UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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Commission File No. 000-24337
HORIZON ORGANIC HOLDING CORPORATION
(a Delaware Corporation)
I.R.S. Employer Identification Number 84-1405007
6311 Horizon Lane
Longmont, Colorado 80503
(303) 530-2711
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes /X/. No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant based upon the last sales price of the Common
Stock reported on the National Association of Securities Dealers Automated
Quotation National Market System was $ 33,055,195 as of March 1, 2001.
As of March 1, 2001, the registrant had outstanding 9,901,098 shares of its
common stock, $.001 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE:
Information required by Part III (Items 10, 11, 12 and 13) is incorporated by
reference to portions of the registrant's definitive proxy statement for the
2001 Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 2000 year.
HORIZON ORGANIC HOLDING CORPORATION
Annual Report on Form 10-K
December 31, 2000
Table of Contents
PART I
Item 1 Business............................................................... 1
Item 2 Properties............................................................. 20
Item 3 Legal Proceedings...................................................... 20
Item 4 Submission of Matters to a Vote of Security Holders.................... 21
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.. 21
Item 6 Selected Consolidated Financial Data................................... 21
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 23
Item 7A Quantitative and Qualitative Disclosures about Market Risks............ 29
Item 8 Consolidated Financial Statements and Supplementary Data............... 29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................... 30
PART III
Item 10 Directors and Executive Officers of the Registrant..................... 30
Item 11 Executive Compensation................................................. 30
Item 12 Security Ownership of Certain Beneficial Owners and Management......... 30
Item 13 Certain Relationships and Related Transactions......................... 30
PART IV
Item 14 Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K.................................................... 30
PART I
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS SECTION UNDER THE HEADING "RISK FACTORS."
ITEM 1. BUSINESS
GENERAL
Horizon Organic Holding Corporation ("Horizon Organic" or the "Company")
produces, processes and markets the leading brand of certified organic fluid
milk and a full line of refrigerated certified organic dairy products. Horizon
Organic was the first dairy to offer in the United States nationwide
distribution of organic fluid milk by establishing a national network of organic
farm milk producers and processors and by building a nationwide customer base.
From its position as the market leader in organic fluid milk sales, Horizon
Organic has leveraged its brand to create a full line of refrigerated organic
dairy products, and a refrigerated organic citrus juice and egg line. In the
United Kingdom, Horizon Organic is a processor and supplier of organic fluid
milk where it produces private label and branded organic milk and dairy products
for leading supermarket chains.
Horizon Organic was founded in Boulder, Colorado in 1991 and introduced its
first products, organic nonfat yogurts, in 1992. The Company introduced organic
fluid milk in 1993, and since that time it has developed and introduced a number
of new organic dairy products, including cottage cheese, hard cheese, butter and
sour cream and more recently, organic citrus juices. Since 1995, the Company has
focused its efforts on expanding and integrating a nationwide production,
processing and distribution system.
From 1992 to 1994, the Company contracted for the supply of organic fluid
milk with Coulee Region Organic Produce Pool, a Wisconsin organic agricultural
cooperative ("CROPP"). In 1994, the Company made a strategic decision to begin
developing its own organic milk supply. Accordingly, the Company began building
a herd of organic cows and developing its own source of organic feed, and
entered into a lease and management agreement with a subsidiary of Aurora Dairy
Corporation ("Aurora") for a dairy farm in Idaho ("Sunrise"). These facilities
became the Company's Idaho Dairy (the "Idaho Dairy") in fiscal 1997. Aurora is
controlled by Marc Peperzak, a former member of the Company's Board of
Directors. In fiscal 1997, in order to develop an organic farm milk supply for
products sold in the eastern United States, the Company began developing its
second organic dairy farm in Maryland (the "Maryland Dairy"). Shipments of
organic farm milk from the Maryland Dairy began in the first quarter of 1998. In
1999, the Company began to ship organic milk from a third Company-owned herd
located in Colorado and managed by Aurora. Horizon Organic sources the remainder
of its organic farm milk supply through supply arrangements with independent
dairy cooperatives and farmers throughout the United States.
In 1999, with the acquisition of Rachel's Dairy Limited ("Rachel's") in the
United Kingdom (UK), the Company started to develop a presence in Europe.
