SPECTRUM ORGANIC PRODUCTS INC - 10-Q Quarterly Report

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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 JUNE 30, 2004.

[ ] 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 (707)778-8900
- ----------------------------------- ------------------------
(Address of executive offices) (Issuer's telephone number)

Indicate by check mark 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 [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:

Indicate by check mark 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 conformed 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,
46,386,943 shares issued and outstanding as of August 2, 2004.

Transitional Small Business Disclosure Format: Yes [ ] No [ X ]

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
SPECTRUM ORGANIC PRODUCTS, INC.
BALANCE SHEETS

ASSETS
(Unaudited)
June 30, December 31,
2004 2003
------------- ------------

Current Assets:
Cash $ 4,500 $ 7,300
Accounts receivable, net 4,272,400 4,163,200
Inventories, net 8,832,800 8,007,200
Deferred income taxes - current 764,300 514,200
Prepaid expenses and other current assets 499,100 297,500
------------ ------------
Total Current Assets 14,373,100 12,989,400

Property and Equipment, net 4,819,600 4,338,700

Other Assets:
Deferred income taxes - long-term 797,000 1,087,700
Intangible assets, net 585,800 586,800
Other assets 231,200 218,300
------------ ------------
Total Assets $ 20,806,700 $ 19,220,900
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 21,700 $ 513,800
Line of credit 6,033,000 4,833,000
Accounts payable, trade 5,357,300 4,168,000
Accrued expenses 718,300 1,307,700
Current maturities of term notes payable and capital lease
obligations 364,600 322,300
Current maturities of notes payable, related parties 252,100 275,200
Income taxes payable -- 9,900
------------ ------------
Total Current Liabilities 12,747,000 11,429,900

Notes payable and capitalized lease obligations, less
current maturities 1,372,100 1,104,200
Notes payable, related parties, less current maturities 441,600 549,200
Deferred rent 43,800 50,700
------------ ------------
Total Liabilities 14,604,500 13,134,000
------------ ------------
Commitments and Contingencies

Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, no par value, 60,000,000 shares
authorized, 46,386,943 and 46,254,777 issued
and outstanding at June 30, 2004 and
December 31, 2003, respectively 9,625,400 9,579,500
Accumulated deficit (3,423,200) (3,492,600)
------------ ------------
Total Stockholders' Equity 6,202,200 6,086,900
------------ ------------
Total Liabilities and Stockholders' Equity $ 20,806,700 $ 19,220,900
============ ============

The accompanying notes are an integral part of the financial statements.

2

SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENTS OF OPERATIONS

(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------

Net Sales $ 12,811,400 $ 11,380,800 $ 25,544,500 $ 21,689,400

Cost of Goods Sold 9,851,900 8,414,900 19,682,300 15,650,700
------------ ------------ ------------ ------------
Gross Profit 2,959,500 2,965,900 5,862,200 6,038,700
------------ ------------ ------------ ------------
Operating Expenses:

Sales and Marketing 1,722,900 1,632,100 3,704,800 3,064,800

General and Administrative 874,400 917,700 1,903,800 1,815,300
------------ ------------ ------------ ------------
Total Operating Expenses 2,597,300 2,549,800 5,608,600 4,880,100
------------ ------------ ------------ ------------

Income from Operations 362,200 416,100 253,600 1,158,600
------------ ------------ ------------ ------------
Other Income (Expense):

Interest Expense (77,800) (82,700) (151,800) (153,100)
Other 12,900 9,300 13,900 10,500
------------ ------------ ------------ ------------
Total Other Expenses (64,900) (73,400) (137,900) (142,600)
------------ ------------ ------------ ------------

Income Before Income Taxes 297,300 342,700 115,700 1,016,000

Provision for Income Taxes (118,900) (26,500) (46,300) (64,300)
------------ ------------ ------------ ------------
Net Income $ 178,400 $ 316,200 $ 69,400 $ 951,700
============ ============ ============ ============

Basic and Fully Diluted Income Per Share $ 0.00 $ 0.01 $ 0.00 $ 0.02
============ ============ ============ ============

Weighted Average Shares Outstanding 46,321,295 45,705,571 46,298,426 45,705,571
============ ============ ============ ============

Fully Diluted Average Shares Outstanding 48,464,066 46,023,029 48,739,211 46,059,234
============ ============ ============ ============

The accompanying notes are an integral part
of the financial statements.

3

SPECTRUM ORGANIC PRODUCTS, INC.
STATEMENTS OF CASH FLOWS

(Unaudited)
Six Months Ended
June 30, June 30,
2004 2003
------------ ------------
Cash Flows from Operating Activities:
Net Income $ 69,400 $ 951,700
Adjustments to Reconcile Net Income to Net
Cash used in Operating Activities:
Provision for uncollectible receivables 20,000 36,700
Provision for inventory obsolescence 105,600 74,700
Depreciation and amortization 302,200 211,200
Imputed interest on note payable, related party 10,100 9,400

Changes in Assets and Liabilities:
Accounts receivable (129,200) (876,100)
Inventories (931,200) (3,398,600)
Other assets (173,900) (80,200)
Accounts payable 1,189,300 2,948,600
Accrued expenses and other liabilities (606,100) (186,100)
------------ ------------
Net Cash Used in Operating Activities (143,800) (308,700)
------------ ------------

Cash Flows from Investing Activities:
Purchase of property and equipment (782,200) (915,000)
Purchase of intellectual property -- (275,000)
------------ ------------
Net Cash Used in Investing Activities (782,200) (1,190,000)
------------ ------------

Cash Flows from Financing Activities:
Decrease in bank overdraft (492,100) (152,100)
Proceeds from line of credit 11,198,100 22,676,600
Repayment of line of credit (9,998,100) (20,754,600)
Proceeds from note payable 460,000 --
Repayment of bank term notes payable (140,800) (103,100)
Repayment of capitalized lease obligations (24,800) (24,600)
Repayment of notes payable, related parties (125,000) (136,500)
Proceeds from exercise of stock options 45,900 --
------------ ------------
Net Cash Provided by Financing Activities 923,200 1,505,700
------------ ------------
Net Increase (Decrease) in Cash (2,800) 7,000

Cash, beginning of the year 7,300 1,000
------------ ------------
Cash, end of the period $ 4,500 $ 8,000
============ ============

Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 16,000 $ 266,000
Cash paid for interest $ 144,500 $ 156,300

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.'s
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. Operating results
for the six month period ended June 30, 2004 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
2004 or future periods.

Certain reclassifications have been made to the prior year unaudited
interim financial statements to be consistent with the presentation at June
30, 2004. These reclassifications had no impact on net income or retained
earnings.

2. Nature of Operations and Business Segments:

Spectrum Organic Products, Inc. ("Spectrum", the "Registrant" or the
"Company") competes primarily in three business segments: natural and
organic foods under the Spectrum Naturals(R) brand, essential fatty acid
nutritional supplements under the Spectrum Essentials(R) brand, and
industrial ingredients for use by other manufacturers sold under the
Spectrum Ingredients name. The vast majority of the Company's products are
oil-based and the Company has positioned itself as "The Good Fats Company."

Within the natural and organic foods segment, 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 fats,
contain no hydrogenated or trans fats and are offered in a variety of sizes
and flavors in both organic and conventional, non-GMO offerings.

Within the nutritional supplement segment, the Company's products 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
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(R) (formerly known as Spectrum Commodities, Inc.)
segment includes organic and conventional non-GMO culinary oils, organic
vinegar, condiments and nutritional oils offered 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
products.

