Spectrum Organic Products, Inc.

5341 Old Redwood Highway, Suite 400
Petaluma, California 94954
U.S.A.
Telephone: (707) 778-8900
Toll Free: (800) 995-2705
Fax: (313) 782-3333
Web site: http://www.spectrumnaturals.com

Public Company
Incorporated: 1980 as Spectrum Naturals, Inc.
Employees: 59
Sales: $40.6 million (2003)
Stock Exchanges: Over the Counter (OTC)
Ticker Symbol: SPOP
NAIC: 311421 Fruit and Vegetable Canning; 311422 Specialty Canning

Spectrum Organic Products, Inc., comprises three major business segments: natural and organic foods under the Spectrum Naturals brand, essential fatty acid nutritional supplements under the Spectrum Essentials brand, and industrial ingredients for use by other producers sold under the Spectrum Ingredients name. The company is a leading producer of high-quality culinary oils and essential fatty acid products and has positioned itself as "The Good Fats Company." The company's natural and organic foods products consist of olive oils and other culinary oils, salad dressings, condiments, and butter substitutes, such as Spectrum Organic Margarine and Spectrum Spread. All of the company's culinary products comprise healthy fats, contain no hydrogenated or trans fats, and are provided in a variety of sizes and flavors in both organic and conventional non-GMO (genetically modified organisms) offerings. The nutritional supplement products under the Spectrum Naturals brand include organic flax oils, evening primrose oil, borage oil, Norwegian fish oil, and other essential fatty acids in both liquid and capsule forms. The Spectrum Ingredients segment produces organic and conventional non-GMO culinary oils, organic vinegar, condiments, and nutritional oils offered to other manufacturers. The company sells its products either directly or through distributors to health food and specialty food stores, club stores, and retail chain and independent grocery stores in the United States, Canada, Europe, and the Far East. The company changed its name to Spectrum Organic Products following its merger with Spectrum Naturals in 1999.

Company Founding

Spectrum Organic Products, Inc. is the result of a 1999 merger between Spectrum Naturals, Inc., founded by Jethren Phillips in Petaluma, California, in 1980, and S&D Foods, Inc., which was incorporated in 1987. Jethren Phillips founded Spectrum Naturals, Inc. to bring nutrition and quality into the vegetable oil market. After launching the Spectrum Naturals brand in 1986 to produce quality vegetable oil, Phillips gradually expanded its product line to include condiments and salad dressings. At the same time, he created the Spectrum Essentials brand to produce and market nutritional supplements. Both brands were marketed as premium, healthy alternatives to conventional products stemming from the use of organic raw ingredients and the chemical-free extraction of the oils utilizing mechanical (expeller) pressing techniques. As a result, Spectrum Naturals became a leading innovator in the development and marketing of expeller-pressed and certified organic vegetable oils. The company also became a leading proponent of testing and verifying the absence of genetically modified organisms in its culinary oils.

Beginning in 1987, Spectrum Naturals introduced a series of new products, first marketing natural mayonnaise, then adding organic vinegar in 1989 and healthy fat salad dressings in 1996. Spectrum Spread, a healthy alternative to butter or margarine in baking, was introduced in 1993. Expanding into the market for nutritional supplements, Spectrum Naturals began a program of nutritional research and development, becoming the first company to market organic flax oil in the United States. In 1989, Spectrum also instituted its proprietary technology known as SpectraVac, which constituted an organic method of fresh oil extraction from seed without the use of chemicals that also minimized the impact of oxygen, light, and heat. The SpectraVac system employed micron filtration technology, which eliminated impurities without stripping out the beneficial compounds in the oil.

In 1995, the company formed Spectrum Commodities, Inc. to serve other natural food producers with similar bulk ingredient needs. Spectrum Commodities' mission was to improve the integrity of the ingredients used in food manufacturing by offering, for example, expeller-pressed oils instead of those made with petroleum solvents. Spectrum Commodities also obtained exclusive distribution rights to new products such as organic palm and coconut oils and entered a distribution network that had rail car pumping stations and warehouses on both coasts. With this distribution network in place, Spectrum Commodities could provide industrial quantities of organic and expeller-pressed culinary and nutritional oils and organic vinegar to manufacturers, co-packers, and private label and food service accounts throughout the country.