Rachel's processes, markets and distributes organic yogurts and creams. In June
2000, the Company continued its expansion into Europe with the acquisitions of
Meadow Farms Limited ("Meadow Farms"), including its wholly owned subsidiary,
Organic Dairies Limited ("ODL"), and Organic Matters Limited ("Organic
Matters"). Meadow Farms is a leading processor and supplier of organic fluid
milk in the United Kingdom where it produces private label organic milk, and
recently Horizon Organic branded milk, for leading supermarket chains in the
United Kingdom. ODL operates a processing and packaging plant that produces
fluid milk in plastic bottles and paperboard cartons. Organic Matters previously
marketed its branded organic dairy products in the United Kingdom, and recently
began the conversion to the Horizon Organic brand. With these acquisitions, the
Company has become the leading organic dairy products supplier in the United
Kingdom.
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STRATEGY
Horizon Organic's goal is to strengthen its position as the leading brand
of organic food products and to continue to drive the growth of the organic
dairy and juice markets. The key elements of Horizon Organic's growth strategy
include the following:
BUILD RETAIL AVAILABILITY. The Company believes that increased retail
availability of Horizon Organic brand products will enable it to grow the
organic dairy and juice markets and capture the majority of that growth. The
Company originally focused its resources on penetrating conventional
supermarkets with organic fluid milk, which is a staple item for consumers with
a high turnover rate for food retailers. The Company believes that introducing
organic fluid milk as its initial product has enabled it to capture shelf space
and gain credibility with retailers while creating consumer awareness of the
Horizon Organic brand. During 2000, the Company began the introduction of
organic dairy sections with many conventional grocery customers. These sections
are intended to attract consumer attention to organic dairy and juice products
and to segregate them from their conventional counterparts. These sections,
which often include more than 20 Horizon Organic products, have helped the
Company increase the visibility and purchase of its products in conventional
grocery stores.
EFFECTIVELY INTRODUCE NEW PRODUCTS. Consumer research indicates that both
the Horizon Organic brand and distinctive "Happy Cow" logo stand for high
quality organic food products. As a result, the Company believes that the
Horizon Organic brand is extendable to many product categories. In 2000, the
Company introduced a line of ultra pasteurized ("UP") milk products. These
products, with their extended (55 day) shelf life, enabled the Company to expand
distribution to approximately 43% of the conventional grocery stores in the US.
It will enable the Company to continue its rapid distribution growth in the
future. Additionally, the Company introduced a line of organic single-serve
juices. These products enable the Company to participate in the rapidly growing
single-serve beverage business.
ENHANCE THE IMAGE AND AWARENESS OF THE HORIZON ORGANIC BRAND. The Company
believes that its distinctive, "Happy Cow" logo appeals to a broad audience of
consumers, particularly mothers and children. The Company believes that
continued expansion of the Horizon Organic brand through marketing of new
products and through licensing and co-branding arrangements will lead to further
growth. Horizon Organic intends to build additional brand awareness by educating
consumers about the value of organic products and by conducting consumer and
trade promotions. The creation of the Horizon Organic Farm and Education Center
will provide an additional platform to increase awareness of the Horizon Organic
brand.
In 2000, the Company demonstrated that the Horizon Organic brand and logo
are extendable internationally. Specifically, the Company introduced the Horizon
Organic brand into the milk business in both Japan and the United Kingdom.
IMPROVE PARTNERSHIPS WITH CUSTOMERS, PROCESSORS AND DISTRIBUTORS. The
Company intends to expand and improve its relationship with customers,
processors and distributors. This effort includes expanding the relationship
with retail customers to include category management of organic dairy sections,
improving its relationship with strategically located milk, dairy product and
juice processors and consolidating its independent warehouses to improve
efficiency and reduce costs. In particular, in 2000 the Company significantly
expanded its capacity for UP milk processing to meet the potential growth
opportunities of that business. It also upgraded its juice processing
capabilities.