Operating data is captured by segment to the gross profit level. However,
operating statement data below gross profit and balance sheet data have not
been disaggregated and captured by business segment since the information
is presently unavailable to the Company's chief operating decision maker.
Accordingly, the following segment information is currently captured by the
Company:

5

Three Months Ended June 30,
2004 2003 % Change
---- ---- --------

Net Sales:
Spectrum Naturals(R) $ 6,092,300 $ 5,059,200 +20%
Spectrum Essentials(R) 2,130,500 2,530,300 -16%
Spectrum Ingredients/Other 4,588,600 3,791,300 +21%
----------- ----------- ----
Total Net Sales $12,811,400 $11,380,800 +13%
=========== =========== ====

Gross Profit:
Spectrum Naturals(R) $ 1,515,100 $ 1,362,700 +11%
Spectrum Essentials(R) 942,700 1,175,100 -20%
Spectrum Ingredients/Other 501,700 428,100 +17%
----------- ----------- ----
Total Gross Profit $ 2,959,500 $ 2,965,900 --
=========== =========== ====

Six Months Ended June 30,
2004 2003 % Change
---- ---- --------
Net Sales:
Spectrum Naturals(R) $11,909,900 $ 9,657,200 +23%
Spectrum Essentials(R) 4,799,300 4,976,600 -4%
Spectrum Ingredients/Other 8,835,300 7,055,600 +25%
----------- ----------- ----
Total Net Sales $25,544,500 $21,689,400 +18%
=========== =========== ====

Gross Profit:
Spectrum Naturals(R) $ 2,920,200 $ 2,716,200 +8%
Spectrum Essentials(R) 2,008,700 2,374,500 -15%
Spectrum Ingredients/Other 933,300 948,000 -2%
----------- ----------- ----
Total Gross Profit $ 5,862,200 $ 6,038,700 -3%
=========== =========== ====

3. Amendment to Loan and Security Agreement:

On June 4, 2004 the Company entered into the First Amendment (the
"Amendment") to the Loan and Security Agreement (the "Credit Facility")
with its primary lender, Comerica Bank. The Amendment provides the Company
with additional borrowing capacity and flexibility via four significant
changes to the Credit Facility:

a) The maturity date of the Credit Facility was extended an additional
twelve months to June 30, 2006.

b) The maximum borrowing available under the revolving line of credit was
increased from $7,000,000 to $9,000,000, subject to eligible collateral
levels.

c) The maximum borrowings available for eligible inventory under the
revolving line of credit was increased from $1,500,000 in excess of
eligible accounts receivable to $2,000,000 in excess of eligible
accounts receivable.

6

d) The drawdown period under the Company's $1,000,000 capital expenditures
term note was extended an additional six months to December 31, 2004.
During the six months ended June 30, 2004 proceeds received under this
note were $460,000.

The Amendment continues to require that the Company meet various financial
covenants for 2004 and beyond related to profitability levels, debt service
coverage, and the ratio of total liabilities to tangible net worth. As of
June 30, 2004 the Company was in compliance with all requirements under the
Credit Facility.

A copy of the Amendment has been filed as Exhibit 10.55 with this quarterly
report on Form 10-Q.

4. Manufacturing Facility Relocation and Reconfiguration:

During the first quarter of 2004, the Company began the implementation of
its plan to relocate its SpectraVac manufacturing operation from its leased
facility at 133 Copeland Street, Petaluma, California to a leased facility
located in Cherokee, Iowa managed by American Natural Soy Processors, LLC
("ANS"). The SpectraVac operation utilizes the Company's intellectual
property purchased on April 15, 2003 for the benign extraction of oil from
vegetable seeds, and is currently used primarily for the production of flax
oil.

The Company is replacing most of the equipment currently used in the
SpectraVac operation in Petaluma with new, more efficient equipment in
Cherokee and will operate both facilities in parallel prior to shutting
down the Petaluma facility. The Company plans to disassemble and relocate
most of the Petaluma equipment to Cherokee after the shutdown.

ANS will provide labor and management services to the Company for the
SpectraVac operation in Cherokee under contract. The Company will continue
to own the equipment and also intends to enter into other oil seed crushing
arrangements with ANS under a strategic alliance.

During the six months ended June 30, 2004 capital spending in Cherokee
associated with the Iowa relocation was $492,000. Additionally, the Company
incurred $81,200 in consulting fees associated with the relocation to Iowa,
which was included in general and administrative expense. The Company
anticipates that additional capital spending of approximately $250,000 and
moving expenses of approximately $400,000 will be incurred during the third
and fourth quarters to complete the relocation to Iowa.

5. Industrial Accident:

On February 4, 2004 the Company pleaded no contest to two misdemeanor
counts of violations under California Labor Code Section 6425 ("CLCS
6425"), violation of a regulation issued by the California Occupational
Health and Safety Administration ("CAL-OSHA"), requiring employers to
provide, maintain and ensure employees use required confined space
equipment. The plea arose in connection with a tragic production accident
on April 25, 2002 that resulted in the death of two of the Company's
employees. Under the Terms of Settlement and Probation entered into with
the plea, the Company will pay a fine under CLCS 6425 of $150,000 in three
annual installments of $50,000 each on June 1, 2004, 2005 and 2006. In
addition the Company paid $150,000 in restitution to the California
District Attorneys Association Workers Safety Training Account to assist in
the prosecution of worker safety cases in the State of California. The
Company also reimbursed costs of $25,000 each to the Petaluma Police

7

Department, the Petaluma Fire Department and the Sonoma County District
Attorney's Office. Finally, an additional fine of $250,000 under CLCS 6425
was suspended conditioned upon the Company's compliance with the terms of
court supervised probation for three years. Accordingly, the Company
accrued an expense of $375,000 during the year ended December 31, 2003 to
cover the net present value of the above payments, plus attorney's fees.
Total payments made during the six months ended June 30, 2004 in connection
with the plea were $275,000.

On May 25, 2004 the Company settled one of the appeals filed with the
Workers' Compensation Appeals Board for $35,000 which was paid on June 3,
2004 and charged against the industrial accident reserve.

As of June 30, 2004 the Company had a remaining reserve of $197,600 to
cover the remaining fine under CLCS 6425 of $100,000, the anticipated
penalties from CAL-OSHA, the remaining appeal filed with the Workers'
Compensation Appeals Board of California, and related attorney's fees.
CAL-OSHA has completed their investigation of the accident and issued their
report and notice of proposed penalties on October 18, 2002. Their report
included nine citations for safety violations with total proposed penalties
of $137,900. There were no willful citations and the CAL-OSHA report
acknowledged that all the safety violations had been 100% abated prior to
the report's issuance. The Company has filed a formal appeal with CAL-OSHA
in the hopes of reducing the citations and proposed penalties. The
remaining workers compensation appeal is for an additional death benefit of
$62,500, payable by the Company to the dependents of the deceased worker if
the dependents successfully establish that the Company was guilty of
serious and willful misconduct by allowing unsafe working conditions to
exist. The Company intends to defend itself vigorously and believes it has
meritorious defenses. If actually litigated, the workers compensation
appeal is an all-or-nothing proposition under which the Company will either
be liable for $62,500 or nothing. Based on the advice of counsel, the
Company expects the remaining workers compensation appeal to be settled
rather than litigated. Management believes the remaining reserve of
$197,600 will be adequate to cover the remaining two installments under the
CLCS 6425 fine of $50,000 each, the settlement of the CAL-OSHA penalties,
the workers compensation appeal and related attorney's fees.

