in favor of any Borrower or any other Person or to proceed upon or against or exhaust any security or remedy before proceeding to enforce the Agreement and the other Loan Documents. Each Borrower expressly waives any right to require Bank to marshal assets in favor of any Borrower or any other Person or to proceed against any other Borrower or any Collateral provided by any Person, and agrees that Bank may proceed against Borrowers or any Collateral in such order as it shall determine in its sole and absolute discretion. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) c. Bank may file a separate action or actions against any Borrower, whether action is brought or prosecuted with respect to any security or against any other person, or whether any other person is joined in any such action or actions. Each Borrower agrees that Bank and any Borrower and any Subsidiary or Affiliate of any Borrower may deal with each other in connection with the Indebtedness or otherwise, or alter any contracts or agreements now or hereafter existing between any of them, in any manner whatsoever, all without in any way altering or affecting the continuing efficacy of the Agreement or the other Loan Documents. d. Bank's rights under the Loan Documents shall be reinstated and revived, and the enforceability of the Agreement and the other Loan Documents shall continue, with respect to any amount at any time paid on account of the Indebtedness which thereafter shall be required to be restored or returned by Bank, all as though such amount had not been paid. The rights of Bank created or granted herein and the enforceability of the Agreement and the other Loan Documents at all times shall remain effective to cover the full amount of all the Indebtedness even though the Indebtedness, including any part thereof or any other security or guaranty therefor, may be or hereafter may become invalid or otherwise unenforceable as against any Borrower and whether or not any other Borrower shall have any personal liability with respect thereto. e. To the maximum extent permitted by applicable law and to the extent that a Borrower is deemed a guarantor, each Borrower expressly waives any and all defenses now or hereafter arising or asserted by reason of (a) any disability or other defense of any other Borrower with respect to the Indebtedness, (b) the unenforceability or invalidity of any security or guaranty for the Indebtedness or lack of perfection or continuing perfection or failure of priority of any security for the Indebtedness, (c) the cessation for any cause whatsoever of the liability of any other Borrower (other than by reason of the full payment and performance of all Indebtedness), (d) any failure of the Bank to marshal assets in favor of Bank or any Borrower or any other person, (e) any failure of Bank to give notice of sale or other disposition of collateral to any Borrower or any other Person or any defect in any notice that may be given in connection with any sale or disposition of collateral, (f) any failure of Bank to comply with applicable law in connection with the sale or other disposition of any collateral or other security for any Obligation, including any failure of Bank to conduct a commercially reasonable sale or other disposition of any collateral or other security for any Obligation, (g) any act or omission of Bank or others that directly or indirectly results in or aids the discharge or release of any Borrower or the Indebtedness or any security or guaranty therefor by operation of law or otherwise, (h) any law which provides that the obligation of a surety or guarantor must neither be larger in amount nor in other respects more burdensome than that of the principal or which reduces a surety's or guarantor's obligation in proportion to the principal obligation, (i) any failure of Bank to file or enforce a claim in any bankruptcy or other proceeding with respect to any Person, (j) the election by Bank of the application or non-application of Section 1111(b)(2) of the United States Bankruptcy Code, (k) any extension of credit or the grant of any lien under Section 364 of the United States Bankruptcy Code, (1) any use of cash collateral under Section 363 of the United States Bankruptcy Code, (m) any agreement or stipulation with respect to the provision of adequate protection in any bankruptcy proceeding of any Person, (n) the avoidance of any lien in favor of Bank for any reason, or (o) any action taken by Bank that is authorized by the Agreement or any other provision of any Loan Document. Until such time as all of the Indebtedness have been fully, finally, and indefeasibly paid in full in cash: (i) each Borrower hereby waives and postpones any right of subrogation it has or may have as against any other Borrower with respect to the Indebtedness; and (ii) in addition, each Borrower also hereby waives and postpones any right to proceed or to seek recourse against or with respect to any property or asset of any other Borrower. Each Borrower expressly waives all setoffs and counterclaims and all presentments, demands for payment or performance, notices of nonpayment or nonperformance, protests, notices of protest, notices of dishonor and all other notices or demands of any kind or nature whatsoever with respect to the Indebtedness, and all notices of acceptance of the Agreement or the other Loan Documents or of the existence, creation or incurring of new or additional Indebtedness. f. In the event that all or any part of the Indebtedness at any time are secured by any one or more deeds of trust or mortgages or other instruments creating or granting liens on any interests in real property, each Borrower authorizes Bank, upon the occurrence of and during the continuance of any Event of Default, at its sole option, without notice or demand and without affecting the obligations of any Borrower, the enforceability of the Agreement and the other Loan Documents, or the validity or enforceability of any liens of Bank, to foreclose any or all of such deeds of trust or mortgages or other instruments by judicial or nonjudicial sale. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) g. Without limiting the generality of any other waiver or other provision set forth in this Agreement, each Borrower waives all rights and defenses that such Borrower may have because the Indebtedness is secured by real property. This means, among other things: (1) Bank may collect from any Borrower without first foreclosing on any real or personal property pledged as Collateral by any other Borrower to secure the Indebtedness. (2) If Bank forecloses on any real property pledged as Collateral by any Borrower: (a) the amount of the debt may be reduced only by the price for which that Collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. (b) Bank may collect from any Borrower even if Bank, by foreclosing on the real property pledged as Collateral, has destroyed any right that Borrower may have to collect from any other Borrower. This is an unconditional and irrevocable waiver of any rights and defenses each Borrower may have because the Indebtedness is secured by Real Property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. h. To the fullest extent permitted by applicable law, to the extent that a Borrower is deemed a guarantor, each Borrower expressly waives any defenses to the enforcement of the Agreement and the other Loan Documents or any rights of Bank created or granted hereby or to the recovery by Bank against any Borrower or any other Person liable therefor of any deficiency after a judicial or nonjudicial foreclosure or sale, even though such a foreclosure or sale may impair the subrogation rights of Borrowers and may preclude Borrowers from obtaining reimbursement or contribution from other Borrowers. To the fullest extent permitted by applicable law, each Borrower expressly waives any suretyship defenses or benefits that it otherwise might or would have under applicable law. WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH BORROWER WAIVES ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY BANK, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY FOR THE INDEBTEDNESS, HAS DESTROYED SUCH BORROWER'S RIGHTS OF SUBROGATION AND REIMBURSEMENT AGAINST THE OTHER BORROWERS BY OPERATION OF LAW, INCLUDING BUT NOT LIMITED TO SECTION 580d OF THE CALIFORNIA CODE OF CIVIL PROCEDURE, OR OTHERWISE. 10.6 THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS. 10.7 In the event that Bank elects to waive any rights or remedies hereunder, or compliance with any of the terms hereof, or delays or fails to pursue or enforce any term, such waiver, delay or failure to pursue or enforce shall only be effective with respect to that single act and shall not be construed to affect any subsequent transactions or Bank's right to later pursue such rights and remedies. 11. ONE CONTINUING LOAN TRANSACTION. -------------------------------- All loans and advances heretofore, now or at any time or times hereafter made by Bank to Borrower under this Agreement or any other agreement between Bank and Borrower, shall constitute one loan secured by Bank's security interests in the Collateral and by all other security interests, liens, encumbrances heretofore, now or from time to time hereafter granted by Borrower to Bank. Notwithstanding the above, (i) to the extent that any portion of the Indebtedness is a consumer loan, that portion shall not be secured by any deed of trust or mortgage on or other security interest in Borrower's principal dwelling which is not a purchase money security interest as to that portion, unless expressly provided to the contrary in another place, or (ii) if Borrower (or any of them) has (have) given or give(s) Bank a deed of trust or mortgage covering real property, that deed of trust or mortgage shall not secure the loan and any other Indebtedness of Borrower (or any of them), unless expressly provided to the contrary in another place. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 12. NOTICES. -------- Unless otherwise provided in this Agreement, all notices or demands by either party on the other relating to this Agreement shall be in writing and sent by regular United States mail, postage prepaid, properly addressed to Borrower or to Bank at the addresses stated in this Agreement, or to such other addresses as Borrower or Bank may from time to time specify to the other in writing. Requests for information made to Borrower by Bank from time to time hereunder may be made orally or in writing, at Bank's discretion. 13. AUTHORIZATION TO DISBURSE. -------------------------- Bank is hereby authorized to make loans and advances hereunder upon telephonic or other instructions received from anyone purporting to be an officer, employee, or representative of Borrower, or at the discretion of Bank if said loans and advances are necessary to meet any Indebtedness of Borrower to Bank. Bank shall have no duty to make inquiry or verify the authority of any such party, and Borrower shall hold Bank harmless from any damage, claims or liability by reason of Bank's honor of, or failure to honor, any such instructions. 14. PAYMENTS. --------- Borrower hereby authorizes Bank to deduct the full amount of any interest, fees, costs, or Bank Expenses due under this Agreement and not paid or collected when due in accordance with the terms and conditions hereof from any account maintained by Borrower with Bank. Should there be insufficient funds in any such account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower; provided, however, that Bank shall not be obligated to advance funds to cover any such payment. 15. DESTRUCTION OF BORROWER'S DOCUMENTS. ------------------------------------ Any documents, schedules, invoices or other papers delivered to Bank, may be destroyed or otherwise disposed of by Bank six (6) months after they are delivered to or received by Bank, unless Borrower requests, in writing, the return of the said documents, schedules, invoices or other papers and makes arrangements, at Borrower's expense, for their return. 16. CHOICE OF LAW. -------------- The validity of this Agreement, its construction, interpretation and enforcement, and the rights of the parties hereunder and concerning the Collateral, shall be determined according to the laws of the State of California. The parties agree that all actions or proceedings arising in connection with this Agreement shall be tried and litigated only in the state and federal courts in the Northern District of California or the County of Santa Clara. 17. GENERAL PROVISIONS. ------------------- 17.1 This Agreement shall be binding and deemed effective when executed by Borrower and accepted and executed by Bank at its Western Division headquarters office. 17.2 This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights hereunder without Bank's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Bank shall release Borrower or any guarantor from their obligations to Bank. Bank may assign this Agreement and its rights and duties hereunder. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in Bank's rights and benefits hereunder. In connection therewith, Bank may disclose all documents and information which Bank now or hereafter may have relating to Borrower or Borrower's business. 17.3 Paragraph headings and paragraph numbers have been set forth herein for convenience only; unless the contrary is compelled by the context, everything contained in each paragraph applies equally to this entire Agreement. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, and the term "including" is not limiting. The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. LOAN & SECURITY AGREEMENT (ACCOUNTS AND INVENTORY) 17.4 Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Bank or Borrower, whether under any rule of construction or otherwise; on the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 17.5 Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 17.6 This Agreement cannot be changed or terminated orally. This Agreement contains the entire agreement of the parties hereto and supersedes all prior agreements, understandings, representations, warranties and negotiations, if any, related to the subject matter hereof, and none of the parties shall be bound by anything not expressed in writing. 