INCREASE PRODUCTIVITY AND REDUCE COSTS. The Company will continue to
streamline its logistics and during 2000 made great progress in revamping its
warehousing and distribution system. This accomplishment coupled with continuing
focus on more efficient and strategically-located processors offers significant
opportunities to reduce costs and improve productivity. In 2000, the Company
also made the decision to invest in new enterprise and supply chain management
information systems to better manage its outsourced supply chain. This decision
is expected to show significant results in the second half of 2001 when the
information systems are operational.
HORIZON ORGANIC DAIRY STANDARDS
On December 20, 2000, the United States Department of Agriculture ("USDA")
published its final regulations under the Organic Foods Production Act (the
"Organic Regulations"). The Organic Regulations will be implemented
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by October 2002. The Organic Regulations provide for a minimum federal standard
that all organic producers will have to follow in order to be "certified"
organic, and include a seal to provide consumers with assurance that products
sold as "organic" meet these minimum standards. The Organic Regulations, when
implemented, replace the former wide range of organic standards which were
applied independently by a variety of state agencies and private certification
organizations.
Organic certification typically includes inspections of farm fields and
operations, processing and distribution facilities; detailed record-keeping and
periodic testing of soil and water; and review of the organic producer's
comprehensive "organic plan" which details farm practices, documents product
inputs and discusses all procedures. These procedures are designed to ensure
that all producers, processors and transporters are meeting the applicable
organic food standards. However, since some of these functions are out-sourced,
there is a risk that a third party could cause the Company to lose its organic
certification with regard to some of the Company's product lots. See "Risk
Factors - Risk of Loss of Organic Certification."
The Company believes that its long-standing rigorous organic standards meet
or exceed all currently applicable governmental certification standards, as well
as all significant private organic certification standards. Furthermore, the
Company believes that it will be in full compliance with the Organic Regulations
by the October 2002 implementation deadline. The farm milk which Horizon Organic
sources from certified organic dairy farms is produced by cows which have not
been treated with antibiotics or synthetic growth hormones, such as rBGH, and
which are fed 100% organic feed. The farm milk which Horizon Organic sources
from newly-converted, certified organic dairy farms is produced by cows which
have not been treated with antibiotics or synthetic growth hormones, and which
are fed at least 80% organic feed for the first nine of the 12 months preceding
their first milking and 100% organic feed for the 90 days preceding their first
milking and thereafter.
To be certified by private organizations in the United States as organic,
feed must be grown on land that has been free of synthetic fertilizers,
pesticides and herbicides for at least three years. Furthermore, Horizon
Organic's organic farm milk must be isolated from contact with conventional milk
residue throughout the production and distribution process, from milking through
transporting, processing and packaging. In the United States, all of the
Company's third party producers, processors and milk transporters are currently
meeting the applicable organic food standards and are certified by independent
third-party certification organizations.
The Company is currently reviewing the potential capital and operating
costs of complying with the Organic Regulations. While no final determination
has been made at this time, the Company believes the compliance costs to be
minimal. The company believes that it will incur costs in connection with
compliance with the Organic Regulations, however, at this time the exact nature
and amount of those costs have not been quantified.
Currently, in the US Horizon Organic's fluid milk and dairy products are
certified organic primarily by Quality Assurance International, Inc., an
accredited international private certification firm which performs inspections
and organic certification for a variety of companies. The Company selected
Quality Assurance International to certify its organic products because the
Company believes Quality Assurance International is one of the leading
accredited third-party certification groups in the United States. Currently in
the United Kingdom, Horizon Organic's fluid milk and dairy products are
certified organic primarily by The Soil Association which is the leading
third-party certification group in the United Kingdom. See "Risk Factors - Risk
of Loss of Organic Certification".
PRODUCTS
Approximately 59% of Horizon Organic's total net sales in fiscal 2000 were
from sales of organic fluid milk products in the US. The Company's next largest
product line was its organic yogurt, which comprised approximately 6% of its
total net sales and its organic butter products which comprised approximately 6%
of its total net sales for the same period. The Company's juice line accounted
for approximately 5% of its net sales, while international sales comprised
approximately 18% of its total net sales. Historically, the Company believed
that introducing organic fluid milk as its initial product enabled it to capture
shelf space and gain credibility with retailers while creating consumer
3
awareness of the Horizon Organic brand. As demand for Horizon Organic's organic
fluid milk products has developed in conventional supermarkets, Horizon Organic
has been able to introduce organic dairy sections which contain 20 or more milk
and other organic dairy Stock Keeping Units ("SKU(s)"), including yogurt, juice,
cheese and butter. The Company anticipates that its product mix will continue to
change over time as it introduces other organic dairy and non-dairy products in
accordance with this business strategy.