6. Inventories:

Inventories consisted of the following:

June 30, December 31,
2004 2003
---------- ----------
Finished goods $6,950,500 $6,853,400
Raw materials 1,839,400 1,166,100
Deposits on inventory 319,500 236,200
---------- ----------
Total Inventories 9,109,400 8,255,700
Less: Reserve for obsolete inventory 276,600 248,500
---------- ----------
Net Inventories $8,832,800 $8,007,200
========== ==========

Deposits on inventory primarily represent flaxseed paid for prior to its
receipt at the Company's production facility.

8

7. 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 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. Final royalties paid
during the three months ended March 31, 2003 were $50,700.

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 evaluates 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. No impairment charges have been
required to date.

8. Commitments and Contingencies:

Pending Litigation - Proposition 65 Complaint

On November 26, 2003 the Company was notified by attorneys for the
Environmental Law Foundation (the "ELF") that the Spectrum Naturals(R)
Organic Balsamic Vinegar contains lead in excess of the allowable
quantities under the Safe Drinking Water and Toxic Enforcement Act of 1986,
also known as Proposition 65. The ELF is a California non-profit
organization that represents itself as dedicated to the preservation of
human health and the environment.

ELF's attorneys filed a Complaint for Civil Penalties, Statutory, Equitable
and Injunctive Relief (the "Complaint") against Cost Plus, Inc., Safeway,
Inc., Trader Joe's Company, Williams-Sonoma, Inc., Whole Foods, Inc. and
unspecified defendants one through 100 in the Superior Court of the State
of California on May 20, 2003 alleging violation of Proposition 65 for the
sale of various products that contain lead in excess of the allowable
limits without the required warning label. ELF's attorneys later notified
Spectrum and dozens of other retailers, importers and manufacturers of
vinegar that they would be included as one of the 100 unspecified
defendants in the Complaint.

While lead has been shown to cause cancer and reproductive toxicity in
humans, the Proposition 65 consumption quantity defined as no significant
risk level for cancer was set at 15 micrograms per day. Lead is a naturally
occurring element in all vinegars. Based on the Company's tests, a person
would need to consume somewhere between 1.3-2.6 cups (270-630ml) daily of
the Company's various vinegar products to reach the Proposition 65 lead
level. The small lead content in vinegar occurs naturally in the soil and
is absorbed by the grapes used to make vinegar. The level of lead in
vinegar is not affected by the manufacturing process and, therefore, is not
subject to regulation under Proposition 65.

9

The Spectrum Naturals(R) brand was built on the premise of providing
consumers with organic healthy oils and condiments. Management does not
believe the consumption of its various vinegar products as condiments or
salad dressings poses any increased risk for cancer or reproductive
toxicity.

The Company has joined a Joint Defense Group established by attorneys
representing several of the defendants in the Complaint. The initial fee to
join was a $5,000 retainer, which the Company paid on February 17, 2004.
Management believes the Complaint will eventually be shown to be without
merit. Accordingly, no provision for loss or future attorney's fees has
been recorded at June 30, 2004.

Pending Litigation - Patent Infringement Complaint

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 (the "first patents") issued in
the United States that pertain to particular fat compositions suitable for
human consumption. The patent holder, Brandeis University, exclusively
licensed each of these patents to GFA. GFA demanded that the Company cease
the manufacture and sale of the margarine and threatened legal action if
the Company failed to comply.

It has always been Management's view that the formula for Spectrum Naturals
Organic Margarine(R) fell outside the claims made in the Brandeis
University patents. Despite numerous attempts, the Company was unable to
convince GFA that its formula for the margarine fell outside the claims of
the first patents. Therefore, the Company filed a complaint against GFA for
declaratory judgment of non-infringement and invalidity of the two patents
on August 28, 2001. The complaint requested 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, or attorney's fees.

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 issued its
ruling on the Markman hearing on December 3, 2003 in favor of the Company's
interpretation of the patent claims. On July 16, 2004 counsel for the
Company and GFA verbally agreed to settle the case with respect to the
first patents by a joint stipulation to dismiss all claims without
prejudice to either party, with a provision that the Markman ruling will
continue to be binding between the Company and GFA in the event of any
future litigation.

Meanwhile, unbeknownst to the Company, Brandeis University had filed for an
additional patent (the "second patent") with the U.S. Patent Office which
included patent claims that did encompass the Company's formula for
Spectrum Naturals Organic Margarine(R). Unlike trademark law, patents are
issued in the United States without pre-publication or notice which would
allow for comment or appeal by potentially affected parties. On October 7,
2003 the U.S. Patent Office granted the second patent to Brandeis
University. On the advice of counsel, the Company ceased the production of
the margarine immediately thereafter and is currently evaluating its
options with regards to the second patent.

10

There is no infringement by the Company of the second patent since the
Company immediately ceased the production of the margarine upon
notification of the patent's issuance. Accordingly, no provision for loss
has been recorded at June 30, 2004.

Court Supervised Probation

Also in connection with the industrial accident on April 25, 2002 the
Company entered a plea of no contest to two misdemeanor counts of
violations under CLCS 6425, violation of a regulation issued by the
California Occupational Health and Safety Administration, requiring
employers to provide, maintain and ensure employees use required confined
space equipment. Under the Terms of Settlement and Probation entered into
with the plea, the Company received a suspended fine of $250,000
conditioned upon the Company's compliance with the terms of court
supervised probation for three years. The probation terms require that the
Company submit to a warrant-less search of its premises during business
hours by any local or state law enforcement, safety or health officer; and
that the Company shall be of good conduct and obey all laws, particularly
those laws relating to worker safety and health. Should the Company fail to
honor the probation terms, the suspended fine of $250,000 may be reimposed
by the Sonoma County District Attorney.

9. Stock-based Compensation:

Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148") issued
in December 2002 provides alternative methods of accounting for a voluntary
transition to the fair value method of accounting for stock-based employee
compensation as prescribed in SFAS 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Additionally, SFAS 148 requires more prominent
and more frequent disclosures in financial statements of the effects of
stock based compensation effective for fiscal years ending after December
15, 2002. 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" ("APB 25"). 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. Options
granted to non-employees are recorded over the service period at the
estimated fair value of the option granted.

All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant.
In accordance with the accounting for such options utilizing the intrinsic
value method prescribed in APB 25, there is no related compensation expense
recorded in the Company's financial statements. Had compensation cost for
stock-based compensation been determined based on the fair value of the
options at the grant dates consistent with SFAS 123, the Company's net
income or loss and net income or loss per share for the three and six month
periods ended June 30, 2004 and 2003 would have been adjusted to the
pro-forma amounts presented below:

11

Three Months Ended Six Months Ended
------------------------- --------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
--------- --------- --------- ---------

Net income as reported $ 178,400 $ 316,200 $ 69,400 $ 951,700

Less: Total compensation expense under fair value
method for all stock-based awards, net of related
tax effects 103,700 52,900 174,000 120,900
--------- --------- --------- ---------
Pro-Forma net income (loss) $ 74,700 $ 263,300 $(104,600) $ 830,800
========= ========= ========= =========
Basic and diluted income (loss) per share:
As reported $ 0.00 $ 0.01 $ 0.00 $ 0.02
Pro-forma $ 0.00 $ 0.01 $ (0.00) $ 0.02

The fair value of the option grants for 2004 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 2.0%,
no dividend yield and volatility of 95%. The weighted average fair value of
the option grants during the first quarter of 2004 was $0.61 per share.

The fair value of the 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 weighted average fair value
of the option grants during the first quarter of 2003 was $0.25 per share.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------

General:

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.

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.

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

12

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.