Merger Sets New Course: Late 1990s

The company's current manifestation as Spectrum Organic Products, Inc. was formed on October 6, 1999 by the merger of Spectrum Naturals and Organic Food Products, Inc., based in Morgan Hills, California. The merger also included Spectrum Commodities, Inc., an affiliate of Spectrum Naturals, and Organic Ingredients Inc., an affiliate of Organic Food Products. Organic Food Products was incorporated in 1987 as S&D Foods, and changed its name to Garden Valley Naturals in 1995. The company operating as Garden Valley Naturals from 1987 to 1995 specialized in producing and marketing pesticide-free ("organic") and preservative-free ("all natural") pasta sauces, salsas, and condiments under the brand names "Garden Valley Naturals" and "Parrot." In June 1996, Garden Valley merged with Organic Food Products, which also marketed a line of organic food products, including pasta sauces and salsas, together with dry cut pastas and organic children's meals. The surviving merged entity operated under the Organic Food Products Inc. name. In February 1998, Organic Food Products acquired the natural fruit juice and water bottling operations of Sunny Farms Corporation for cash and 566,667 shares of common stock. In addition, in 1997, Organic Food Products went public and was traded on the NASDAQ small cap market until being delisted in May 1999 due to non-compliance with the net tangible assets requirement. The company's common stock thereafter traded on the OTC Bulletin Board System until the October 1999 merger, upon which the two companies adopted the name Spectrum Organic Products, Inc.

The merger agreement was a change from the original plan, in which Organic Food Products was slated to acquire Spectrum's food division in May 1998. The acquisition collapsed, however, because the company was losing money and could not complete the takeover before an August 1998 deadline to conclude the agreement. The two companies continued discussions over the following year as Organic Food Products' stock plunged, dropping from $3.75 a share in August 1998 to 38 cents in December. As a result, Spectrum took the lead in the negotiations with its stronger finances and in a reverse acquisition bought Organic Foods in the form of a stock for stock exchange. Under the merger agreement, Jethren Phillips became chief executive officer and chairman of the board of the merged company. John Battendieri, president of Organic Food Products, would lead the new product and business development efforts and serve as a member of the board. The merger was expected to produce consolidated annual revenues of about $50 million in branded products and industrial ingredients for the organic and natural products industry. The terms of the agreement also provided management and board members with ownership of almost 88 percent of the company. The merger was designed to open new channels of distribution for both companies in an industry that was growing 20 percent a year as natural food products were spreading from health food stores to mainstream grocery chains.

Following the merger, the new company obtained an $11.6 million loan from Wells Fargo Bank to consolidate accounts, reduce debt, and provide capital for growth and began trading on the NASDAQ Bulletin Board under the trading symbol "SPOP." Further, the merger had strengthened the positioned of the new company as a leading producer and marketer of organic foods, culinary oils, vinegar, and condiments under the Spectrum Naturals, Millina's Finest, Garden Valley Organic, Parrot Brand, and Grandma Millina's Kids Meals labels. In addition, Spectrum was a leading manufacturer and marketer of essential fatty acids nutritional supplements under the Spectrum Essentials label.

Company Perspectives:

Simply put, we're passionate about healthy fats. Our founder, Jethren Philips, started Spectrum over twenty years ago wit the purpose of making healthy oils available to the American public. That commitment and vision hasn't dimmed one bit. Whether artisan olive oils and trans-fat free spreads, or supplements like Flax Oil and other essential lipids, we're committed to bringing you the best there is.