ORGANIC FLUID MILK PRODUCTS. Horizon Organic currently markets 21 SKUs of
fluid milk under the Horizon Organic brand. The May 1999 acquisition of The
Organic Cow brand of organic products contributed significantly to the fluid
milk product offerings including UP. During late 1999 and throughout 2000 the
Company significantly expanded the production and sale of UP milk products, and
by the end of 2000, UP milk accounted for 34% of the Company's US fluid milk
sales. UP milk has a much longer shelf life (55 days versus 17 days for
traditionally pasteurized milk), and as a result it is a much more desirable
introductory product for new retail customers. Consequently, UP milk products
have been the Company's strongest product line for expanding into new grocery
distribution. Horizon Organic currently markets 10 SKUs of UP milk under the
Horizon Organic brand and 10 SKUs of UP milk under The Organic Cow brand. In
addition, the Company markets 4 SKUs of private label milk products in the US,
in both traditionally pasteurized ("HTST") and UP.
The Horizon Organic brand organic fluid milk products are made by
processing organic farm milk sourced from either the Company-owned dairy herds
or other strategically located organic farm milk producers. The Company's
processors use standard dairy industry homogenization and pasteurization
methods. See "--Production and Processing."
The Horizon Organic brand organic fluid milk products have distinct product
packaging consistent with the Company's trade dress theme. See "--Marketing."
The Company's sales and distribution strategy for its organic fluid milk
products includes a network of natural foods distributors, dairy distributors
and direct sales to supermarket chains. See "--Sales and Distribution."
OTHER ORGANIC DAIRY PRODUCTS. Horizon Organic currently markets 38 SKUs of
other (non-fluid milk) organic dairy products such as cheese, yogurt, butter,
sour cream, and cottage cheese.
CITRUS JUICES. In September 1998, Horizon Organic introduced a line of
chilled, not-from-concentrate, pasteurized, certified organic juices. In 2000,
the Company expanded its product line from several SKUs of orange and grapefruit
juice to include orange-carrot juice and several SKUs of single-serve juices
including lemonade. The Company currently sells 10 SKUs of citrus juice. Eight
of these items are produced in half-gallon containers and two are produced in
single-serve containers. Horizon Organic sources its organic oranges and ruby
red grapefruits from premium growers in Florida and California and then
associates with juice processors and packers in the two states. During
production, the juices, which are not from concentrate and contain no added
sugar or water, are flash pasteurized.
EGGS. The Company currently licenses its brand to Glenwood Foods, LLC and
NuCal Foods, Inc. for use in connection with the sale of organic eggs.
INTERNATIONAL. In April 1999, the Company acquired all the assets and
liabilities of Rachel's, a United Kingdom company, for $2.4 million in cash plus
acquisition costs of $.4 million. Rachel's is a processor of organic yogurts and
creams. Rachel's currently produces and sells 25 SKUs of yogurts and creams to
the UK market under the Rachel's name as well as 7 private label offerings.
In June 2000, the Company acquired, through a wholly owned subsidiary, all
of the outstanding and issued stock of Meadow Farms for $24.2 million in cash,
plus acquisition costs of $1.7 million. Meadow Farms processes and produces
private label organic milk and recently began producing Horizon Organic branded
milk products for leading supermarket chains in the United Kingdom. Also, in
June 2000, the Company acquired all of the outstanding and issued stock of
Organic Matters for $2.1 million in cash. Organic Matters is a brand of organic
dairy products that is marketed to small chains, independent grocery stores and
health foods stores in the UK. Beginning in the fourth quarter of 2000 the
Company began the conversion of all Organic Matters products to the Horizon
Organic brand. Meadow Farms
4
produces 17 SKUs of private label products and 13 SKUs of Horizon Organic
branded products. Organic Matters previously produced 7 SKUs of branded products
under its brand.