Introduction:

Spectrum Organic Products, Inc. ("Spectrum", the "Company", or the "Registrant")
competes primarily in three segments: 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."

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.

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:

13

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 $470,000 at June 30, 2004 on gross trade
accounts receivable of $4,735,500. 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 $276,600 at June 30, 2004 on total gross inventories
of $9,109,400. 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.

Industrial Accident Reserve - During the fourth quarter of 2003 the Company
accrued an expense of $375,000 to record the Terms of Settlement and Probation
(the "Settlement") entered into on February 4, 2004 with the Sonoma County
District Attorney's Office with regards to an industrial accident that occurred
on April 25, 2002 (see Note 5 to the financial statements). As of June 30, 2004
the industrial accident reserve was $197,600. In addition to covering the
Settlement, the reserve also covers the estimated settlement of citations and
fines from CAL-OSHA, the remaining application to the Workers' Compensation
Appeals Board of the State of California for serious and willful misconduct
penalties to be levied against the Company, and attorney's fees. This reserve is
somewhat uncertain because the CAL-OSHA proposed fines of $137,900 have been
appealed and the application to the Workers' Compensation Appeals Board for
serious and willful misconduct penalties, if litigated, is an all-or-nothing
proposition under which the Company will either be liable for $62,500 in total
or nothing. The Company does not anticipate that the Workers' Compensation
Appeal will be litigated based upon the advice of its attorneys; however
expenses in excess of the reserve could be incurred if the Worker's Compensation
Appeal is litigated.

Deferred Tax Asset Valuation Allowance - As of December 31, 2003 the Company had
net deferred tax assets of $1,601,900 primarily resulting from net operating
loss carryforwards ("NOLs"), which consisted of $4,431,000 of Federal NOLs that
expire at various times through 2020, and $3,150,000 of state NOLs that expire
at various times through 2010. 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 eliminated the deferred tax asset valuation reserve that had
been maintained since the 1999 merger as of December 31, 2003. The Company has
reported taxable income to the various taxing authorities for 2001 and 2002 and
will do so again for 2003. The reserve was reversed because Management believes
that it is more likely than not that the Company will continue to report
sufficient taxable income in the foreseeable future, allowing utilization of
100% of its deferred tax assets. Management will continue to evaluate the
Company's deferred tax assets in the future to determine whether a deferred tax
asset reserve should be reinstated at some future point.

14

- --------------------------------------------------------------------------------
Results of Operations for the Three Month Periods Ending June 30, 2004 and
June 30, 2003
- --------------------------------------------------------------------------------

Summary Discussion:

In general, the Company continued to benefit from the ongoing trend away from
hydrogenated culinary oils towards a healthier alternative during the second
quarter. The Company's Spectrum Naturals(R) brand of expeller-pressed oils,
condiments and butter substitutes delivered 20% net sales growth in the second
quarter. Additionally, small and medium sized food manufacturers continued their
push to eliminate partially hydrogenated oils from their products which drove
the Spectrum Ingredients industrial sales up 21% versus the prior year.

The Spectrum Essentials(R) brand of nutritional supplements posted a decline in
net sales of 16% versus the prior year, as a result of increased competition in
that category. The Company will be responding later this year with new
positioning and packaging to strengthen the brand's position in this category.

The Company reported net income of $178,400 for the second quarter, which was
down 44% versus the prior year. The reduced profitability was primarily due to
margin pressure on the Spectrum Naturals(R) and Spectrum Essentials(R) branded
consumer product lines as a result of increased raw material costs for certain
key organic raw materials such as olive oil, canola oil and flaxseed. Gross
margin (gross profit expressed, as a percentage of net sales) was down three
points versus the prior year. The Company has increased its selling prices in
certain culinary product lines and has announced another price increase to the
trade effective August 15, 2004.

Also contributing to the reduced profitability for the second quarter was
increased spending on several new sales and marketing initiatives in 2004. In
particular, there was increased spending on the Company's new advertising
campaign and increased sponsorships.

Management believes that Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") is an important measure of the Company's operating
performance. Management incentive compensation is earned, in part, based on the
achievement of EBITDA targets that are established and approved by the Company's
Board of Directors prior to the beginning of the year. For the three months
ended June 30, 2004 EBITDA was $529,100 compared to $532,900 for the prior year,
a decrease of $3,800 or 1%. The reduced performance in 2004 is discussed in
detail below, but was primarily attributable to the decreased gross profit and
increased sales and marketing expenses.

While Management believes that EBITDA 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 may
be different from the calculation used by other companies, thereby limiting
comparability.

15

The Company's calculations to arrive at EBITDA are detailed in the following
table:

Three Months Ended
June 30,
2004 2003
-------- --------
Net income $178,400 $316,200
Add back: Provision for income taxes 118,900 26,500
Interest expense 77,800 82,700
Depreciation and amortization expense 154,000 107,500
-------- --------
EBITDA $529,100 $532,900
======== ========

The following is Managements' discussion and analysis of the significant line
items within the financial statements and the reasons behind the trends and
variances versus the prior year.

Revenues:

Spectrum's net sales for the three months ended June 30, 2004 were a new
quarterly record of $12,811,400 compared to $11,380,800 for 2003, an increase of
$1,430,600 or 13%. The increase is detailed by segment in the following table:

Three Months Ended June 30,
2004 2003 % Change
---- ---- --------

Spectrum Naturals(R)Culinary Products $ 6,092,300 $ 5,059,200 +20%
Spectrum Essentials(R)Nutritional Supplements 2,130,500 2,530,300 -16%
Spectrum Ingredients/Other 4,588,600 3,791,300 +21%
----------- ----------- ----
Total Net Sales $12,811,400 $11,380,800 +13%
=========== =========== ====

Within the Spectrum Naturals(R) culinary products, sales were significantly
higher than prior year in olive oil (+94%), food service oils (+23%), vinegar
(+53%) and packaged mayonnaise (+18%). The Company's culinary oils continued to
benefit from increased consumer awareness of the importance of avoiding
hydrogenated oils.

Spectrum Essentials(R) nutritional supplement sales decreased 16% versus the
prior year, primarily as a result of increased competition in the organic flax
oil category. Packaged liquid supplements, which encompass the majority of the
Spectrum Essentials(R) line, decreased by 18% versus the prior year. Sales of
encapsulated nutritional supplements, primarily flax and fish oil, increased 6%
versus the prior year.

The Spectrum Ingredients sales were up 21% versus the prior year on the strength
of increased customer demand for non hydrogenated oils. Many small and mid-sized
food manufacturers are eliminating partially hydrogenated oils from their
products, which lends itself directly to the Spectrum Ingredients product
offerings.

Cost of Goods Sold:

The Company's cost of goods sold for the three months ended June 30, 2004 was
$9,851,900 versus $8,414,900 for the prior year, an increase of 17%. The
increase was primarily volume-related with respect to the Spectrum Ingredients
segment and both volume and rate driven in the Spectrum Naturals(R) and Spectrum
Essentials(R) segments, as detailed in the following table:

16

Three Months Ended June 30,
2004 2003 % Change
---- ---- --------

Spectrum Naturals(R)Culinary Products $4,577,200 $3,694,300 +24%
Spectrum Essentials(R)Nutritional Supplements 1,187,800 1,355,200 -12%
Spectrum Ingredients/Other 4,086,900 3,365,400 +21%
---------- ---------- ----
Total Cost of Goods Sold $9,851,900 $8,414,900 +17%
========== ========== ====

Cost of goods sold as a percent of net sales increased to 76.9% in 2004 versus
73.9% in 2003. The increase was primarily due to increased raw material costs in
most of the Company's consumer packaged product lines and an unfavorable sales
mix that featured a higher concentration of Spectrum Ingredients products, the
Company's lowest margin items. Raw material costs were higher in the Company's
Spectrum Essentials(R) products as the remaining high cost flaxseed purchased
from China in 2003 sold through in April. Imported olive oil from Europe was
sharply higher than the prior year as a result of the dollar's weakness versus
the euro, which drove the cost of the Spectrum Naturals(R) packaged olive oils
up. Finally, organic canola oil, a key raw material in many of the culinary
products, was also higher as a result of increased demand and the dollar's
weakness versus the Canadian dollar.