17.7 The parties intend and agree that their respective rights, duties, powers, liabilities, obligations and discretions shall be performed, carried out, discharged and exercised reasonably and in good faith. 17.8 In addition, if this Agreement is secured by a deed of trust or mortgage covering real property, then the trustor or mortgagor shall not mortgage or pledge the mortgaged premises as security for any other indebtedness or obligations. This Agreement, together with all other indebtedness secured by said deed of trust or mortgage, shall become due and payable immediately, without notice, at the option of Bank, (a) if said trustor or mortgagor shall mortgage or pledge the mortgaged premises for any other indebtedness or obligations or shall convey, assign or transfer the mortgaged premises by deed, installment sale contract or other instrument; (b) if the title to the mortgaged premises shall become vested in any other person or party in any manner whatsoever, or (c) if there is any disposition (through one or more transactions) of legal or beneficial title to a controlling interest of said trustor or mortgagor. 17.9 Each undersigned Borrower hereby agrees that it is jointly and severally, directly, and primarily liable to Bank for payment and performance in full of all duties, obligations and liabilities under this Agreement and each other document, instrument and agreement entered into by Borrower with or in favor of Bank in connection herewith, and that such liability is independent of the duties, obligations and liabilities of any other Borrower or any other guarantor of the Indebtedness, as applicable. Each reference herein to Borrower shall mean each and every Borrower party hereto, individually and collectively, jointly and severally. IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security Agreement (Accounts and Inventory) to be executed as of the date first hereinabove written. BORROWER: Accepted and effective as of: SPECTRUM ORGANIC PRODUCTS, INC. ---------- a California corporation at Bank's Western Division Headquarters Office By: /s/ Jethren P. Phillips ---------------------------- Name: Jethren P. Phillips COMERICA BANK-CALIFORNIA ---------------------------- Title: Chairman of the Board ---------------------------- By: /s/ Misako Noda By: /s/ Robert B. Fowles ------------------------------ ---------------------------- Name: Misako Noda Name: Robert B. Fowles ---------------------------- Title: Vice President Title: CFO ---------------------------- Address for Notices: Address for Notices: 75 East Trimble Road 5341 Old Redwood Highway San Jose, California 95131 Petaluma, California 94954 Attn: Credit Manager Attn: Robert Fowles Fax number: (408) 556-5097 Fax number: (707) 765-8747 Schedule 1.48 ------------- Subordinated Debt ----------------- Subordinated Creditor Subordinated Debt Amount 1 --------------------- ------------------------ Debora Bainbridge Phillips $1,621,716 Steven Reedy $ 265,000 1 Original principal amount. Schedule 6.5 ------------ Collateral Locations Address Owner/Lessor of Location Mortgagee ------- ------------------------ --------- Borrower Locations ------------------ 5341 Old Redwood Highway Petaluma, California 94954 133 Copeland Street Petaluma, California 94952 1250 North McDowell Blvd. Petaluma, California 94954 Bailee Locations ---------------- Adobe Creek Storage Same N/A 3800 Lakeville Highway Petaluma, California 94954 American Natural Soy Same N/A 1510 South 2nd Street Cherokee, Iowa 51012 The Barlow Company Same N/A 200 Morris Street Sebastopol, California 94573 Blossom Valley Foods Same N/A 20 Casey Street Gilroy, California 95020 Specialty Distributing Same N/A 207 Tobin Crescent Saskatoon, Canada Catania-Spagna Corp. Same N/A 1 Nemco Way Ayer, Ma 01432 Custom Park Same N/A 620 Spring Street North Dighton, Massachusetts 02764 Cotati Egg Farm Same N/A 441 Houser Street Cotati, California 94931 Follmer Development Co. Same N/A 850 Tourmaline Drive Newbury Park, California 91320 Interpac Technologies, Inc. Same N/A 260 Pioneer Avenue North Woodland, California 95776 Liberty Vegetable Oil Same N/A 15306 So. Carmenita Road Santa Fe Springs, California 90670 Manzana Products Same N/A 9141 Green Valley Road Sebastopol, California 95473 Partners Mira Loma Old Storage Same N/A 4705 Brook Hollow Circle Mira Loma, California 92509 Q & B Foods Same N/A 15547 First Street Irwindale, California 91706 Robinson Pharma Same N/A 3330 S. Harbor Boulevard Santa Ana, California 92704 Swiss Caps Same N/A 14193 S.W. 119th Avenue Miami, Florida 33186 Collateral Locations(Continued) Address Owner/Lessor of Location Mortgagee ------- ------------------------ --------- U.S. Cold Storage Same N/A 33400 Dowe Avenue Union City, California 94587 Terminal Freezers Same N/A 908 East 3rd Street Oxnard, California 93030 Triple H Food Processors Same N/A 5821 Wilderness Avenue Riverside, California 92504 Wilbur-Ellis Seed Storage Same N/A 10660 Houston Avenue Hanford, California 93230
Schedule 1.42 ------------- Permitted Indebtedness - -------------------- -------------- -------------- ----------------- ------------- Creditor Original Amt. Maturity Date Monthly Payment Collateral - -------------------- --------------- -------------- ----------------- ------------- John R. Battendieri $ 102,243.47 10/01/04 $2,170.35 (a) None - -------------------- --------------- -------------- ----------------- ------------- Joseph J. Stern $ 110,423.32 10/10/04 $2,343.99 (a) None - -------------------- --------------- -------------- ----------------- ------------- Term Life Debora B. Phillips $1,621,716.00 03/20/04 $ 15,625 (b) Ins. Policy - -------------------- --------------- -------------- ----------------- ------------- Debora B. Phillips $ 613,284.00 02/31/11 None None - -------------------- --------------- -------------- ----------------- ------------- Steven Reedy $ 265,000.00 10/06/05 $4,259.04 (a) None - -------------------- --------------- -------------- ----------------- ------------- (a) Includes amounts representing interest (b) Ms. Phillips retains the unilateral right to return to monthly principal payments of $31,250 upon 60 days prior written notice to the Company.
Schedule 1.44 ------------- Permitted Liens - ---------------- ------------- ---------- ----------- -------------------- Creditor Original Maturity Monthly Collateral Amt. Date Payment* - ---------------- ------------- ---------- ----------- -------------------- Nitsuko America $ 52,442.85 09/10/04 $1,139.64 Telephone System - ---------------- ------------- ---------- ----------- -------------------- Conseco Finance $110,423.32 09/06/04 $ 274.80 Voicemail System - ---------------- ------------- ---------- ----------- -------------------- 2 Red Lion SFC Capital $ 74,712.50 09/27/05 $1,718.00 Expeller Presses - ---------------- ------------- ---------- ----------- -------------------- Nitrogen Injection GE Capital $ 27,120.00 06/15/04 $1,020.04 System - ---------------- ------------- ---------- ----------- -------------------- Raymond Leasing Corp. $ 25,262.50 12/03/04 $ 781.10 Forklift - ---------------- ------------- ---------- ----------- -------------------- (*) Includes amounts representing interest EX-10.45 4 spectrumexhib1045-093003.txt ADDENDUM TO LOAN AND SECURITY AGREEMENT Exhibit 10.45 LIBOR ----- Addendum To Loan and Security Agreement This Addendum to Loan and Security Agreement (this 'Addendum') is entered into as of this 12 day of June, 2003, by and between COMERICA BANK-CALIFORNIA, a California banking corporation ("Bank") and SPECTRUM ORGANIC PRODUCTS, INC., a California corporation ("Borrower"). This Addendum supplements the terms of the Loan and Security Agreement of even date herewith. 1. Definitions. a. Advance. As used herein, "Advance" means a borrowing requested by Borrower and made by Bank under the Note, including a LIBOR Option Advance and/or a Base Rate Option Advance. b. Business Day. As used herein, "Business Day" means any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation. c. LIBOR. As used herein, "LIBOR" means the rate per annum (rounded upward if necessary, to the nearest whole 1/8 of l%) and determined pursuant to the following formula: LIBOR = Base LIBOR ------------------------------- 100% - LIBOR Reserve Percentage (1) "Base LIBOR" means the rate per annum determined by Bank at which deposits for the relevant LIBOR Period would be offered to Bank in the approximate amount of the relevant LIBOR Option Advance in the inter-bank LIBOR market selected by Bank, upon request of Bank at 10:00 am. California time, on the day that is the first day of such LIBOR Period. (2) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable LIBOR Period. d. LIBOR Business Day. As used herein, "LIBOR Business Day" means a Business day on which dealings in Dollar deposits may be carried out in the interbank LIBOR market. e. LIBOR Period. As used herein, "LIBOR Period" means, with respect to a LIBOR Option Advance: (1) initially, the period commencing on, as the case may be, the date the Advance is made or the date on which the Advance is converted to a LIBOR Option Advance, and continuing for, in every case, a thirty (30), sixty (60), ninety (90), one hundred eighty (180), two hundred seventy (270), or three hundred sixty (360) day period thereafter so long as the LIBOR Option is quoted for such period in the applicable interbank LIBOR market, as such period is selected by Borrower in the notice of Advance as provided in the Note or in the notice of conversion as provided in this Addendum; and (2) thereafter, each period commencing on the last day of the next preceding LIBOR Period applicable to such LIBOR Option Advance and continuing for, in every case, a thirty (30), sixty (60), ninety (90), one hundred eighty (180), two hundred seventy (270), or three hundred sixty (360) day period thereafter so long as the LIBOR Option is quoted for such period in the applicable interbank LIBOR market, as such period is selected by Borrower in the notice of continuation as provided in this Addendum. f. Note. As used herein, "Note" means the Loan and Security Agreement of even date herewith. g. Regulation D. As used herein, "Regulation D' means Regulation D of the Board of Governors of the Federal Reserve System as amended or supplemented from time to time. h. Regulatory Development. As used herein, "Regulatory Development" means any or all of the following: (i) any change in any law, regulation or interpretation thereof by any public authority (whether or not having the force of law); (ii) the application of any existing law, regulation or the interpretation thereof by any public authority (whether or not having the force of law); and (iii) compliance by Bank with any request or directive (whether or not having the force of law) of any public authority. -1- 2. Interest Rate Options. Borrower shall have the following options regarding the interest rate to be paid by Borrower on Advances under the Note: a. A rate equal to two and one quarter of one percent (2.25%) above Bank's LIBOR, (the "LIBOR Option"), which LIBOR Option shall be in effect during the relevant LIBOR Period; or b. A rate equal to zero percent (0.00%) above the "Base Rate" as referenced in the Note and quoted from time to time by Bank as such rate may change from time to time (the "Base Rate Option"). 3. LIBOR Option Advance. The minimum LIBOR Option Advance will not be less than Five Hundred Thousand and 00/100 Dollars ($500,000.00) for any LIBOR Option Advance. 4. Payment of Interest on LIBOR Option Advances. Interest on each LIBOR Option Advance shall be payable pursuant to the terms of the Note. Interest on such LIBOR Option Advance shall be computed on the basis of a 360-day year and shall be assessed for the actual number of days elapsed from the first day of the LIBOR Period applicable thereto but not including the last day thereof. 5. Bank's Records Re: LIBOR Option Advances. With respect to each LIBOR Option Advance, Bank is hereby authorized to note the date, principal amount, interest rate and LIBOR Period applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to the Note, which notations shall be prima facie evidence of the accuracy of the information noted. 6. Selection/Conversion of Interest Rate Options. At the time any Advance is requested under the Note and/or Borrower wishes to select the LIBOR Option for all or a portion of the outstanding principal balance of the Note, and at the end of each LIBOR Period, Borrower shall give Bank notice specifying (a) the interest rate option selected by Borrower; (b) the principal amount subject thereto; and (c) if the LIBOR Option is selected, the length of the applicable LIBOR Period. Any such notice may be given by telephone so long as, with respect to each LIBOR Option selected by Borrower, (i) Bank receives written confirmation from Borrower not later than three (3) LIBOR Business Days after such telephone notice is given; and (ii) such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the LIBOR Period. For each LIBOR Option requested hereunder, Bank will quote the applicable fixed LIBOR Rate to Borrower at approximately 10:00 a.m., California time, on the first day of the LIBOR Period. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a redetermination of the rate by Bank; provided, however, that if Borrower fails to accept any such quotation given, then the quoted rate shall expire and Bank shall have no obligation to permit a LIBOR Option to be selected on such day. If no specific designation of interest is made at the time any Advance is requested under the Note or at the end of any LIBOR Period, Borrower shall be deemed to have selected the Base Rate Option for such Advance or the principal amount to which such LIBOR Period applied. At any time the LIBOR Option is in effect, Borrower may, at the end of the applicable LIBOR Period, convert to the Base Rate Option. At any time the Base Rate Option is in effect, Borrower may convert to the LIBOR OPTION, and shall designate a LIBOR Period. 