Strategic Alliances, Spin-offs, and Litigation in the 21st Century

In October 2000, Spectrum signed an exclusive agreement with Venice Maid Foods of Vineland, New Jersey, the first of many strategic alliances it planned to make to become the leading organic foods and nutritional supplements company in the industry. Under the agreement, Spectrum's industrial division, Organic Ingredients, would supply Venice Maid with all of its organic raw materials. In addition, Spectrum would serve as the exclusive master distributor for all of Venice Maid's organic products. In June 2001, however, Spectrum sold its tomato-based products and children's meals marketed under the Garden Valley Naturals, Parrot, and Millina's Finest brand to Acirca, Inc. to raise additional working capital to invest in its core businesses of essential fatty acids and supplement products. The sale made Acirca the nation's second-leading producer and marketer of organic pasta sauces with a 22 percent market share. Also in 2001, the company announced a series of new products, including organic omega-3 mayonnaise, organic hemp oil supplements, and nutritional supplements based on omega-3 rich flaxseed oils, GLA rich borage oil, and selected Chinese herbs such as black cohosh, wild yam, and black haw bark. The supplements based on traditional Chinese medicinal theory were packaged and offered under the marketing names Flax Relax, Cycle Balance, and Menopause Balance. Despite the introduction of new products, the company reported a net loss of $5.2 million for 2001 versus a net loss of $2 million for the prior year. The increased loss stemmed primarily from the sale of the company's tomato-based product lines. Spectrum CEO Jethren Phillips explained the loss as reflecting several non-recurring write-offs associated with restructuring efforts to rid the company of underperforming assets.

In April 2002, the company experienced an industrial accident at its Petaluma manufacturing and bottling plant when two men died after being found unconscious in a stainless steel tank filled with deadly gas. Police investigators concluded that one man fell in while cleaning the tank and the other man followed while attempting a rescue. The tank was empty of oil at the time of the accident but was filled with argon. The inert gas, like nitrogen or carbon dioxide, is used to clean industrial vats by purging them of oxygen to eliminate bacteria. As a result of an investigation, the California workplace safety agency cited the company for multiple safety violations, concluding that Spectrum failed to provide proper training and safety equipment to employees who clean tanks to process flaxseed oil for use in a variety of nationally retailed organic food and health products. Spectrum subsequently appealed the $137,895 in fines proposed by the state Occupational and Safety and Health Administration, but in February 2004 Spectrum pleaded no contest to two counts of violating the California Labor Code Section 6425, requiring employers to provide, maintain, and ensure employees use required confined space equipment. As part of the terms of settlement, the company agreed to pay $375,000 in fines, restitution fees, and reimbursements to various state and county law enforcement and health and safety agencies. The settlement also imposed a probationary period during which Spectrum was required to ensure that all worker safety and health laws were upheld within its facilities. A large portion of the restitution payments went to the state of California to assist in the prosecution of other worker safety cases.

In May 2002, Spectrum sold its Organic Ingredients division to Acirca, Inc. The division included the company's industrial sales of organic fruits, vegetables, concentrates, purees, and certain private label products. Philips said that after the sale of Spectrum's tomato-based product lines to Acirca in June 2001, it became clear that Organic Ingredients no longer complemented the company's other operations. The sale of the business was anticipated to improve the company's working capital and allow Spectrum to focus funds on its core business of natural and organic fats and nutritional supplements business.

Return to Profitability under New Leadership

On September 1, 2002, Spectrum appointed Neil G. Blomquist as its new Chief Executive Officer. Blomquist had served as president of the company's branded divisions since Spectrum was formed in a 1999 four-way merger. Spectrum founder Jethren Philips, who stepped down as CEO, continued to serve as the chairman of the board. Under Blomquist's leadership, the company returned to profitability, earning a record net income for 2002 of $1.1 million compared to a net loss for the prior year of $5.2 million. Leading the way were increased industrial ingredient sales of culinary oils and vinegars, which rose by 30 percent over the previous year. Sales of consumer products also rose significantly for the company's culinary products and nutritional supplements. At the same time, Spectrum continued to diversify its product lines, introducing new varieties of organic salad dressings, dips, non-stick cooking spray, and toasted hazelnut and toasted pumpkin seed oils. The company's robust sales continued through 2003, increasing to a record $45.7 million compared to $40.5 million for 2002, an increase of 13 percent. Net sales for the company's Spectrum Ingredients Division rose by 31 percent, benefiting in part from mass media attention to the link between hydrogenated oils and obesity and cardiovascular disease. During 2003, several food companies issued press releases promising to reduce or eliminate hydrogenated oils from their packaged consumer products, which helped to direct attention to Spectrum's ingredient product lines. In addition, the trend toward healthy oils benefited the company's Spectrum Naturals line of packaged culinary oils, dressings, and butter substitutes, contributing to increased sales for these products by 19 percent over the previous year.