Gross Profit:

Gross profit for the three months ended June 30, 2004 was $2,959,500 versus
$2,965,900 for the prior year, a decrease of less than 1%. The decrease was
primarily attributable to the raw material cost increases described above,
offset by significant volume increases in the Spectrum Naturals(R) and Spectrum
Ingredients segments, as detailed in the following table:

Three Months Ended June 30,
2004 2003 % Change
---- ---- --------

Spectrum Naturals(R)Culinary Products $1,515,100 $1,362,700 +11%
Spectrum Essentials(R)Nutritional Supplements 942,700 1,175,100 -20%
Spectrum Ingredients/Other 501,700 428,100 +17%
---------- ---------- ----
Total Gross Profit $2,959,500 $2,965,900 --
========== ========== ====

Gross profit as a percent of net sales (gross margin) was 23.1% for 2004 versus
26.1% for 2003, primarily as a result of the increased raw material costs in the
Company's consumer packaged product lines and the unfavorable sales mix.

Sales and Marketing Expenses:

The Company's sales and marketing expenses for the three months ended June 30,
2004 were $1,722,900 or 13.4% of net sales, versus $1,632,100 or 14.3% of net
sales for the prior year. The increase in spending of $90,800 is detailed in the
following table which reconciles sales and marketing spending for the second
quarter of 2004 versus 2003, and discloses the significant variances by spending
category:

17

Total sales and marketing expenses, second quarter 2003 $ 1,632,100
Increased advertising 231,000
Decreased broker commissions (77,100)
Decreased market research (62,500)
All other, net (600)
-----------
Total sales and marketing expenses, second quarter 2004 $ 1,722,900
===========

The increased advertising spending was related to the launch of the new "I am
Spectrum" campaign for 2004. The decreased broker commissions were related to
the decreased sales of the Spectrum Essentials(R) products. The decreased market
research spending was primarily the result of focus group research conducted
during the prior year.

General and Administrative Expenses:

The Company's general and administrative expenses for the three months ended
June 30, 2004 were $874,400 or 6.8% of net sales, versus $917,700 or 8.1% of net
sales for the prior year. The decrease in spending of $43,300 is detailed in the
following table which reconciles general and administrative spending for the
second quarter of 2004 versus 2003, and discloses significant variances by
spending category:

Total general and administrative expenses, second quarter 2003 $ 917,700
Iowa relocation expenses 31,600
Decreased compensation and benefits expense (98,800)
All other, net 23,900
---------
Total general and administrative expenses, second quarter 2004 $ 874,400
=========

The Iowa relocation expenses were primarily associated with consulting in
conjunction with the Company's upcoming relocation of its manufacturing facility
to Cherokee, Iowa. The decreased compensation and benefits expense was primarily
associated with reduced accruals in 2004 for incentive compensation as a result
of the lower profitability of the Company versus the prior year.

Interest Expense:

The Company's interest expense for the three months ended June 30, 2004 was
$77,800 versus $82,700 for the prior year. The decrease of $4,900 or 6% is
detailed in the following table which reconciles interest expense for 2004
versus 2003, and discloses the significant variances by type of debt:

Total interest expense, second quarter 2003 $ 82,700
Increased interest on bank term notes payable 11,100
Decreased interest on revolving line of credit (11,900)
All other, net (4,100)
--------
Total interest expense, second quarter 2004 $ 77,800
========

The increased interest on the bank term notes payable was the result of the
refinancing of the Company's variable-rate term debt effective July 11, 2003
with the change in primary lenders to Comerica Bank. The decreased interest on
the revolving line of credit was due to the lower rates available to the Company
under the Comerica relationship, partially offset by higher average borrowings
in 2004 to support the increased level of operations. The Company's weighted
average effective interest rate under the line of credit was 3.6% in 2004 versus
5.5% in 2003.

18

Provision for Income Taxes:

The Company recorded a provision for income taxes of $118,900 for the three
months ended June 30, 2004 versus a provision for state income taxes of $26,500
for the prior year. The provision for 2004 was estimated at 40% of the Company's
income before income taxes.

- --------------------------------------------------------------------------------
Results of Operations for the Six Month Periods Ending June 30, 2004 and
June 30, 2003
- --------------------------------------------------------------------------------

Summary Discussion:

Management believes that Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") is an important measure of the Company's operating
performance. For the six months ended June 30, 2004 EBITDA was $569,700 compared
to $1,380,300 for the prior year, a decrease of $810,600 or 59%. The reduced
performance in 2004 is discussed in detail below, but was primarily attributable
to decreased gross profit and increased sales and marketing expenses.

While Management believes that EBITDA 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 may
be different from the calculation used by other companies, thereby limiting
comparability.

The Company's calculations to arrive at EBITDA are detailed in the following
table:
Six Months Ended June 30,
2004 2003
---------- ----------
Net income $ 69,400 $ 951,700
Add back: Provision for income taxes 46,300 64,300
Interest expense 151,800 153,100
Depreciation and amortization expense 302,200 211,200
---------- ----------
EBITDA $ 569,700 $1,380,300
========== ==========

The following is Management's discussion and analysis of the significant line
items within the financial statements and the reasons behind the trends and
variances versus the prior year.

Revenues:

Spectrum's net sales for the six months ended June 30, 2004 were $25,544,500
compared to $21,689,400 for 2003, an increase of $3,855,100 or 18%. The increase
is detailed by segment in the following table:

19

Six Months Ended June 30,
2004 2003 % Change
---- ---- --------

Spectrum Naturals(R) Culinary Products $11,909,900 $ 9,657,200 +23%
Spectrum Essentials(R) Nutritional Supplements 4,799,300 4,976,600 -4%
Spectrum Ingredients/Other 8,835,300 7,055,600 +25%
----------- ----------- ----
Total Net Sales $25,544,500 $21,689,400 +18%
=========== =========== ====

Within the Spectrum Naturals(R) culinary products, sales were significantly
higher than prior year in olive oil (+62%), food service oils (+27%), packaged
culinary oils (+24%), vinegar (+35%) and packaged mayonnaise (+18%). The
Company's culinary oils continued to benefit from increased consumer awareness
of the importance of avoiding hydrogenated oils.

Spectrum Essentials(R) nutritional supplement sales decreased 4% versus the
prior year, primarily as a result of increased competition in the organic flax
oil category. Packaged liquid supplements, which encompass the majority of the
Spectrum Essentials(R) line, decreased by 8% versus the prior year. Sales of
encapsulated nutritional supplements, primarily flax and fish oil, increased 16%
versus the prior year.

The Spectrum Ingredients sales were up 25% versus the prior year on the strength
of increased customer demand for non hydrogenated oils. Many small and mid-sized
food manufacturers are eliminating partially hydrogenated oils from their
products, which lends itself directly to the Spectrum Ingredients product
offerings.