TRADEMARKS. The Horizon Organic brand dairy products each carry the Horizon
Organic "Happy Cow" and earth logo and bright colors as well as, except for
certain yogurt flavors, the red, yellow and blue colors which are part of the
Company's trade dress theme. The Horizon Organic organic citrus juice products
also carry the Horizon brightly-colored flying cow and earth logo and bright
colors which are part of the Company's trade dress theme. The Organic Cow
products are packed in their distinctive Northeast package while the Rachel's
products are packaged primarily in distinctive black "pots". See "--Marketing."
MARKETING
Horizon Organic's marketing strategy is designed to continue to build
awareness of the Horizon Organic brand and generate consumer loyalty. The
Company believes that its distinctive product packaging, which stands out in
crowded refrigerated cases, is a key element to its branding strategy. All of
the Company's organic fluid milk and other dairy products carry the Company's
distinctive, "Happy Cow" logo or other distinctive trade dress. In addition, all
of the Company's organic fluid milk products and certain of the Company's other
organic dairy products are packaged using the bright red, yellow and blue colors
which are part of the Company's trade dress theme. In addition, the Company uses
its packaging to carry educational information about the value of organic
products. For example, the Company's half gallon fluid milk product packaging
has at times carried information about the Organic Foods Production Act,
including the Company's position on the Act and the USDA's address to which
consumers could send comments.
During 2000, Horizon Organic began the introduction of organic dairy
sections in many of its conventional grocery chain customers. These sections are
intended to attract retail customer attention to organic dairy products (and
Horizon Organic products in particular) and to segregate them from conventional
dairy products. These sections have also helped the Company initially introduce
a larger number of products into new grocery stores, thereby increasing the
visibility of its products.
Horizon Organic also engages in other traditional consumer and trade
marketing activities, including public relations activities, a consumer-oriented
web page - www.horizonorganic.com, consumer coupons, product sampling and trade
promotions. Horizon Organic plans to increase consumer awareness of the Horizon
Organic brand and the value of organic products through additional
consumer-oriented marketing activities, such as consumer promotions and
advertising. Horizon Organic plans to focus these efforts initially in highly
developed mass markets which have demonstrated market acceptance of organic
products, such as Los Angeles, San Francisco, Denver and New York City.
In October 2000, the Company opened the Horizon Organic Farm and Education
Center (the "Center") on the site of the former United States Naval Academy
Dairy Farm near Annapolis, Maryland. Approximately eight million consumers live
within one-and-one-half hours of the Center. The Center is open to the public as
a tourist attraction, with an 865 acre working organic farm, a 3,000 square foot
Discovery Barn, and a 2,200 square foot store featuring organic merchandise,
Horizon Organic branded products and other environmentally friendly products.
Visitors to the Center are exposed to the Horizon Organic brand products and the
production of organic milk.
Horizon Organic's marketing strategy also includes leveraging the Company's
increasingly well-known brand by extending it to new product categories. For
example, the Company currently licenses its brand to Glenwood Foods, LLC and
NuCal Foods, Inc. for use in connection with the sale of organic eggs. In 1999
the Company entered into its first international trademark licensing agreement
with Takanashi Milk Products, Ltd. The three-year agreement includes provisions
for the two companies to co-brand organic dairy products for the Japanese
market. In addition, the Company has a licensing arrangement with Kogee Coffee
whereby Kogee produces and markets a shelf-stable coffee beverage which includes
Horizon Organic cream and which bears the Horizon Organic brand. Horizon Organic
will consider other licensing and co-branding arrangements where the Company's
organic dairy products can be used as ingredients in other
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organic products. In the UK the Company has begun to leverage the well known
Rachel's brand and Meadow Farms' private label business in order to introduce
selected Horizon Organic brand products. In addition to branded products, a key
element of selling in the UK is providing private label offerings to key
accounts.