7. Default Interest Rate. From and after the maturity date of the Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of the Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to three percent (3.00%) above the rate of interest from time to time applicable to the Note. 8. Prepayment. In the event that the LIBOR Option is the Applicable Interest Rate for all or any part of the outstanding principal balance of the Note, and any payment or prepayment of any such outstanding principal balance of the Note shall occur on any day other than the last day of the LIBOR Period then applicable thereto (whether voluntarily, by acceleration, required payment, or otherwise), or if Borrower elects the LIBOR Option as the Applicable Interest Rate for all or any part of the outstanding principal balance of the Note in accordance with the terms and conditions hereof, and, subsequent to such election, but prior to the commencement of the LIBOR Period applicable thereto, Borrower revokes such election for any reason whatsoever, or if the Applicable Interest Rate in respect of any outstanding principal balance of the Note hereunder shall be changed, for any reason whatsoever, from the LIBOR Option to the Base Rate Option prior to the last day of the LIBOR Period applicable thereto, or if Borrower shall fail to make any payment of principal or interest hereunder at any time that the LIBOR Option is the Applicable Interest Rate hereunder in respect of such outstanding principal balance of the Note, Borrower shall reimburse Bank, on demand, for any resulting loss, cost or expense incurred by Bank as a result thereof, including, without limitation, any such loss, cost or expense incurred in obtaining, liquidating, employing or redeploying deposits from third parties. Such amount payable by Borrower to -2- Bank may include, without limitation, an amount equal to the excess, if any, of (a) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, refunded or converted, for the period from the date of such prepayment or of such failure to borrow, refund or convert, through the last day of the relevant LIBOR Period, at the applicable rate of interest for such outstanding principal balance of the Note, as provided under this Note, over (b) the amount of interest (as reasonably determined by Bank) which would have accrued to Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. Calculation of any amounts payable to Bank under this paragraph shall be made as though Bank shell have actually funded or committed to fund the relevant outstanding principal balance of the Note hereunder through the purchase of an underlying deposit in an amount equal to the amount of such outstanding principal balance of the Note and having a maturity comparable to the relevant LIBOR Period; provided, however, that Bank may fund the outstanding principal balance of the Note hereunder in any manner it deems fit and the foregoing assumptions shall be utilized only for the purpose of the calculation of amounts payable under this paragraph. Upon the written request of Borrower, Bank shall deliver to Borrower a certificate setting forth the basis for determining such losses, costs and expenses, which certificate shall be conclusively presumed correct, absent manifest error. Any prepayment hereunder shall also be accompanied by the payment of all accrued and unpaid interest on the amount so prepaid. Any outstanding principal balance of the Note which is bearing interest at such time at the Base Rate Option may be prepaid without penalty or premium. Partial prepayments hereunder shall be applied to the installments hereunder in the inverse order of their maturities. 9. Hold Harmless and Indemnification. Borrower agrees to indemnify Bank and to hold Bank harmless from, and to reimburse Bank on demand for, all losses and expenses which Bank sustains or incurs as a result of (i) any payment of a LIBOR Option Advance prior to the last day of the applicable LIBOR Period for any reason, including, without imitation, termination of the Note, whether pursuant to this Addendum or the occurrence of an Event of Default; (ii) any termination of a LIBOR Period prior to the date it would otherwise end in accordance with this Addendum; or (iii) any failure by Borrower, for any reason, to borrow any portion of a LIBOR Option Advance. 10. Funding Losses. The indemnification and hold harmless provisions set forth in this Addendum shall include, without limitation, all losses and expenses arising from interest and fees that Bank pays to lenders of funds it obtains in order to fund the loans to Borrower on the basis of the LIBOR Option(s) and all losses incurred in liquidating or re-deploying deposits from which such funds were obtained and loss of profit for the period after termination. A written statement by Bank to Borrower of such losses and expenses shall be conclusive and binding, absent manifest error, for all purposes. This obligation shall survive the termination of this Addendum and the payment of the Note. 11. Regulatory Developments Or Other Circumstances Relating To Illegality or Impracticality of LIBOR. If any Regulatory Development or other circumstances relating to the interbank Euro-dollar markets shall, at any time, in Bank's reasonable determination, make it unlawful or impractical for Bank to fund or maintain, during any LIBOR Period, to determine or charge interest rates based upon LIBOR, Bank shall give notice of such circumstances to Borrower and: (i) In the case of a LIBOR Period in progress, Borrower shall, if requested by Bank, promptly pay any interest which had accrued prior to such request and the date of such request shall be deemed to be the last day of the term of the LIBOR Period; and (ii) No LIBOR Period may be designated thereafter until Bank determines that such would be practical. 12. Additional Costs. Borrower shall pay to Bank from time to time, upon Bank's request, such amounts as Bank determines are needed to compensate Bank for any costs it incurred which are attributable to Bank having made or maintained a LIBOR Option Advance or to Bank's obligation to make a LIBOR Option Advance, or any reduction in any amount receivable by Bank hereunder with respect to any LIBOR Option or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Developments, which (i) change the basis of taxation of any amounts payable to Bank hereunder with respect to taxation of any amounts payable to Bank hereunder with respect to any LIBOR Option Advance (other than taxes imposed on the overall net income of Bank for any LIBOR Option Advance by the jurisdiction where Bank is headquartered or the jurisdiction where Bank extends the LIBOR Option Advance; (ii) impose or modify any reserve, special deposit, or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, Bank (including any LIBOR Option Advance or any deposits referred to in the definition of LIBOR); or (iii) impose any other condition affecting this Addendum (or any of such extension of credit or liabilities). Bank shall notify Borrower of any event occurring after the date hereof which entitles Bank to compensation pursuant to this paragraph as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Determinations by. Bank for purposes of this paragraph, shall be conclusive, provided that such determinations are made on a reasonable basis. -3- 13. Legal Effect. Except as specifically modified hereby, all of the terms and conditions of the Note remain in full force and effect. IN WITNESS WHEREOF, the parties have agreed to the foregoing as of the date first set forth above. SPECTRUM ORGANIC PRODUCTS, INC., COMERICA BANK-CALIFORNIA, a California corporation a California banking corporation By: /s/ Robert B. Fowles By: /s/ Misako Noda ------------------------------- -------------------------------- Robert B. Fowles Misako Noda Title: CFO Title: Vice President ---------------------------- ----------------------------- By: ------------------------------- Title: ---------------------------- -4- EX-10.46 5 spectrumexhib1046-061203.txt VARIABLE RATE INSTALLMENT NOTE Exhibit 10.46 VARIABLE RATE-INSTALLMENT NOTE - -------------------------------------------------------------------------------- AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION # $1,250,000.00 June 12, 2003 June 30, 2008 94-3076294 - -------------------------------------------------------------------------------- For Value Received, the undersigned promise(s) to pay to the order of Comerica Bank-California ("Bank"), at any office of the Bank in the State of California One Million Two Hundred Fifty Thousand and no/100 Dollars (U.S.) in installments of $ 20,833.33 each Plus interest on the unpaid balance from the date of this Note at a per annum rate equal to the Bank's base rate from time to time in effect plus 0.250% per annum until maturity, whether by acceleration or otherwise, or until Default, as later defined, and after that at a default rate equal to the rate of interest otherwise prevailing under this Note plus 3% per annum (but in no event in excess of the maximum rate permitted by law). Interest shall be calculated for the actual number of days the principal is outstanding on the basis of a 360 day year if this Note evidences a business or commercial loan or a 365 day year if a consumer loan. The Bank's "base rate" is that annual rate of interest so designated by the Bank and which is changed by the Bank from time to time. Interest rate changes will be effective for interest computation purposes as and when the Bank's base rate changes. Installments of principal and accrued interest due under this Note shall be payable on the 31st day of each MONTH, commencing July 31, 2003, and the entire remaining unpaid balance of principal and accrued interest shall be payable on the Maturity Date set forth above. If the frequency of principal and interest installments is not otherwise specified, installments of principal and interest due under this Note shall be payable monthly on the first day of each month. In the event the periodic installments set forth above are Inclusive of interest, these installments are calculated at an assumed fixed interest rate and an assumed amortization term. The amortization term ends on June 30, 2008. In the event this Note evidences a business or commercial loan and the Bank's base rate changes, the Bank, at its sole option, may from time to time recalculate the periodic installment amount so that the remaining periodic installments will fully amortize the remaining loan balance within the remaining amortization term in equal installments at the interest rate then being charged under this Note. THE UNDERSIGNED AGREE(S) TO PAY THE PERIODIC INSTALLMENTS AS THEY MAY BE RECALCULATED BY THE BANK, AT THE BANK'S SOLE OPTION, FROM TIME TO TIME AND ACKNOWLEDGE(S) THAT A RECALCULATION SHALL NOT AFFECT THE MATURITY DATE OR THE OTHER TERMS AND PROVISIONS OF THIS NOTE. If this Note or any installment under this Note shall become payable on a day other than a day on which the Bank is open for business, this payment may be extended to the next succeeding business day and interest shall be payable at the rate specified in this Note during this extension. Any payments of principal in excess of the installment payments required under this Note need not be accepted by the Rank (except an required under applicable law), but if accepted shall apply to the installments last falling due. A late installment charge, equal to 5% of each late installment may be charged on any installment payment not received by the Bank within 10 calendar days after the installment due date, but acceptance of payment of this charge shall not waive any default under this Note. This Note and any other indebtedness and liabilities of any kind of the undersigned (or any of them) to the Bank, and any and all modifications, renewals or extensions of it, whether joint or several, contingent or absolute, now existing or later arising, and however evidenced (collectively "Indebtedness") are secured by and the Bank is granted a security interest in all items deposited in any account of any of the undersigned with the Bank and by all proceeds of these items (cash or otherwise), all account balances of any of the undersigned from time to time with the Bank, by all property of any of the undersigned from time to time in the possession of the Bank and by any other collateral, rights and properties described in each and every deed of trust, mortgage, security agreement, pledge, assignment and other agreement which has been, or will at any time(s) later be, executed by any (or all) of the undersigned to or for the benefit of the Bank (collectively "Collateral). Notwithstanding the above, (i) to the extent that any portion of the Indebtedness is a consumer loan, that portion shall not be secured by any deed of trust or mortgage on or other security interest In any of the undersigned's principal dwelling or in any of the undersigned's real property which is not a purchase money security Interest as to that portion, unless expressly provided to the contrary in another place, or (ii) If the undersigned (or any of them) has (have) given or give(s) Bank a deed of trust or mortgage covering real property, that deed of trust or mortgage shall not secure this Note or any other indebtedness of the undersigned (or any of them), unless expressly provided to the contrary in another place. If the undersigned (or any of them) or any guarantor under a guaranty of all or part of the Indebtedness ("guarantor") (a) fail(s) to pay this Note or any of the Indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to pay any indebtedness owing on a demand basis upon demand; or (b) fail(s) to comply with any of the terms or provisions of any agreement between the undersigned (or any of them) or