Cost of Goods Sold:

The Company's cost of goods sold for the six months ended June 30, 2004 was
$19,682,300 versus $15,650,700 for the prior year, an increase of 26%. The
increase was primarily volume-related with respect to the Spectrum Ingredients
segment and both volume and rate driven in the Spectrum Naturals(R) and Spectrum
Essentials(R) segments, as detailed in the following table:

Six Months Ended June 30,
2004 2003 % Change
---- ---- --------

Spectrum Naturals(R)Culinary Products $ 8,989,700 $ 6,938,800 +29%
Spectrum Essentials(R)Nutritional Supplements 2,790,600 2,602,100 +7%
Spectrum Ingredients/Other 7,902,000 6,109,800 +29%
----------- ----------- ----
Total Cost of Goods Sold $19,682,300 $15,650,700 +26%
=========== =========== ====

Cost of goods sold as a percent of net sales increased to 77.1% in 2004 versus
72.2% in 2003. The increase was primarily due to increased raw material costs in
most of the Company's consumer packaged product lines and an unfavorable sales
mix that featured a higher concentration of Spectrum Ingredients products, the
Company's lowest margin items. Raw material costs were higher in the Company's
Spectrum Essentials(R) products as the remaining high cost flaxseed purchased
from China in 2003 sold through during the first four months of 2004. Imported
olive oil from Europe was sharply higher than the prior year as a result of the
dollar's weakness versus the euro, which drove the cost of the Spectrum
Naturals(R) packaged olive oils up. Finally, organic canola oil, a key raw
material in many of the culinary products, was also higher as a result of
increased demand and the dollar's weakness versus the Canadian dollar.

20

Gross Profit:

Gross profit for the six months ended June 30, 2004 was $5,862,200 versus
$6,038,700 for the prior year, a decrease of 3%. The decrease was primarily
attributable to the raw material cost increases described above, partially
offset by significant volume increases in the Spectrum Naturals(R) and Spectrum
Ingredients segments, as detailed in the following table:

Six Months Ended June 30,
2004 2003 % Change
---- ---- --------

Spectrum Naturals(R)Culinary Products $2,920,200 $2,716,200 +8%
Spectrum Essentials(R)Nutritional Supplements 2,008,700 2,374,500 -15%
Spectrum Ingredients/Other 933,300 948,000 -2%
---------- ---------- ----
Total Gross Profit $5,862,200 $6,038,700 -3%
========== ========== ====

Gross profit as a percent of net sales (gross margin) was 22.9% for 2004 versus
27.8% for 2003, primarily as a result of the increased raw material costs in the
Company's consumer packaged product lines and the unfavorable sales mix.

Sales and Marketing Expenses:

The Company's sales and marketing expenses for the six months ended June 30,
2004 were $3,704,800 or 14.5% of net sales, versus $3,064,800 or 14.1% of net
sales for the prior year. The increase in spending of $640,000 is detailed in
the following table which reconciles sales and marketing spending for 2004
versus 2003, and discloses the significant variances by spending category:

Total sales and marketing expenses, first half 2003 $ 3,064,800
Increased advertising 438,100
Increased compensation and benefits 133,800
Increased trade show spending 65,200
Increased sponsorships 34,500
All other, net (31,600)
-----------
Total sales and marketing expenses, first half 2004 $ 3,704,800
===========

The increased advertising spending was related to the launch of the new "I am
Spectrum" campaign for 2004. The increased compensation and benefits was
primarily associated with increased staffing of three positions in the Marketing
Department. The increased trade show spending and sponsorships has enabled the
Company to maintain a greater presence within the industry.

General and Administrative Expenses:

The Company's general and administrative expenses for the six months ended June
30, 2004 were $1,903,800 or 7.5% of net sales, versus $1,815,300 or 8.4% of net
sales for the prior year. The increase in spending of $88,500 is detailed in the
following table which reconciles general and administrative spending for 2004
versus 2003, and discloses significant variances by spending category:

21

Total general and administrative expenses, first half 2003 $ 1,815,300
Iowa relocation expenses 81,200
Increased professional fees 33,200
Decreased compensation and benefits expense (104,000)
All other, net 78,100
-----------
Total general and administrative expenses, first half 2004 $ 1,903,800
===========

The Iowa relocation expenses were primarily associated with consulting in
conjunction with the Company's upcoming relocation of its manufacturing facility
to Cherokee, Iowa. The increased professional fees were primarily associated
with increased tax consulting services. The decreased compensation and benefits
expense was primarily associated with reduced accruals in 2004 for incentive
compensation as a result of the lower profitability levels achieved by the
Company in 2004.

Interest Expense:

The Company's interest expense for the six months ended June 30, 2004 was
$151,800 versus $153,100 for the prior year. The decrease of $1,300 is detailed
in the following table which reconciles interest expense for 2004 versus 2003,
and discloses the significant variances by type of debt:

Total interest expense, first half 2003 $ 153,100
Increased interest on bank term notes payable 20,100
Decreased interest on revolving line of credit (18,900)
All other, net (2,500)
---------
Total interest expense, first half 2004 $ 151,800
=========

The increased interest on the bank term notes payable was the result of the
refinancing of the Company's variable-rate term debt effective July 11, 2003
with the change in primary lenders to Comerica Bank. The decreased interest on
the revolving line of credit was due to the lower rates available to the Company
under the Comerica relationship, partially offset by higher average borrowings
in 2004 to support the increased level of operations. The Company's weighted
average effective interest rate under the line of credit was 3.6% in 2004 versus
5.5% in 2003.

Provision for Income Taxes:

The Company recorded a provision for income taxes of $46,300 for the six months
ended June 30, 2004 versus a provision for state income taxes of $64,300 for the
prior year. The provision for 2004 was estimated at 40% of the Company's income
before income taxes.

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 affected to reduce the risk of price swings due to demand
fluctuations. These annual purchases can create overages and shortages in
inventory.

22

Liquidity and Capital Resources:

On June 4, 2004 the Company entered into the First Amendment to its Credit
Facility with Comerica Bank ("Comerica") that extends the maturity date of the
Credit Facility to June 30, 2006. The Amendment also increases the revolving
line of credit up to a maximum of $9,000,000, and extends the drawdown period
under the capital expenditure term loan of $1,000,000 by six months to December
31, 2004. The 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 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 2004 and beyond related to
profitability levels, debt service coverage, and the ratio of total liabilities
to tangible net worth. As of June 30, 2004 the Company was in compliance with
all requirements under the Credit Facility.

At June 30, 2004 the Company had working capital of $1,626,100 which reflected
an improvement of $1,555,400 versus June 30, 2003. The increase was primarily
attributable to higher accounts receivable as a result of the double-digit sales
growth and the reinstatement of $764,300 of net short-term deferred tax assets,
partially offset by increased borrowings outstanding under the line of credit to
finance the higher level of operations in general.

During 2004 the Company used $143,800 in cash from operating activities,
compared to using $308,700 in cash in 2003. The decrease in cash used in 2004
was primarily due to the lower profitability levels in 2004, partially offset by
reductions in the cash used for working capital items. During 2003 the Company
was required to hold significant quantities of flaxseed in inventory prior to
production, which was no longer necessary in 2004.

Cash used in investing activities was $782,200 in 2004 compared to $1,190,000 in
2003. In 2004 the cash was primarily invested in the new production facility in
Iowa. In 2003 the cash was invested in the purchase of the SpectraVac
intellectual property and in machinery and equipment, primarily a new rotary
labeler and six used expeller presses, which were subsequently installed in the
new Iowa facility.

