Spectrum Organic Products Reports Record Sales for 2004

Spectrum Organic Products, Inc., Petaluma, Calif., recently reported its fourth quarter and full year results for 2004. Net sales for the year ended December 31, 2004 were an all-time record of $49,915,400 versus $45,676,500 for the prior year, an increase of 9%.

Sales growth continued to be excellent on the culinary side of the business, with the Spectrum Naturals brand of culinary products up 17% and the Spectrum Ingredients Division industrial culinary sales increasing by 11%. The strong performance on the culinary side of the business was partially offset by an 8% decline in the Company's Spectrum Essentials brand of nutritional supplements, which were temporarily impacted by the launch of the Company's new Fresh & Cold program, which asks that distributors treat Spectrum Essentials like a perishable product line. That change required a one-time reduction of trade inventories to an approximate 30-day supply, but will improve the freshness of product at the retail shelf.

For the fourth quarter net sales increased by 3%, driven by an 18% increase in Spectrum Naturals net sales, which was partially offset by declines in the sales of Spectrum Ingredients industrial culinary oils and Spectrum Essentials nutritional supplements of 10% and 5%, respectively.

Spectrum reported a net loss for 2004 of $832,700 or $0.02 per share versus net income of $2,663,600 ($0.06 per share) for the prior year. The net loss for 2004 was primarily attributable to expenses associated with the manufacturing facility relocation and reconfiguration of $1,565,300. During the fourth quarter of 2004 the Company completed the final phase of a three-year project to close its leased manufacturing facility located in Petaluma where flax oil production formerly occurred. The Company held a grand opening event for its new production facility in Cherokee, Iowa in October.

In connection with the shutdown of the Petaluma facility, the Company incurred non-cash write-offs of $919,500 for infrastructure and leasehold improvements at the Petaluma facility which could not be relocated to Iowa, plus $237,100 in write-downs to fair market value for equipment that was relocated to Iowa. There was also $408,700 in cash expenses incurred for relocation costs and project management fees associated with the move to Iowa. Also contributing to the net loss incurred in 2004 were higher sales and marketing expenses which increased by $1,089,000 versus 2003, primarily due to increased print advertising associated with the "I am Spectrum" campaign.

For the fourth quarter the Company reported a net loss of $934,400 or $0.02 per share versus net income of $1,386,700 ($0.03 per share) for the prior year. Again, the majority of the decline in profitability versus 2003 was attributable to the expenses associated with the manufacturing facility relocation and the increased sales and marketing expenses during 2004. During the fourth quarter of 2003, the Company eliminated the 100% valuation reserve that had previously been maintained against its deferred tax assets, which contributed $1,647,800 of income to the prior year fourth quarter.

Management believes that earnings before interest, taxes, depreciation and amortization, the plant relocation and expenses associated with the 2002 industrial accident (EBITDA as adjusted) is an important measure of its financial performance. For the year ended December 31, 2004 Spectrum reported EBITDA as adjusted of $1,192,000 versus $2,436,100 for the prior year. The decline was primarily attributable to the increased sales and marketing spending and lower gross profit.

Margins in the Company's culinary segments were squeezed due to higher costs for certain key organic raw materials such as canola and olive oils due to the weak dollar, an unfavorable commodity cycle during 2004, and increased importation and transportation costs. For the fourth quarter ended December 31, 2004 the Company reported EBITDA as adjusted of $140,600 compared to $410,600 for the corresponding period of the prior year, a decrease of 66%. Once again, the decrease was primarily attributable to increased sales and marketing expenses and gross margin pressure.

"Spectrum completed its long-term goal of closing the Petaluma plant with the grand opening celebration at our new production facility in Cherokee, Iowa on October 12, 2004. While the closing of the Petaluma plant was painful from a financial standpoint, the Iowa facility is a brand new, state-of-the-art production facility that will deliver lower cost and higher quality oils to the Petaluma bottling facility," said Neil G. Blomquist, Spectrum CEO. "Working in partnership with BIOWA Nutraceuticals, we expect to begin realizing the benefits of the plant relocation in 2005."

Spectrum Organic Products, Inc. is a leading marketer of natural and organic culinary oils, vinegar, condiments and butter substitutes under the Spectrum Naturals brand and essential fatty acid nutritional supplements under the Spectrum Essentials brand. The company also produces and sells a wide range of oils, vinegar and nutritional ingredients to other manufacturers through its Spectrum Ingredients Division. All of the company's products feature healthy oils that are mechanically extracted and free of trans fats and genetically modified organisms.

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