any guarantor and the Bank; or (c) become(s) insolvent or the subject of a voluntary or involuntary proceeding in bankruptcy, or a reorganization, arrangement or creditor composition proceeding, (if a business entity) cease(s) doing business as a going concern, (if a natural person) die(s) or become(s) incompetent, (if a partnership) dissolve(s) or any general partner of it dies, becomes incompetent or becomes the subject of a bankruptcy proceeding or (if a corporation or a limited liability company) is the subject of a dissolution, merger or consolidation: or (d) if any warranty or representation made by any of the undersigned or any guarantor in connection with this Note or any of the indebtedness shall be discovered to be untrue or incomplete; or (e) if there is any termination, notice of termination, or breach of any guaranty, pledge, collateral assignment or subordination agreement relating to all or any part of the indebtedness; or (0 if there is any failure by any of the undersigned or any guarantor to pay when due any of its indebtedness (other than to the Bank) or in the observance or performance of any term, covenant or condition in any document evidencing, securing or relating to such Indebtedness; or (g) if the Bank deems itself insecure, believing that the prospect of payment of this Note or any of the Indebtedness is impaired or shall fear deterioration, removal or waste of any of the Collateral; or (h) if there is filed or issued a levy or writ of attachment or garnishment or other like judicial process upon the undersigned (or any of them) or any guarantor or any of the Collateral, including without limit, any accounts of the undersigned (or any of them) or any guarantor with the Bank, then the Bank, upon the occurrence of any of these events (each a "Default"), may at its option and without prior notice to the undersigned (or any of them), declare any or all of the Indebtedness to be immediately due and payable (notwithstanding any provisions contained in the evidence thereof to the contrary), sell or liquidate all or any portion of the Collateral, set off against the Indebtedness any amounts owing by the Bank to the undersigned (or any of them), charge interest at the default rate provided in the document evidencing the relevant indebtedness and exercise any one or more of the rights and remedies granted to the Bank by any agreement with the undersigned (or any of them) or given to it under applicable law. In addition, if this Note is secured by a deed of trust or mortgage covering real property, then the trustor or mortgagor shall not mortgage or pledge the mortgaged premises as security for any other indebtedness or obligations. This Note, together with all other indebtedness secured by said deed of trust or mortgage, shall become due and payable immediately, without notice, at the option of the Bank, (a) if said trustor or mortgagor shall mortgage or pledge the mortgaged premises for any other indebtedness or obligations or shall convey, assign or transfer the mortgaged premises by deed, installment sale contact or other instrument, or (b) if the title to the mortgaged premises shall become vested in any other person or party in any manner whatsoever, or (c) if there is any disposition (through one or more transactions) of legal or beneficial title to a controlling interest of said trustor or mortgagor. All payments under this Note shall be in immediately available United States funds, without setoff or counterclaim. If this Note is signed by two or more parties (whether by all as makers or by one or more as an accommodation party or otherwise), the obligations and undertakings under this Note shall be that of all and any two or more jointly and also of each severally. This Note shall bind the undersigned, and the undersigned's respective heirs, personal representatives, successors and assigns. The undersigned waive(s) presentment, demand, protest, notice of dishonor, notice of demand or intent to demand, notice of acceleration or intent to accelerate, and all other notices and agree(s) that no extension or indulgence to the undersigned (or any of them) or release, or substitution or nonenforcement of any security, or release or substitution of any of the undersigned, any guarantor or any other party, whether with or without notice, shall affect the obligations of any of the undersigned. The undersigned waive(s) all defenses or right to discharge available under Section 3-605 of the California Uniform Commercial Code and waive(s) all other suretyship defenses or right to discharge. The undersigned agree(s) that the Bank has the right to sell, assign, or grant participations, or any interest, in any or all of the indebtedness, and that, in connection with this right, but without limiting its ability to make other disclosures to the full extent allowable, the Bank may disclose all documents and information which the Bank now or later has relating to the undersigned or the indebtedness. The undersigned agree(s) that the Bank may provide information relating to this Note or to the undersigned to the Bank's parent, affiliates, subsidiaries and service providers. The undersigned agree(s) to reimburse the holder or owner, of this Note for any and all costs and expenses (including without limit, court costs, legal expenses and reasonable attorney fees, whether inside or outside counsel is used, whether or not suit is instituted and, if suit is instituted, whether at the trial court level, appellate level, in a bankruptcy, probate or administrative proceeding or otherwise) incurred in collecting or attempting to collect this Note or incurred in any other matter or proceeding relating to this Note. The undersigned acknowledge(s) and agree(s) that there are no contrary agreements, oral or written, establishing a term of this Note and agree(s) that the terms and conditions of this Note may not be amended, waived or modified except in a writing signed by an officer of the Bank expressly stating that the writing constitutes an amendment, waiver or modification of the terms of this Note. As used in this Note, the word "undersigned" means, individually and collectively, each maker, accommodation party, endorser and other party signing this Note in a similar capacity. If any provision of this Note is unenforceable in whole or part for any reason, the remaining provisions shall continue to be effective. THIS NOTE IS MADE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. The maximum interest rate shall not exceed the highest applicable usury ceiling. THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS. Spectrum Organic Products, Inc. By: /s/ Robert B. Fowles Its: CFO ------------------------------- ----------------------------------- Robert B. Fowles By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- 5341 Old Redwood Highway Petaluma CA USA 94954 - -------------------------------------------------------------------------------- STREET ADDRESS CITY STATE COUNTRY ZIP CODE - -------------------------------------------------------------------------------- For Bank Use Only CCAR# - -------------------------------------------------------------------------------- Loan Officer Initials Loan Group Name Obligor(s) Name San Francisco Middle Spectrum Organic Products, Inc. MN Market - -------------------------------------------------------------------------------- Loan Officer ID. No. Loan Group No. Obligor # Note #4 Amount 49571 95742 $1,25O,000.00 - -------------------------------------------------------------------------------- Borrower's Authorization - -------------------------------------------------------------------------------- To: Comerica Bank-California ("Bank") Re: Loan from the Bank evidenced by a note/agreement dated as of June 12 2003 in the current amount of One Million Two Hundred Fifty Thousand and no/1OO Dollars ($1,250,000.00) ("Loan") executed by Spectrum Organic Products, Inc. ("Borrower") Borrower hereby authorizes, and directs Bank to: 1. Disburse the proceeds of the Loan as follows: a. Wire Transfer to ___________________________the sum of $______________. b. Deposit to Account No.______________________in the name of____________ ______________________________________________________________________ at Bank the sum of $___________________________. c. Credit to Loan No.___________________at Bank the sum of $_____________ effective as of________________________________. d. Pay to Bank the sum of $________________for payment of the Loan Fee. e. Pay to Bank the sum of $__________________________________________ for reimbursement of its costs and expenses for legal fees, appraisal fees, title fees, flood certification, tax service contract, etc. (Not Applicable for CALREAL product) f. Other_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Spectrum Organic Products, Inc. By: /s/ Robert B. Fowles Its: CFO ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- EX-10.47 6 spectrumexhib1047-093003.txt VARIABLE RATE SINGLE PAYMENT NOTE Exhibit 10.47 VARIABLE RATE-SINGLE PAYMENT NOTE (Advancing-Optional Advances) AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION # $1,000,000.00 June 12, 2003 June 30, 2008 94-3076294 On the Maturity Date, as stated above, for value received, the undersigned promise(s) to pay to the order of Comerica Bank-California ("Bank"), at any office of the Bank in the State of California, One Million and no/100 Dollars (U.S.) (or that portion of it advanced by the Bank and not repaid as later provided) with interest until maturity, whether by acceleration or otherwise, or until Default, as later defined, at a per annum rate equal to the Bank's base rate from time to time In effect plus 0.250% per annum and after that at a default rate equal to the rate of interest otherwise prevailing under this Note plus 3% per annum (but in no event in excess of the Maximum Rate). The Bank's "base rate" is that annual rate of interest so designated by the Bank and which is changed by the Bank from time to time. Interest rate changes will be effective for interest computation purposes as and when the Bank's base rate changes. Subject to the limitations hereinbelow set forth, interest shall be calculated for the actual number of days the principal is outstanding on the basis of a 360-day year if this Note evidences a business or commercial loan or a 365-day year if a consumer loan. Accrued interest on this Note shall be payable on (i) the Maturity Date or (ii) the 31st day of each MONTH commencing July 31, 2003 until the Maturity Date when all amounts outstanding under this Note shall be due and payable In full [check applicable box]. It the frequency of interest payments is not otherwise specified, accrued interest on this Note shall be payable monthly on the first day of each month. If any payment of principal or interest under this Note shall be payable on a day other than a day on which the Bank is open for business, this payment shall be extended to the next succeeding business day and interest shall be payable at the rate specified in this Note during this extension. A late payment charge equal to a reasonable amount not to exceed 5% of each late payment may be charged on any payment not received by the Bank within 10 calendar days after the payment due date, but acceptance of payment of this charge shall not waive any Default under this Note. Principal amounts advanced under this Note and repaid may not be reborrowed. The term "Maximum Rate," as used herein, shall mean at the particular time in question the maximum nonusurious rate of interest which, under applicable law, may then be charged on this Note. If such maximum rate of interest changes after the date hereof, the Maximum Rate shall be automatically increased or decreased, as the case may be, without notice to the undersigned from time to time as of the effective date of each change in such maximum rate. The principal amount payable under this Note shall be the sum of all advances made by the Bank to or at the request of the undersigned, less principal payments actually received In cash by the Bank, The books and records of the Bank shall be the best evidence Of the principal amount and the unpaid Interest amount owing at any time under this Note and shall be conclusive absent manifest error. No Interest shall accrue under this Note until the date of the first advance made by the Bank; after that interest on all advances shall accrue and be computed on the principal balance outstanding from time to time under this Note until the same is paid in full. AT NO TIME SHALL THE BANK BE UNDER ANY OBLIGATION TO MAKE ANY ADVANCES TO THE UNDERSIGNED PURSUANT TO THIS NOTE (NOTWITHSTANDING ANYTHING EXPRESSED OR IMPLIED IN THIS NOTE OR ELSEWHERE TO THE CONTRARY, INCLUDING WITHOUT LIMIT IF THE BANK SUPPLIES THE UNDERSIGNED WITH A BORROWING FORMULA), AND THE BANK, AT ANY TIME AND FROM TIME TO TIME, WITHOUT NOTICE, AND IN ITS SOLE DISCRETION, MAY REFUSE TO MAKE ADVANCES TO THE UNDERSIGNED WITHOUT INCURRING ANY LIABILITY DUE TO THIS REFUSAL AND WITHOUT AFFECTING THE UNDERSIGNED'S LIABILITY UNDER THIS NOTE FOR ANY AND ALL AMOUNTS ADVANCED. The preceding sentence shall not apply to this Note if this Note is secured by a deed of trust or mortgage covering real property This Note and any other indebtedness and liabilities of any kind of the undersigned (or any of them) to the Bank, and any and all modifications, renewals or extensions of it, whether joint or several, contingent or absolute, now existing or later arising, and however evidenced and whether incurred voluntarily or involuntarily, known or unknown, or originally payable to the Bank or to a third party and subsequently acquired by flank including, without limitation, any late charges, loan fees or charges, overdraft indebtedness, costs incurred by Bank in establishing, determining, continuing or defending the validity or priority of any securIty interest, pledge or other lien or in pursuing any of its rights or remedies under any loan document (or Otherwise) or in connection with any proceeding involving