Cash provided by financing activities was $923,200 in 2004 compared to cash
provided of $1,505,700 in 2003. The cash provided in 2004 was primarily from
proceeds under the revolving line of credit and the capital expenditures term
note. The cash provided in 2003 was primarily increased borrowing under the
revolving line of credit to finance the equipment purchases and the cash used
for operating activities.

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. Excess borrowing capacity under the revolving line of credit was
$967,000 and $1,722,900 at June 30, 2004 and 2003, respectively.

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.

23

Related Party Transactions and Other Relationships:

There was one significant transaction with a related party during the six months
ended June 30, 2004. The Company paid consulting fees of $33,000, plus expenses
incurred, to Running Stream Food and Beverage, Inc. ("RSFB"). RSFB provided
private label consulting and management services to the Company until April 16,
2004 and is owned and operated by John R. Battendieri, a non-executive Director
of the Company until his resignation from the Board of Directors effective April
1, 2004 (see Item 5 - Other Information in this report). The Company elected to
terminate the consulting services agreement with RSFB at the end of its two-year
term on April 16 in order to focus on its core business in healthy oils and
nutritional supplements. 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 external Directors and also sits on
the Board of United Natural Foods, Inc. ("UNFI"). UNFI is the Company's largest
customer, representing approximately 36% of the Company's net sales for the year
ended December 31, 2003.

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. The Company will occasionally purchase
inventories in foreign currencies; however, in most cases payment is made at the
time title to the inventory passes to the Company. Therefore, any foreign
currency gain or loss has been immaterial to date.

The book value of all financial instruments approximates fair value. For trade
accounts receivable and trade accounts payable, the book value approximates fair
value due to the short-term maturity of these items. The Company's
interest-bearing term notes payable and capital lease obligations approximate
fair value based on rates currently available for debt with similar terms and
maturities. The fair value of the line of credit approximates book value because
the interest rate fluctuates with changes in the LIBOR or prime rate.

Throughout the course of its fiscal year, the Company utilizes a variable
interest rate line of credit at various borrowing levels. For the six months
ended June 30, 2004 the average outstanding balance under the line of credit was
$5,126,900 with a weighted average effective interest rate of 3.6% per annum.
For the six months ended June 30, 2003 the average outstanding balance under the
line of credit was $4,072,700 with a weighted average effective interest rate of
5.5% per annum. Effective July 11, 2003 with the change in the primary banking
relationship to Comerica Bank, the line of credit agreement called for the
interest rate to float at the prime rate or LIBOR plus 2.25%, at the Company's
option. The previous line of credit agreement called for the interest rate to
float at the prime rate plus 1.0%.

Certain other debt items are also sensitive to changes in interest rates. The
following table summarizes estimated fair values, future principal payments and
related weighted average interest rates by expected maturity date for long-term
debt, excluding capital leases ($ thousands):

24

Expected Future Principal Payments
(Years Ended December 31)

2004 2005 2006 2007 2008 2011 Total Fair Value
---- ---- ---- ---- ---- ---- ----- ----------
Long Term Debt:

Fixed Rate $ 134.3 $ 228.2 $ 15.6 -- -- -- $ 378.1 $ 378.1
Avg. Int. Rate 9.3% 9.2% 9.0% -- -- -- 9.2%
Variable Rate $ 214.0 $ 426.3 $ 426.3 $ 426.3 $ 301.4 -- $ 1,705.3 $ 1,705.3
Avg. Int. Rate Var. Var. Var. Var. Var. -- Var.
Imputed Rate -- -- -- -- -- $ 513.3 $ 513.3 $ 315.5
Avg. Int. Rate -- -- -- -- -- 6.5% 6.5%

The fair value of all long-term debt is equal to the sum of the expected future
principal payments with the exception of the non-interest bearing note payable
due in one lump sum of $513,300 on December 31, 2011. Interest has been imputed
on that note at an effective rate of 6.5% per annum, leaving a fair value at
June 30, 2004 of $315,500.

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 June 30, 2004 these future commitments approximated
fair value because they 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.

The Company is subject to a wide variety of risks in the ordinary course of its
business. Some of the more significant risks include heavy concentrations of
sales with a few key customers; heavy concentrations of raw material supply with
a few key suppliers; heavy reliance on several key processors for its dressings,
condiments and butter substitutes; reliance on one processor for bottling of its
oils as well as warehousing and distribution of its finished case goods;
regulation by various federal, state and local agencies with regards to the
manufacture, handling, storage and safety of food products; regulation of its
manufacturing facilities for cleanliness and employee safety; and regulation by
various agencies with regards to the labeling and certification of organic and
kosher foods. The Company is also subject to competition from other food
companies, the risk of crop shortages due to weather or other factors, and is
dependant on the continued demand for healthy oils and nutritional supplements
by consumers.

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 six months ended June 30, 2004. Management is not aware of any significant
deficiencies in the design or operation of internal controls.

25

PART II - OTHER INFORMATION

Item 1. Legal Proceedings
- --------------------------

Industrial Accident

On February 4, 2004 the Company pleaded no contest to two misdemeanor counts of
violations under CLCS 6425, violation of a regulation issued by the California
Occupational Health and Safety Administration ("CAL-OSHA"), requiring employers
to provide, maintain and ensure employees use required confined space equipment.
The plea arose in connection with a tragic production accident on April 25, 2002
that resulted in the death of two of the Company's employees. Under the Terms of
Settlement and Probation entered into with the plea, the Company will pay a fine
of $150,000 in three annual installments of $50,000 each on June 1, 2004, 2005
and 2006. In addition the Company paid $150,000 in restitution to the California
District Attorneys Association Workers Safety Training Account to assist in the
prosecution of worker safety cases in the State of California. The Company also
reimbursed costs of $25,000 each to the Petaluma Police Department, the Petaluma
Fire Dept. and the Sonoma County District Attorney's Office. Finally, an
additional fine of $250,000 under CLCS 6425 was suspended conditioned upon the
Company's compliance with the terms of court supervised probation for three
years. Accordingly, the Company accrued an expense of $375,000 against the year
ended December 31, 2003 to cover the net present value of the above payments,
plus estimated attorney's fees to reach agreement on the plea with the District
Attorney's Office. Total payments made in connection with the plea during the
six months ended June 30, 2004 were $275,000.

At June 30, 2004 the remaining unsettled issues in connection with the
industrial accident were the CAL-OSHA proposed penalties of $137,900 which have
been appealed by the Company, and one remaining appeal filed with the Workers'
Compensation Appeals Board of California for serious and willful misconduct
penalties of $62,500. The Company intends to defend itself vigorously and
believes it has meritorious defenses, since the CAL-OSHA citations did not
include any willful penalties. If actually litigated, the workers compensation
appeal is an all-or-nothing proposition under which the Company will either be
liable for $62,500 or nothing. Based on the advice of counsel, the Company
expects the workers compensation appeal to be settled rather than litigated. The
Company had a reserve of $197,600 at June 30, 2004 to cover the anticipated
settlement of these outstanding issues plus attorney's fees and the two
remaining installments of $50,000 each under the CLCS 6425 fine, which
Management believes will be adequate.

Proposition 65 Complaint

On November 26, 2003 the Company was notified by attorneys for the Environmental
Law Foundation (the "ELF") that the Spectrum Naturals(R) Organic Balsamic
Vinegar contains lead in excess of the allowable quantities under the Safe
Drinking Water and Toxic Enforcement Act of 1986, also known as Proposition 65.
The ELF is a California non-profit organization that represents itself as
dedicated to the preservation of human health and the environment.