In March 2004, Spectrum provided an educational grant to support the first annual Nutrition and Health Conference. The conference, which was held March 11-13 by the University of Arizona Program in Integrative Medicine in conjunction with the Columbia University College of Physicians and Surgeons in Tucson, represented the first initiative on behalf of the company to further nutrition-based education to health care professionals. The company sponsored the conference with the aim of providing clinical relevance to nutrition and its role in health.

Key Dates:

1987:: Jethren Philips founds Spectrum Naturals, Inc.
1989:: Spectrum Naturals introduces a new proprietary technology known as SpectraVac.
1995:: The company establishes Spectrum Commodities, Inc.
1999:: Spectrum Naturals purchases Organic Food Products, Inc. in a reverse acquisition.
2001:: The company sells its tomato-based product lines to Acirca, Inc.
2002:: An industrial accident results in the death of two employees; the company sells Organic Ingredients division to Acirca, Inc.
2004:: Spectrum opens a new flaxseed production facility in Iowa.

Spectrum Looks to the Future

The company also began a major commitment to and investment in a new Iowa-based future in flaxseed farming and processing. As a result, Spectrum entered into a joint venture with BIOWA Nutraceuticals, an Iowa-based company, with the aim of opening the world's largest production facility dedicated to organic, plant-based EFA oils. The joint venture signified a "back-to-the-future" business scenario with flaxseed formerly a leading Iowa crop five generations ago. In 2004, only a handful of farmers were growing flax again due to successful organic agriculture research trials conducted at Iowa State University. However, Spectrum anticipated this statistic would rise dramatically over the next decade to include hundreds of Mid-west farms growing flax organically if its plans for regionalized flax production were achieved. The company believed this new marriage of agriculture with manufacturing would plant a new sustainable economy for the future. By relocating its 15-year-old processing operations to the Midwest, Spectrum planned to pay a 50 percent premium to flax farmers who converted to certified organic practices.

The new $4 million, 10,000-square-foot plant opened on October 12, 2004, after a ribbon-cutting ceremony featuring keynote speaker and Iowa Lieutenant Governor Sally Pederson. The company expected that the relocation of its production facility to Iowa would enable Spectrum and BIOWA Nutraceuticals to work directly with local farmers, including testing new flaxseed varieties. The move also meant that Spectrum could better meet the growing demand for its line of more than 20 certified organic flaxseed oil-based products sold nationally at natural and specialty product retail stores. The new plant, which was certified organic by Quality Assurance International according to USDA standards, would have the capacity to produce 60 tons of flax per day with the ability to expand to 120 tons per day. Because most flaxseed was produced by farmers in Canada or overseas, Spectrum and BIOWA believed their Midwest-based operation also would reduce transportation time and costs. After having positioned itself as the leading producer and marketer of organic and natural oils and condiments in North America with more than 175 products under its brand names, Spectrum's aggressive pursuit of new growth opportunities seemed to have assured that it would continue to prosper into the future.

Principal Divisions

Spectrum Naturals; Spectrum Essentials; Spectrum Ingredients.

Principal Competitors

ConAgra, Inc.; Hain Food Group, Inc.; H.J. Heinz Company.

Spectrum Organic Products, Inc.

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Spectrum Organic Products, Inc.

5341 Old Redwood Highway, Suite 400
Petaluma, California 94954
U.S.A.
Telephone: (707) 778-8900
Toll Free: (800) 995-2705
Fax: (313) 782-3333
Web site: http://www.spectrumnaturals.com

Company Founding

Merger Sets New Course: Late 1990s

Company Perspectives:

Strategic Alliances, Spin-offs, and Litigation in the 21st Century

Return to Profitability under New Leadership

Key Dates:

1987:: Jethren Philips founds Spectrum Naturals, Inc.
1989:: Spectrum Naturals introduces a new proprietary technology known as SpectraVac.
1995:: The company establishes Spectrum Commodities, Inc.
1999:: Spectrum Naturals purchases Organic Food Products, Inc. in a reverse acquisition.
2001:: The company sells its tomato-based product lines to Acirca, Inc.
2002:: An industrial accident results in the death of two employees; the company sells Organic Ingredients division to Acirca, Inc.
2004:: Spectrum opens a new flaxseed production facility in Iowa.