the Bank as a result of any financial accommodation to the undersigned (or any of them), and reasonable costs and expenses of attorneys and paralegals, whether inside or outside counsel is used, and whether any suitor other action is instituted, and to court costs if suitor action is instituted, and whether any such fees, costs or expenses are incurred at the trial court level or on appeal, in bankruptcy, in administrative proceedings, in probate proceedIngs or otherwise (collectively "Indebtedness") are secured by and the Bank is granted a security interest in and lien upon all items deposited in any account of any of the undersigned with the flank and by all proceeds of these items (cash or otherwise), all account balances of any of the undersigned from time to time with the Bank, by all property of any of the undersigned from time to time in the possession of the Bank and by any other collateral, rights and properties described in each and every deed of trust, mortgage, security agreement, pledge, assignment and other security or collateral agreement which has been or will at any time(s) later be, executed by any (or all) of the undersigned to or for the benefit of the Bank (collectively "Collateral"). Notwithstanding the above, (i) to the extent that any portion of the Indebtedness is a consumer loan, that portion shall not be secured by any deed of trust or mortgage on or other security interest in any of the undersigned's principal dwelling or in any of the undersigned's real property which is not a purchase money security interest as to that portion, unless expressly provided to the contrary in another place, or (ii) if the undersigned (or any of them) has (have) given or give(s) Bank a deed of trust or mortgage covering real property, that deed of trust or mortgage shall not secure this Note or any other indebtedness of the undersigned (or any of them), unless expressly provided to the contrary in another place. If the undersigned (or any of them) or any guarantor under a guaranty of all or part of the Indebtedness ("guarantor") (i) fail(s) to pay this Note or any of the indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to pay any Indebtedness owing on a demand basis upon demand: or (ii) fail(s) to comply with any of the terms or provisions of any agreement between the undersigned (or any of them) or any guarantor and the Bank; or (iii) become(s) insolvent or the subject of a voluntary or involuntary proceeding in bankruptcy, era reorganization, arrangement or creditor composition proceeding, (if a business entity) cease(s) doing business as a going concern, (if a natural person) die(s) or become(s) incompetent, (if a partnership) dissolve(s) or any general partner of it dies, becomes incompetent or becomes the subject of a bankruptcy proceeding or (if a corporation or a limited liability company) is the subject of a dissolution, merger or consolidation; or (a) if any warranty or representation made by any of the undersigned or any guarantor in connection with this Note or any of the Indebtedness shall be discovered to be untrue or incomplete; or (b) if there is any termination, notice of termination, or breach of any guaranty, pledge, collateral assignment or subordination agreement relating to all or any part of the indebtedness; or (c) if there is any failure by any of the undersigned or any guarantor to pay when due any of its indebtedness (other than to the Bank) or in the observance or performance of any term, covenant or condition in any document evidencing, securing or relating to such indebtedness; or (d) if the Bank deems itself insecure believing that the prospect of payment of this Note or any of the Indebtedness is impaired or shall fear deterioration, removal or waste of any of the Collateral; or (e) if there is filed or issued a levy or writ of attachment or garnishment or other like judicial process upon the undersigned (or any of them) or any guarantor or any of the Collateral, including, without limit, any accounts of the undersigned (or any of them) or any guarantor with the Bank, then the Bank, upon the occurrence of any of these events (each a "Default"), may at its option and without prior notice to the undersigned (or any of them), declare any or all of the indebtedness to be immediately due and payable (notwithstanding any provisions contained in the evidence of it to the contrary), cease advancing money or extending credit to or for the benefit of the undersigned under this Note or any other agreement between the undersigned (or any of them) and Bank, terminate this Note as to any future liability or obligation of Bank, but without affecting Bank's rights and security interests in any Collateral and the indebtedness of the undersigned (or any of them) to Bank, sell or liquidate all or any portion of the Collateral, set off against the Indebtedness any amounts owing by the Bank to the undersigned (or any of them), charge interest at the default rate provided in the document evidencing the relevant Indebtedness and exercise any one or more of the rights and remedies granted to the Bank by an agreement with the undersigned (or any of them) or given to it under applicable law. In addition, if this Note is secured by a deed of trust or mortgage covering real property, then the trustor or mortgagor shall not mortgage or pledge the mortgaged premises as security for any other Indebtedness or obligations. This Note, together with all other indebtedness secured by said deed of trust or mortgage, shall become due and payable immediately, without notice, at the option of the Bank, (a) if said trustor or mortgagor shall mortgage or pledge the mortgaged premises for any other Indebtedness or obligations or shall convey, assign or transfer the mortgaged premises by deed, installment sale contract or other instrument, or (b) if the title to the mortgaged premises shall become vested in any other person or party in any manner whatsoever, or (c) if there is any disposition (through one or more transactions) of legal or beneficial title to a controlling interest of said trustor or mortgagor. All payments under this Note shall be in immediately available United States funds, without setoff or counterclaim. If this Note is signed by two or more parties (whether by all as makers or by one or more as an accommodation party or otherwise), the obligations and undertakings under this Note shall be that of all and any two or more jointly and also of each severally. This Note shall bind the undersigned, and the undersigned's respective heirs, personal representatives, successors and assigns. The undersigned waive(s) presentment, demand, protest, notice of dishonor, notice of demand or intent to demand, notice of acceleration or intent to accelerate, and all other notices, and agree(s) that no extension or indulgence to the undersIgned (or any of them) or release, substitution or nonenforcenlent of any security, or release or substitution of any of the undersigned, any guarantor or any other party, whether with or without notice, shall affect the obligations of any of the undersigned. The undersigned waive(s) all defenses or right to discharge available under Section 3-605 of the California Uniform Commercial Code and waive(s) all other suretyship defenses or right to discharge. The undersigned agree(s) that the Bank has the right to sell, assign, or grant participations or any interest in, any or all of the Indebtedness, and that, in connection with this right, but without limiting its ability to make other disclosures to the full extent allowable, the Bank may disclose all documents and information which the Bank now or later has relating to the undersigned or the Indebtedness. The undersigned agree(s) that the Bank may provide information relating to this Note, the Indebtedness, or the undersigned to the Banks parent, affiliates, subsidiaries and service providers. The undersigned agree(s) to reimburse the holder or owner of this Note upon demand for any and all costs and expenses (including, without limit, court costs, legal expenses and reasonable attorney fees, whether inside or outside counsel is used, and whether or not suit is instituted and, if suit is Instituted, whether at the trial court level, appellate level, in a bankruptcy, probate or administrative proceeding or otherwise) incurred in collecting or attempting to collect this Note or incurred in any other matter or proceeding relating to this Note. The undersigned acknowledge(s) and agree(s) that there are no contrary agreements, oral or written, establishing a term of this Note and agree(s) that the terms and conditions of this Note may not be amended, waived or modified except in a writing signed by an officer of the Bank expressly stating that the writing constitutes an amendment, waiver or modification of the terms of this Note. As used in this Note, the word "undersigned" means, individually and collectively, each maker, accommodation party, indorser and ether party signing this Note in a similar capacity. If any provision of this Note is unenforceable in whole or part for any reason, the remaining provisions shall continue to be effective. THIS NOTE IS MACE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. The maximum interest rate shall not exceed the highest applicable usery ceiling THE UNDERSIGNED, BY ACCEPTANCE OF THIS NOTE, AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS. See Addendum "A" attached hereto and made a part of this Note. INITIAL HERE RBF --------------- RBF Spectrum Organic Products, Inc. By: /s/ Robert B. Fowles Its: CFO ------------------------------- ----------------------------------- Robert B. Fowles By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- 5341 Old Redwood Highway Petaluma CA USA 94954 - -------------------------------------------------------------------------------- STREET ADDRESS CITY STATE COUNTRY ZIP CODE - -------------------------------------------------------------------------------- For Bank Use Only CCAR# - -------------------------------------------------------------------------------- Loan Officer Initials Loan Group Name Obligor(s) Name San Francisco Middle Spectrum Organic Products, Inc. MN Market - -------------------------------------------------------------------------------- Loan Officer ID. No. Loan Group No. Obligor # Note #4 Amount 49571 95742 $1,0O0,000.00 - -------------------------------------------------------------------------------- ADDENDUM "A" TO VARIABLE RATE-SINGLE PAYMENT NOTE (ADVANCING-OPTIONAL ADVANCES) This Addendum "A" to Variable Rate-Single Payment Note (Advancing-Optional Advances) dated June 12, 2003 (this "Addendum") is attached to, and by this reference shall be a part of and is hereby incorporated by this reference into that certain Variable Rate-Single Payment Note (Advancing-Optional Advances) dated June 12, 2003 (the "Note") executed by Spectrum Organic Products, Inc., a California corporation ("Borrower") in favor of Comerica Bank-California, a California banking corporation ("Bank"). All initially capitalized terms used but not defined in this Addendum shall have the meanings assigned to such terms in the Note. Borrower hereby agrees that the following terms and conditions shall be incorporated into the Note: Subject to the terms and conditions set forth in the Note, advances under the Note shall be available from the date hereof through June 30, 2004 (the "Draw Period"). During the Draw Period, interest shall be payable as set forth in the Note. Upon expiration of the Draw Period, all amounts outstanding under the Note shall be payable on the last day of each month, beginning on July 31, 2004, on the basis of an amortization of forty eight equal payments of principal plus accrued interest thereon. All unpaid principal and accrued but unpaid interest shall in any event be due and payable on or before the Maturity Date set forth in the Note. The principal amount of each advance shall not exceed an amount equal to ninety percent (90%) of the invoice amount of any Equipment as such term is defined in the Equipment Rider to the Loan and Security Agreement executed by the undersigned on June 12, 2003 approved by Bank from time to time. Borrower shall provide Bank with copies of canceled checks, invoices and any other documentation satisfactory to Bank to evidence said purchase and to evidence Bank's first priority interest in said Equipment. SPECTURM ORGANIC PRODUCTS, INC., COMERICA BANK-CALIFORNIA, a California corporation a California banking corporation By: /s/ Robert B. Fowles By: /s/ Misako Noda ------------------------------- -------------------------------- Robert B. Fowles Misako Noda Title: CFO Title: Vice President ---------------------------- ----------------------------- By: ------------------------------- Title: ---------------------------- Borrower's Authorization - -------------------------------------------------------------------------------- To: Comerica Bank-California ("Bank") Re: Loan from the Bank evidenced by a note/agreement dated as of June 12 2003 in the current amount of One Million and no/1OO Dollars ($1,000,000.00) ("Loan") executed by Spectrum Organic Products, Inc. ("Borrower") Borrower hereby authorizes, and directs Bank to: 1. Disburse the proceeds of the Loan as follows: a. Wire Transfer to ___________________________the sum of $______________. b. Deposit to Account No.______________________in the name of____________ ______________________________________________________________________ at Bank the sum of $___________________________. c. Credit to Loan No.