ELF's attorneys filed a Complaint for Civil Penalties, Statutory, Equitable and
Injunctive Relief (the "Complaint") against Cost Plus, Inc., Safeway, Inc.,
Trader Joe's Company, Williams-Sonoma, Inc., Whole Foods, Inc. and unspecified
defendants one through 100 in the Superior Court of the State of California on
May 20, 2003 alleging violation of Proposition 65 for the sale of various
products that contain lead in excess of the allowable limits without the
required warning label. ELF's attorneys later notified Spectrum and dozens of
other retailers, importers and manufacturers of vinegar that they would be
included as one of the 100 unspecified defendants included in the Complaint.

26

While lead has been shown to cause cancer and reproductive toxicity in humans,
the Proposition 65 consumption quantity defined as no significant risk level for
cancer was set at 15 micrograms per day. Lead is a naturally occurring element
in all vinegars. Based on the Company's tests, a person would need to consume
somewhere between 1.3-2.6 cups (270-630ml) daily of the Company's various
vinegar products to reach the Proposition 65 lead level. The small lead content
in vinegar occurs naturally in the soil and is absorbed by the grapes used to
make vinegar. The level of lead in vinegar is not affected by the manufacturing
process and, therefore, is not subject to regulation under Proposition 65.

The Spectrum Naturals(R) brand was built on the premise of providing consumers
with organic healthy oils and condiments. Management does not believe the
consumption of its various vinegar products as condiments or salad dressings
poses any increased risk for cancer or reproductive toxicity.

The Company has joined a Joint Defense Group established by attorneys
representing several of the defendants in the Complaint. The initial fee to join
was a $5,000 retainer, which the Company paid on February 17, 2004. Management
believes the Complaint will eventually be shown to be without merit.
Accordingly, no provision for loss or future attorney's fees has been recorded
at June 30, 2004.

Patent Infringement Complaint

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 (the "first patents") issued in the United
States that pertain to particular fat compositions suitable for human
consumption. The patent holder, Brandeis University, exclusively licensed each
of these patents to GFA. GFA demanded that the Company cease the manufacture and
sale of the margarine and threatened legal action if the Company failed to
comply.

It has always been Management's view that the formula for Spectrum Naturals
Organic Margarine(R) fell outside the claims made in the Brandeis University
patents. Despite numerous attempts, the Company was unable to convince GFA that
its formula for the margarine fell outside the claims of the first patents.
Therefore, the Company filed a complaint against GFA for declaratory judgment of
non-infringement and invalidity of the two patents on August 28, 2001. The
complaint requested 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, or attorney's fees.

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 issued its ruling on the
Markman hearing on December 3, 2003 in favor of the Company's interpretation of
the patent claims. On July 16, 2004 counsel for the Company and GFA verbally
agreed to settle the case with respect to the first patents by a joint
stipulation to dismiss all claims without prejudice to either party, with a
provision that the Markman ruling will continue to be binding between the
Company and GFA in the event of any future litigation.

27

Meanwhile, unbeknownst to the Company, Brandeis University had filed for an
additional patent (the "second patent") with the U.S. Patent Office which
included patent claims that did encompass the Company's formula for Spectrum
Naturals Organic Margarine(R). Unlike trademark law, patents are issued in the
United States without pre-publication or notice which would allow for comment or
appeal by potentially affected parties. On October 7, 2003 the U.S. Patent
Office granted the second patent to Brandeis University. On the advice of
counsel, the Company ceased the production of the margarine immediately
thereafter and is currently evaluating its options with regards to the second
patent.

There is no infringement by the Company of the second patent since the Company
immediately ceased the production of the margarine upon notification of the
patent's issuance. Accordingly, no provision for loss has been recorded at June
30, 2004.

Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------

During the six months ended June 30, 2004 the Company issued 132,200 shares of
its common stock for the exercise of stock options. Total proceeds received by
the Company were $45,900.

The Company has not in the past nor does it intend to pay cash dividends on its
common stock in the future. The Company intends to retain earnings, if any, for
use in the operation and expansion of its business.

Item 3. Defaults Upon Senior Securities
- ----------------------------------------

None.

Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------

An annual meeting of shareholders was held on April 29, 2004 at the Company's
headquarters in Petaluma, California. A definitive Proxy Statement was filed
with the SEC on April 1, 2004 and is incorporated herein by reference.

There were four matters brought before the shareholders for their approval:

1. To elect six Director Nominees to another term.

2. To amend the Company's Amended and Restated Articles of Incorporation
to increase the number of common shares authorized for issuance from
60,000,000 to 100,000,000 and to increase the number of preferred
shares authorized for issuance from 5,000,000 to 10,000,000.

3. To amend the Company's Amended and Restated Articles of Incorporation
to effect a reverse stock split at one of two ratios, to be selected
by the Board of Directors, in order to reduce the aggregate number of
shares of common stock outstanding:

A) One new share for each five currently held
B) One new share for each ten currently held

28

4. To ratify the appointment of Grant Thornton, LLP as the Company's
independent certified public accountants for the current fiscal year.

All four matters were approved by the shareholders. The following table
summarizes the results of the voting:

For Against Abstain Total Votes
---------- --------- ------- -----------

1. Election of Director Nominees:
Jethren P. Phillips 38,260,679 1,517,976 12,000 39,790,655
Neil G. Blomquist 38,260,679 1,517,976 12,000 39,790,655
Phillip L. Moore 38,264,081 1,514,574 12,000 39,790,655
Charles A. Lynch 38,260,679 1,517,976 12,000 39,790,655
Thomas B. Simone 38,260,679 1,517,976 12,000 39,790,655
Conrad W. Hewitt 38,260,679 1,517,976 12,000 39,790,655

2. Increase Shares Authorized for Issuance 32,861,288 1,537,900 -- 34,399,188

3. Reverse Stock Split:
A) one-for-five 38,252,255 1,538,400 -- 39,790,655
B) one-for-ten 38,253,255 1,537,400 -- 39,790,655

4. Ratification of Grant Thornton, LLP 39,778,655 12,000 -- 39,790,655

Mr. John R. Battendieri was included in the definitive Proxy Statement as a
Director Nominee; however, Mr. Battendieri elected to resign from the Company's
Board of Directors effective April 1, 2004.

Item 5. Other Information
- --------------------------

Effective April 1, 2004 Mr. John R. Battendieri resigned as a non-executive
Director of the Company's Board of Directors. Mr. Battendieri's decision to
resign was not the result of any disagreement between himself and the Company or
the Company's other Board members. Mr. Battendieri has also served the Company
as a consultant for the past two years, managing the Company's private label
product offerings. As a result, Mr. Battendieri does not meet the requirements
of the Securities and Exchange Commission as an independent director, and would
be required to meet a three year "cooling off" period, during which time he
could not be compensated in any way by the Company beyond board fees. The
Company intends to upgrade its stock listing to an AMEX or NASDAQ small-cap
listing as soon as it meets the requirements for such. An independent Board of
Directors is required by both exchanges and Mr. Battendieri's resignation will
assist the Company toward meeting that requirement.

Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------

(a) Exhibits:

10.55 First Modification to Loan and Security Agreement dated June 4, 2004
by and between Spectrum Organic Products, Inc. and Comerica Bank.

31.07 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.

29

31.08 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.

32.07 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

32.08 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 June 30, 2004:

The Company filed a Current Report on Form 8-K on May 11, 2004
disclosing the Company's unaudited financial position and results of
operations as of and for the three months ended March 31, 2004.

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: August 2, 2004 SPECTRUM ORGANIC PRODUCTS, INC.

By: /s/ Robert B. Fowles
----------------------------------
Robert B. Fowles
Duly Authorized Officer &
Chief Financial Officer

30