___________________at Bank the sum of $_____________ effective as of________________________________. d. Pay to Bank the sum of $________________for payment of the Loan Fee. e. Pay to Bank the sum of $__________________________________________ for reimbursement of its costs and expenses for legal fees, appraisal fees, title fees, flood certification, tax service contract, etc. (Not Applicable for CALREAL product) f. Other Advances to checking account from time to time_________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Spectrum Organic Products, Inc. By: /s/ Robert B. Fowles Its: CFO ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- EX-10.48 7 spectrumexhib1048-093003.txt SUBORDINATION AGREEMENT - PHILLIPS Exhibit 10.48 Subordination Agreement (All Indebtedness and Liens) - -------------------------------------------------------------------------------- Spectrum Organic Products, Inc. ___________ ("Borrower") is indebted to the undersigned ("Creditor") in the principal sum of Six Hundred Nine Thousand Three Hundred Five and No/l00_______ Dollars ($609,375.00) evidenced by a promissory note which indebtedness is secured by a life insurance policy on Jethren Phillips, and Creditor is or may become financially interested in Borrower and desires to aid Borrower in obtaining or having continued financial accommodations, whether by way of loan, commitment to loan, discounting of instruments, extensions of credit or the obtaining of any other financial aid from Comerica Bank-California ("Bank"). In order to induce the Bank to extend or to continue to extend financial accommodations to Borrower from time to time, whether by way of a loan, commitment to loan, discounting of instruments, extension of credit or otherwise and in consideration of any of these financial accommodations, Creditor agrees as follows: 1. Any and all obligations and liabilities of Borrower to Creditor, including, without limit, principal and interest payments, whether direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or to become due, now existing or later arising and whatever the amount and however evidenced (the "Subordinated Indebtedness"), are subordinated in right of payment to any and all obligations and liabilities of Borrower to the Bank, including, without limit, principal and interest payments, whether direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or to become due, now existing or later arising and however evidenced, together with all other sums due thereon and all costs of collecting the same (including, without limit, reasonable attorneys' fees) for which Borrower is liable (the "Senior Indebtedness"). 2 Creditor will not ask for, demand, sue for, take or receive (by way of voluntary payment, acceleration, set-off or counterclaim, foreclosure or other realization on security, dividends in bankruptcy or otherwise), or offer to make any discharge or release of, any of the Subordinated Indebtedness, and Creditor waives any such rights with respect to the Subordinated Indebtedness nor shall Creditor exercise any rights of subrogation or other similar rights with respect to the Senior Indebtedness. 3. Creditor will not exercise any of Creditor's rights in any collateral now or later securing the Subordinated Indebtedness. All rights of Creditor in any collateral now or later securing the Subordinated Indebtedness are subordinated to all rights of the Bank now or later existing in any of the same collateral securing the Senior Indebtedness. 4. Should any payment, distribution or security or proceeds from these be received by Creditor upon or with respect to the Subordinated Indebtedness prior to the satisfaction in full of the Senior Indebtedness, Creditor shall immediately deliver same to the Bank in the form received (except for endorsement or assignment by Creditor where required by the Bank), for application on the Senior Indebtedness (whether or not then due and in such order of maturity as Bank elects) and, until so delivered, the same shall be held in trust by Creditor as the property of the Bank. 5. Creditor represents and warrants that it has not made or permitted to be made and shall not make or permit any assignment, transfer, pledge, or disposition for collateral purposes or otherwise, of all or any part of the Subordinated Indebtedness or any collateral or other security for the Subordinated Indebtedness so long as this Agreement remains in effect. Creditor shall, on the date of this Agreement or promptly upon receipt if not yet delivered to Creditor, deliver to the Bank, endorsed if required by the Bank, all notes and other instruments evidencing any Subordinated Indebtedness. Creditor hereby authorized Bank to prepare and file all Financing statements deemed necessary by the Bank to perfect the Bank's rights and interests under this Agreement. The Bank is to have all the rights and remedies of a secured creditor under the California Uniform Commercial Code, as amended from time to time, with respect to such interests. Creditor further makes, constitutes and appoints Bank its true and lawful attorney-in-fact with full power of substitution to take any action in furtherance of this Agreement, including, but not limited to, the signing of financing statements, endorsing of instruments, and the execution and delivery of all documents and agreements necessary to obtain or accomplish any protection for or collection or disposition of any pad of any collateral. Such appointment shall be deemed irrevocable and coupled with an interest. 6. This Agreement constitutes a continuing agreement of subordination, even though at times Borrower is not indebted to the Bank. The Bank may continue, in reliance on this Agreement, without notice to Creditor, to lend monies, extend credit, modify, renew or make other financial accommodations, to or for the account of Borrower until the fifth (5th) day ("effective date") following written acknowledgment by an officer of the Bank that the Bank received written notice of revocation of this Agreement from Creditor. Any such notice of revocation shall not be effective as to any Senior Indebtedness existing at the effective date of revocation or any Senior Indebtedness created after that pursuant to any commitment or agreement of the Bank or pursuant to any Borrower loan (whether advances or readvances by the Bank after the effective date of revocation are optional or obligatory) existing at the effective date of revocation or any modifications or renewals of any Senior Indebtedness, whether in whole or in part. Possession by the Bank of any note or other evidence of indebtedness made, endorsed or guaranteed by Borrower shall be conclusive evidence (but not the only means of establishing) that Borrower is indebted to the Bank. 7. Creditor hereby releases Bank, any person or entity that has obtained any interest from Bank in this Agreement and the Senior Indebtedness, and each of Bank's and any such person or entity's officers, directors and employees from any known or unknown claims which Creditor now has against Bank or any such person or entity of any nature, including any claims that Creditor, its successors, counsel, and advisors may in the future discover they would have now had if they had known facts not now known to them, whether founded in contract, in tort or pursuant to any other theory of liability, including but not limited to any claims arising out of or related to this Agreement, the Senior Indebtedness or arising out of any modification or termination of the Senior Indebtedness or any refusal by the Bank to extend additional credit to Borrower relating to the revocation of this Agreement. Creditor waives the provisions of California Civil Code section 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. Creditor hereby further covenants and agrees that the provisions, waivers and releases set forth in this section are binding upon Creditor and Creditor's trustees, agents, beneficiaries, assigns and successors in interest. The provisions, waivers and releases of this section shall inure to the benefit of Bank and its agents, employees, officers, directors, assigns and successors in interest Creditor warrants and represents that Creditor is the sole and lawful owner of all right, title and interest in and to all of the claims released hereby and Creditor has not heretofore voluntarily, by operation of law or otherwise, assigned or transferred or purported to assign or transfer to any person any such claim or any portion thereof. Creditor shall indemnify and hold harmless Bank from and against any claim, demand, damage, debt, liability (including payment of attorneys' fees and costs actually incurred whether or not litigation is commenced) based on or arising out of any assignment or transfer. The provisions of this section shall survive (i) payment in full of the obligations owing from Borrower to Bank under the Senior indebtedness, (ii) full performance of all the terms of this Agreement, (iii) Banks actions to exercise any remedy available under this Agreement, the Senior Indebtedness or otherwise, and/or (iv) the payment in full of the obligations of Borrower to Creditor under the Subordinated Indebtedness. 8. If. at any time or times Bank pays or incurs legal fees and costs or any other claims, damages, costs or expenses in connection with any litigation, contest, dispute, suit, proceeding or action instituted by Creditor or subsequently joined by Creditor in any way relating to this Agreement or any of the subject matter hereof, then Creditor shall reimburse Bank for all such legal expenses (including all reasonable attorneys' fees) together with all other claims, damages, costs and expenses of Bank. which reimbursements shall be payable to Bank by Creditor without demand after notice, and Creditor shall promptly pay all such amounts payable to Bank under this section. 9. Creditor delivers this Agreement based solely on Creditor's independent investigation of (or decision not to investigate) the financial condition of Borrower and is not relying on any information furnished by the Bank. Creditor assumes full responsibility for obtaining any further information concerning the Borrowers financial condition, the status of the Senior Indebtedness or any other matter which Creditor may deem necessary or appropriate now or later, Creditor waives any duty on the part of the Bank, and agrees that Creditor is not relying upon nor expecting the Bank to disclose to Creditor any fact now or later known by the Bank, whether relating to the operations or condition of Borrower, the existence, liabilities or financial condition of any guarantor of the Senior Indebtedness, the occurrence of any default with respect to the Senior Indebtedness, or otherwise, notwithstanding any effect such fact may have upon Creditors risk or Creditor's rights against Borrower. Creditor knowingly accepts the full range of risk encompassed in this Agreement, which risk includes, without limit, the possibility that Borrower may incur Senior Indebtedness to the Bank after the financial condition of Borrower, or its ability to pay Borrower's debts as they mature, has deteriorated. Creditor acknowledges and agrees that the Bank's rights under this Agreement are not conditioned upon pursuit by the Bank of any remedy the Bank may have against Borrower or any other person or any other security. The absence of Borrower's signature at the end of this Agreement shall in no way impair or affect the validity of this Agreement. 10. The Bank, in its sole discretion, without notice to Creditor, may release, exchange, enforce and otherwise deal with any security now or later held by the Bank for payment of the Senior Indebtedness or release any party now or later liable for payment of the Senior Indebtedness without affecting in any manner the Bank's rights under this Agreement. Creditor acknowledges and agrees that the Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty or personalty. to secure payment of the Senior Indebtedness, and Creditor is not relying upon assets in which the Bank has or may have a lien or security interest for payment of the Senior Indebtedness. 11 Notwithstanding any prior revocation, termination, surrender, or discharge of this Agreement in whole or in part, the effectiveness of this Agreement shall automatically continue or be reinstated in the event that any payment received or credit given by the Bank in respect of the Senior Indebtedness is returned, disgorged. or rescinded under any applicable state or federal law, including, without limitation, laws pertaining to bankruptcy or insolvency, in which case this Agreement, shall be enforceable against the Creditor as if the returned, disgorged, or rescinded payment or credit had not been received or given by the Bank, and whether or not the Bank relied upon this payment or credit or changed its position as a consequence of it. In the event of continuation or reinstatement of this Agreement, the Creditor agrees upon demand by the Bank to execute and deliver to the Bank those documents which the Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of the Creditor to do so shall not affect in any way the reinstatement or continuation. 12. Creditor waives any right to require the Bank to: (a) proceed against any person or property; (b) give notice of the terms, time and place of any public or private sale of personal property security held from Borrower or any other person, or otherwise comply with the provisions of Section 9-504 of the California or other applicable Uniform Commercial Code; or (c) pursue any other remedy in the Bank's power. Creditor waives notice of acceptance of this Agreement and presentment, demand. protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Senior Indebtedness, any and all other notices to which the undersigned might otherwise be entitled, and diligence in collecting any Senior Indebtedness, and agrees that the Bank may, once or any number of times, modify the terms of any Senior Indebtedness, compromise. extend, increase, accelerate, renew or forbear to enforce payment of any or all Senior Indebtedness, or permit the Borrower to incur additional Senior Indebtedness, all without notice to Creditor and without affecting in any manner the unconditional obligations of Creditor under this Agreement 13. Creditor acknowledges that the Bank has the right to sell, assign, transfer, negotiate or grant participations or any interest in, any or all of the Senior Indebtedness and any related obligations, including without limit this Agreement. In connection with the above, but without limiting its ability to make other disclosures to the full extent allowable, the Bank may disclose all documents and information which the Bank now or later has or acquires relating to Creditor and this Agreement, however obtained. Creditor further agrees that the Bank may disclose such documents and information to the Borrower. Creditor further agrees that the Bank may provide information relating to this Agreement or relating to the Creditor to the Bank's parent, affiliates, subsidiaries and service providers. 14. No waiver or modification of any of its rights under this Agreement shall be effective unless the waiver or modification shall be in writing and signed by an authorized officer on behalf of the Bank. Each waiver or modification shall be a waiver or modification only with respect to the specific matter to which the waiver or modification relates and shall in no way impair the rights of the Bank or the obligations of Creditor to the Bank in any other respect. 15. This Agreement shall bind and be for the benefit of Creditor and the Bank and their respective successors and assigns, and shall be construed according to the laws of the State of California without regard to conflict of laws principles. If this Agreement is executed by two or more persons. it shall bind each of them individually as well as jointly. 16. The term "Borrower", as used in this Agreement, includes any person, corporation. partnership or other entity which succeeds to the interests or business of Borrower named above, and the terms "Senior Indebtedness" and "Subordinated Indebtedness" include indebtedness of any successor Borrower to the Bank and Creditor, 17. Creditor agrees to reimburse the Bank upon demand for any and all costs and expenses (including, without limit, court costs, legal fees, and reasonable attorneys' fees whether inside or outside counsel is used, whether or not suit is instituted and, if instituted, whether at the trial or appellate level, in a bankruptcy. probate or administrative proceeding, or otherwise) incurred in enforcing any of the duties and obligations of Creditor under this Agreement. 18. Creditor waives any defense against the enforceability of this Agreement based upon or arising by reason of the application by Borrower of the proceeds of any Indebtedness for purposes other than he purposes represented by Borrower to the Bank or intended or understood by the Bank or Creditor. Creditor waives all rights to require the Bank to marshall the Collateral or any other property the Bank may at any time have as security for the Indebtedness and waives all right to require the Bank to first proceed against any guarantor or other person before proceeding against the Collateral. 19. The relative priorities of the Bank and Creditor in the Collateral as set forth in this Agreement control irrespective of the time, method or order of attachment or perfection of the liens and security interests acquired by the parties in the Collateral and irrespective of the priorities as would otherwise be determined by reference to the Uniform Commercial Code or other applicable laws. Creditor shall not contest the validity, priority or perfection of the Bank's security interest in the Collateral (regardless of whether the Bank's security interest in the Collateral is valid or perfected). The priorities of any liens or security interests of the parties in any property of the Borrower other than the Collateral are not affected by this Agreement and shall be determined by reference to applicable law. The Bank's rights under this Agreement are in addition to, and not in substitution of, its rights under any other subordination agreement with Creditor. 20. Special Provisions: (None if left blank.) Anything contained in this Agreement to the contrary notwithstanding, so long as Bank has received all payments required under the Senior Indebtedness and so long as no event of default has occurred or is continuing thereunder, then Borrower may pay to Creditor, and Creditor may accept and retain from Borrower, as and when each becomes due and payable, regularly scheduled payments of principal and interest on the Subordinated Indebtedness according to and in the respective amounts set forth in any documents, instruments or agreements entered into evidencing the Subordinated Indebtedness, provided, that such payments to Creditor shall not cause or result in any default or violation by Borrower of any affirmative or negative covenant, term, condition, or other provision of the Senior Indebtedness. In no event, however, shall Creditor at any time accept or retain any such payment more than 30 days prior to the due date therefor, nor otherwise accept or retain any payments on or against the Subordinated Indebtedness except as expressly provided in the documents, instruments or agreements entered into evidencing the Subordinated Indebtedness. THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT. IN WITNESS WHEREOF, Creditor has caused this Agreement to be executed as of June 12, 2003. Debora Bainbridqe Phillips Trust CREDITOR'S ADDRESS - --------------------------------- (CREDITOR) By: Debora Bainbridge Phillips 3617 Williams Road ------------------------------ ---------------------------------- Signature of STREET ADDRESS Its: Trustee Santa Rosa CA 95404 ---------------------------- ---------------------------------- TITLE (if applicable) CITY STATE ZIP By: /s/ Debora Bainbridge Phillips --------------------------------- Signature of Its: -------------------------------- TITLE (if applicable) BORROWER'S ACKNOWLEDGEMENT Spectrum Organic Products, Inc. ______("Borrower"), accepts notice of subordination created by this Agreement and agrees that it will take no action inconsistent with this Agreement and that, except with the prior written approval of Bank, no payment or distribution shall be made by Borrower on or with respect to the Subordinated Indebtedness, so long as this Agreement remains in effect. Borrower agrees that the Bank may, at its option, without notice and without limiting Banks other rights, upon any breach by Creditor of, or purported termination by the Creditor of, this Agreement, declare all Senior Indebtedness to be immediately due and payable and/or terminate any commitments of Bank to Borrower. Spectrum Organic Products, Inc. By: /s/ Robert B. Fowles Its: CFO ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- BORROWER'S ADDRESS 5341 Old Redwood Highway Petaluma CA USA 94954 - -------------------------------------------------------------------------------- STREET ADDRESS CITY STATE COUNTRY ZIP CODE DATED: June 12, 2003 --------------------------------------- EX-10.49 8 spectrumexhib1049-061203.txt SUBORDINATION AGREEMENT - REEDY Exhibit 10-49 Subordination Agreement (All Indebtedness and Liens) - -------------------------------------------------------------------------------- Spectrum Organic Products, Inc.__________("Borrower") is indebted to the undersigned ("Creditor") in the principal sum of Two Hundred Sixty Five Thousand and no/100 Dollars $265,000.00 evidenced by [ ] an open account [X] a promissory note [ ]other (describe) ___________________________ which indebtedness is [X] unsecured [ ]secured by _________________________________________ and Creditor is or may become financially interested in Borrower and desires to aid Borrower in obtaining or having continued financial accommodations, whether by way of loan, commitment to loan, discounting of instruments, extensions of credit or the obtaining of any other financial aid from Comerica Bank-California ("Bank"). In order to induce the Bank to extend or to continue to extend financial accommodations to Borrower from time to time, whether by way of a loan, commitment to loan, discounting of instruments, extension of credit or otherwi.se and in consideration of any of these financial accommodations, Creditor agrees as follows: 1. Any and all obligations and liabilities of Borrower to Creditor, including, without limit, principal and interest payments, whether direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or to become due, now existing or later arising and whatever the amount and however evidenced (the "Subordinated Indebtedness"), are subordinated in right of payment to any and all obligations and liabilities of Borrower to the Bank, including, without limit, principal and interest payments, whether direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or to become due, now existing or later arising and however evidenced, together with all other sums due thereon and all costs of collecting the same (including, without limit, reasonable attorney fees) for which Borrower is liable (the "Senior Indebtedness"). 2. Creditor will not ask for, demand, sue for, take or receive (by way of voluntary payment, acceleration, set-off or counterclaim, foreclosure or other realization on security, dividends in bankruptcy or otherwise), or offer to make any discharge or release of, any of the Subordinated Indebtedness, and Creditor waives any such rights with respect to the Subordinated Indebtedness nor shall Creditor exercise any rights of subrogation or other similar rights with respect to the Senior Indebtedness. 3. Creditor will not exercise any of Creditor's rights in any collateral now or later securing the Subordinated Indebtedness. All rights of Creditor in any collateral now or later securing the Subordinated Indebtedness are subordinated to all rights of the Bank now or later existing in any of the same collateral securing the Senior Indebtedness. 4. Creditor authorizes and empowers the Bank to demand, enforce payment by legal proceedings, receive and give acquittances for the Subordinated Indebtedness and to exercise all rights of Creditor in any security (other than a deed of trust, mortgage or security interest covering real property or a principal dwelling) now or later held for the Subordinated Indebtedness. As collateral for the Senior Indebtedness, Creditor hereby pledges, assigns and grants to Bank a security interest in the Subordinated Indebtedness, any collateral or other security (other than a deed of trust, mortgage or security interest covering real property or a principal dwelling) for the Subordinated Indebtedness, and all claims or demands of Creditor in connection therewith, with full right on the part of the Bank in its own name or in the name of Creditor, to collect and enforce these claims or demands, by suit, proof of debt in bankruptcy, or in any other proceeding involving dissolution, insolvency, liquidation or an adjustment of the indebtedness of Borrower. The Bank has no obligation to the Creditor to take any steps with regard to these claims or demands, the Subordinated Indebtedness, or any collateral or other security for the Subordinated Indebtedness. 5. Should any payment, distribution or security or proceeds from these be received by Creditor upon or with respect to the Subordinated Indebtedness prior to the satisfaction in full of the Senior Indebtedness, Creditor shall immediately deliver same to the Bank in the form received (except for endorsement or assignment by Creditor where required by the Bank), for application on the Senior Indebtedness (whether or not then due and in such order of maturity as Bank elects) and, until so delivered, the same shall be held in trust by Creditor as the property of the Bank. 6. Creditor represents and warrants that it has not made or permitted to be made and shall not make or permit any assignment, transfer, pledge, or disposition for collateral purposes or otherwise, of all or any part of the Subordinated Indebtedness or any collateral or other security for the Subordinated Indebtedness so long as this Agreement remains in effect. Creditor shall, on the date of this Agreement or promptly upon receipt it not yet delivered to Creditor, deliver to the Bank, endorsed if required by the Bank, all notes and other instruments evidencing any Subordinated Indebtedness. Creditor agrees to execute all financing statements deemed necessary by the Bank to perfect the Bank's rights and interests under this Agreement, The Bank is to have all the rights and remedies of a secured creditor under the California______ Uniform Commercial Code, as, amended from time to time, with respect to such interests, Creditor further makes, constitutes and appoints Bank its true and lawful attorney-in-fact with full power of substitution to take any action in furtherance of this Agreement, including, but not limited to, the signing of financing statements, endorsing of instruments, and the execution and delivery .of all documents and agreements necessary to obtain or accomplish any protection for or collection or disposition of any part of any collateral. Such appointment shall be deemed irrevocable and coupled with an interest. 7. This Agreement constitutes a continuing agreement of subordination, even though at times Borrower is not indebted to the Bank, The Bank may continue, in reliance on this Agreement, without notice to Creditor, to lend monies, extend credit, modify, renew or make other financial accommodations, to or for the account of Borrower until the fifth (5th) day ("effective date") following written acknowledgment by an officer of the Bank that the Bank received written notice of revocation of this Agreement from Creditor. Any such notice of revocation shall not be effective as to any Senior Indebtedness existing at the effective date of revocation or any Senior Indebtedness created after that pursuant to any commitment or agreement of the Bank or pursuant to any Borrower loan (whether advances or readvances by the Bank after the effective date of revocation are optional or obligatory) existing at the effective date of revocation or any modifications or renewals of any Senior Indebtedness, whether in whole or in part. Possession by the Bank of any note or other evidence of indebtedness made, endorsed or guaranteed by Borrower shall be conclusive evidence (but not the only means of establishing) that Borrower is indebted to the Bank. 8. Creditor shall indemnify the Bank against all claims, damages, costs, and expenses, including, without limit, reasonable attorneys' fees, incurred by the Bank in connection with any suit, claim or action against the Bank arising out of any modification or termination of a Borrower loan or any refusal by the Bank to extend additional credit relating to the revocation Of this Agreement. 9. Creditor delivers this Agreement based solely on Creditors independent investigation of (or decision not to investigate) the financial condition of Borrower and is not relying on any information furnished by the Bank. Creditor assumes full responsibility for obtaining any further information concerning the Borrower's financial condition, the status of the Senior Indebtedness or any other matter which Creditor may deem necessary or appropriate now or later. Creditor waives any duty on the part of the Bank, and agrees that Creditor is not relying upon nor expecting the Bank to disclose to Creditor any fact now or later known by the Bank, whether relating to the operations or condition of Borrower, the existence, liabilities or financial condition of any guarantor of the Senior Indebtedness, the occurrence of any default with respect to the Senior Indebtedness, or otherwise, notwithstanding any effect such fact may have upon Creditor's risk or Creditor's rights against Borrower. Creditor knowingly accepts the full range of risk encompassed in this Agreement, which risk includes, without limit, the possibility that Borrower may incur Senior Indebtedness to the Bank after the financial condition of Borrower, or its ability to pay Borrower's debts as they mature, has deteriorated. Creditor acknowledges and agrees that the Banks rights under this Agreement are not conditioned upon pursuit by the Bank of any remedy the Bank may have against Borrower or any other person or any other security. The absence of Borrower's signature at the end of this Agreement shall in no way impair or affect the validity of this Agreement. 10. The Bank, in its sole discretion, without notice to Creditor, may release, exchange, enforce and otherwise deal with any security now or later held by the Bank for payment of the Senior Indebtedness or release any party now or later liable for payment of the Senior Indebtedness without affecting in any manner the Bank's rights under this Agreement. Creditor acknowledges and agrees that the Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty or personalty, to secure payment of the Senior Indebtedness, and Creditor is not relying upon assets in which the Bank has or may have a lien or security interest for payment of the Senior Indebtedness. 11. Notwithstanding any prior revocation, termination, surrender, or discharge of this Agreement in whole or in part, the effectiveness of this Agreement shall automatically continue or be reinstated in the event that any payment received or credit given by the Bank in respect of the Senior Indebtedness is returned, disgorged, or rescinded, under any applicable state or federal law, including, without limitation, laws pertaining to bankruptcy or insolvency, in which case this Agreement, shall be enforceable against the Creditor as if the returned, disgorged, or rescinded payment or credit had not been received or given by the Bank, and whether or not the Bank relied upon this payment or credit or changed its position as a consequence of it. In the event of continuation or reinstatement of this Agreement, the Creditor agrees upon demand by the Bank to execute and deliver to the Bank those documents which the Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of the Creditor to do so shall not affect in any way the reinstatement or continuation. 12. Creditor waives any right to require the Bank to: (a) proceed against any person or property; (b) give notice of the terms, time and place of any public or private sale of personal property security held from Borrower or any other person, or otherwise comply with the provisions of Section 9-504 of the California or other applicable Uniform Commercial Code; or (c) pursue any other remedy in the Banks power. Creditor waives notice of acceptance of this Agreement and presentment demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Senior Indebtedness, any and all other notices to which the undersigned might otherwise be entitled, and diligence in collecting any Senior Indebtedness, and agrees that the Bank may, once or any number of times, modify the terms of any Senior Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Senior Indebtedness, or permit the Borrower to incur additional Senior Indebtedness, all without notice to Creditor and without affecting in any manner the unconditional obligations of Creditor under this Agreement. 13. Creditor acknowledges that the Bank has the right to sell, assign, transfer, negotiate or grant participations or any interest in, any or all of the Senior Indebtedness and any related obligations including without limit this Agreement. In connection with the above, but without limiting its ability to make other disclosures to the full extent allowable, the Bank may disclose all documents and information which the Bank now or later has or acquires relating to Creditor and this Agreement, however obtained. Creditor further agrees that the Bank may disclose such documents and information to the Borrower. Creditor further agrees that the Bank may provide information relating to this Agreement or relating to the Creditor to the Bank's parent, affiliates. subsidiaries and service providers. 14. No waiver or modification of any of its rights under this Agreement shall be effective unless the waiver or modification shall be in writing and signed by an authorized officer on behalf of the Bank. Each waiver or modification shall be a waiver or modification only with respect to the specific matter to which the waiver or modification relates and shall in no way impair the rights of the Bank or the obligations of Creditor to the Bank in any other respect. 15. This Agreement shall bind and be for the benefit of Creditor and the Bank and their respective successors and assigns, and shall be construed according to the laws of the State of California without regard to conflict of laws principles. If this Agreement is executed by two or more persons, it shall bind each of them individually as well as jointly. 16. The term "Borrower", as used in this Agreement, includes any person, corporation, partnership or other entity which succeeds to the interests or business of Borrower named above, and the terms "Senior Indebtedness" and "Subordinated Indebtedness" include indebtedness of any successor Borrower to the Bank and Creditor. 17. Creditor agrees to reimburse the Bank upon demand for any and all costs and expense, (including, without limit, court costs, legal fees, and reasonable attorney fees whether inside or outside counsel is used, whether or not suit is instituted and, if instituted, whether at the trial or appellate level, in a bankruptcy, probate or administrative proceeding. or otherwise) incurred in enforcing any of the duties and obligations of Creditor under this Agreement. 18. Creditor waives any defense against the enforceability of this Agreement based upon or arising by reason of the application by Borrower of the proceeds of any Indebtedness for purposes other than the purposes represented by Borrower to the Bank or intended or understood by the Bank or Creditor. Creditor waives all rights to require the Bank to marshall the Collateral or any other property the Bank may at any time have as security for the Indebtedness and waives all right to require the Bank to first proceed against any guarantor or other person before proceeding against the Collateral. 19. The relative priorities of the Bank and Creditor in the Collateral as set forth in this Agreement control irrespective of the time, method or order of attachment or perfection of the liens and security interests acquired by the parties in the Collateral and irrespective of the priorities as would otherwise be determined by reference to the Uniform Commercial Code or other applicable laws. Creditor shall not contest the validity, priority or perfection of the Bank's security interest in the Collateral (regardless of whether the Bank's security interest in the Collateral is valid or perfected). The priorities of any liens or security interests of the parties in any property of the Borrower other than the Collateral are not affected by this Agreement and shall be determined by reference to applicable law, The Bank's rights under this Agreement arc in addition to, and not in substitution of its rights under any other subordination agreement with Creditor. 20. Special Provisions: [None if left blank.] Anything contained in this Agreement to the contrary notwithstanding, so long as Bank has received all payments required under the Senior Indebtedness and so long as no event of default has occurred or is continuing thereunder, then Borrower may pay to Creditor, and Creditor may accept and retain from Borrower, as and when each becomes due and payable, regularly scheduled payments of principal and interest on the Subordinated Indebtedness according to and in the respective amounts set forth in any documents, instruments or agreements entered into evidencing the Subordinated Indebtedness, provided, that such payments to Creditor shall not cause or result in any default or violation by Borrower of any affirmative or negative covenant, term, condition, or other provision of the Senior Indebtedness. In no event, however, shall Creditor at any time accept or retain any such payment more than 30 days prior to the due date therefor, nor otherwise accept or retain any payment on or against the Subordinated Indebtedness except as expressly provided in the documents, instruments or agreements entered into evidencing the Subordinated Indebtedness. THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT. IN WITNESS WHEREOF, Creditor has caused this Agreement to be executed as of June 12, 2003. /s/ Steven Reedy - -------------------------------- (CREDITOR) CREDITOR'S ADDRESS By: /s/ Steven Reedy 3103 Hillside Drive ----------------------------- ----------------------------------- SIGNATURE OF Steven Reedy STREET ADDRESS ITS: Burlingame, California 94010 ---------------------------- ----------------------------------- TITLE (if applicable) CITY STATE ZIP By: ---------------------------- SIGNATURE OF ITS: ---------------------------- TITLE (if applicable) BORROWER'S ACKNOWLEDGEMENT Spectrum Organic Products, Inc. ______("Borrower"), accepts notice of subordination created by this Agreement and agrees that it will take no action inconsistent with this Agreement and that, except with the prior written approval of Bank, no payment or distribution shall be made by Borrower on or with respect to the Subordinated Indebtedness, so long as this Agreement remains in effect. Borrower agrees that the Bank may, at its option, without notice and without limiting Banks other rights, upon any breach by Creditor of, or purported termination by the Creditor of, this Agreement, declare all Senior Indebtedness to be immediately due and payable and/or terminate any commitments of Bank to Borrower. Spectrum Organic Products, Inc. By: /s/ Robert B. Fowles Its: CFO ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- By: /s/ Its: ------------------------------- ----------------------------------- BORROWER'S ADDRESS 5341 Old Redwood Highway Petaluma CA USA 94954 - -------------------------------------------------------------------------------- STREET ADDRESS CITY STATE COUNTRY ZIP CODE DATED: June 12, 2003 --------------------------------------- EX-31.01 9 spectrumexhib3101-093003.txt CERTIFICATION OF CEO PER SECTION 302 Exhibit 31.01 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Neil G. Blomquist, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Spectrum Organic Products, Inc. (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the Audit Committee of Registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 3, 2003 /s/ Neil G. Blomquist ----------------------------------- Neil G. Blomquist Chief Executive Officer EX-31.02 10 spectrumexhib3102-093003.txt CERTIFICATION OF CFO PER SECTION 302 Exhibit 31.02 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Robert B. Fowles, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Spectrum Organic Products, Inc. (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the Audit Committee of Registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 3, 2003 /s/ Robert B. Fowles ----------------------------------- Robert B. Fowles Chief Financial Officer EX-32.01 11 spectrumexhib3201-093003.txt CERTIFICATION OD CEO PER SECTION 906 Exhibit 32.01 Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Spectrum Organic Products, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Neil G. Blomquist, as Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) the information contained in the Report presents fairly, in all material respects, the financial condition and results of operations of the Company for the quarterly period covered by the Report. /s/ Neil G. Blomquist ----------------------------------- Neil G. Blomquist Chief Executive Officer November 3, 2003 EX-32.02 12 spectrumexhib3202-093003.txt CERTIFICATION OF CFO PER SECTION 906 Exhibit 32.02 Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Spectrum Organic Products, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert B. Fowles, as Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) the information contained in the Report presents fairly, in all material respects, the financial condition and results of operations of the Company for the quarterly period covered by the Report. /s/ Robert B. Fowles ----------------------------------- Robert B. Fowles Chief Financial Officer November 3, 2003 -----END PRIVACY-ENHANCED MESSAGE-----