SALES AND DISTRIBUTION
Horizon Organic's sales and distribution strategy is focused on building
the Horizon Organic brand in the United States in conventional supermarkets
while maintaining its leading position in natural foods stores. The Company's
sales and distribution strategy is similar for both its organic fluid milk
products and its other organic dairy and juice products. Horizon Organic
currently offers 79 SKUs of premium-priced organic products under the Horizon
Organic and The Organic Cow brands and 25 SKUs of Rachel's brand in the UK. In
addition, Horizon Organic offers 4 SKUs of private label milk products in the US
and 24 SKUs of private label milk products in the UK. Horizon Organic
distributes its products to retailers across the United States through natural
foods distributors, dairy distributors and directly to supermarket chains. The
UK sales are either direct-shipped to the larger customers or sold through dairy
distributors. Horizon Organic's sales team includes regional sales managers who
are responsible for all selling activities and customer relationships as well as
managing a network of food brokers to facilitate selling and distribution to,
and in-store merchandising for, retailers. The field sales personnel work
closely with Horizon Organic's internal customer service team to meet the daily
order and logistic needs of the Company's customers. In addition, Horizon
Organic conducts national marketing programs with the two largest natural foods
retailers, Whole Foods Markets and Wild Oats Markets.
Horizon Organic's distributors generally deliver the Company's products
directly to retail stores. Horizon Organic's retail supermarket chain customers
typically take delivery of Horizon Organic's products at the customer's
distribution warehouse. In fiscal 2000, the Company's two largest accounts were
United Natural Foods, a national distributor which is comprised of five regional
distributors who have independent purchasing arrangements with the Company and
H.P. Hood, a dairy processor and distributor headquartered in Boston. For such
period, these two customers each accounted for approximately 12% of the
Company's sales, or 24% in total.
COMPETITION
The dairy business is highly competitive. It consists of a range of
competitors, including large, conventional dairies, large food companies with
well-established dairy product brands and retailers with private-labeled fluid
milk and other products which together occupy a significant portion of the
available shelf space in Horizon Organic's target retail markets.
The Company's principal competitors for organic fluid milk vary by region
and include Organic Valley (which is marketed by CROPP, a dairy cooperative
located in Wisconsin), Alta Dena Certified Dairy (a regional dairy located in
southern California) and Straus Family Creamery (a regional organic dairy
located in northern California). Certain of these competitors also sell other
organic dairy products in competition with Horizon Organic on a national basis.
The Company's principal competitors for organic dairy products also vary by
region, and include the competitors who sell organic fluid milk as well as
Stonyfield Farm (a national organic and conventional dairy located in New
Hampshire), Echo Springs (a regional organic and conventional dairy located in
Oregon) and Brown Cow West, Inc. ( a regional organic and conventional dairy
located in northern California). The Company's principal competitor in citrus
juices is Odwalla, a national brand which is mostly non-organic. Organic Valley
recently announced the introduction of not-from-concentrate juices, the
competitive impact of which is still being evaluated. In addition, Horizon
Organic expects increased competition from new and existing competitors in its
market, along with competitive private label juices from natural food retailers.
The Company is well-positioned to grow its milk, dairy product and juice
businesses and maintain organic leadership, but there can be no assurance that
the Company will be able to compete effectively in the future.
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In the UK, the largest competitor to Rachel's is Yeo Valley which produces
conventional and organic yogurts and has the leading market share of organic
yogurt. The largest competitors to Meadow Farms are Dairy Crest and Arla Foods.
PRODUCTION AND PROCESSING
Horizon Organic has established an extensive, vertically-integrated
production, processing and distribution system, which includes two Company-owned
organic dairy farms, relationships with strategically-located organic farm milk
producers, a Company-owned farm milk separator and a network of
geographically-dispersed dairy and juice processors. Since 1995, Horizon Organic
has focused its resources on improving this vertically integrated system to
continuously reduce the cost of producing, processing and transporting organic
fluid milk to retail stores and to improve product shelf life. Horizon Organic
has improved the efficiency of its supply chain by adding geographically
dispersed organic farm milk producers and processors. Horizon Organic currently
sources organic farm milk from producers in six regions across the United States
and uses 27 fluid milk and other dairy product processors.
ORGANIC MILK SUPPLY. In the US, the Company uses both its own organic farm
milk supply and supplies from over 200 independent organic dairy farmers in the
production of all of its organic fluid milk and dairy products. See
"--Products." The majority of Horizon Organic's organic farm milk is produced at
the Company's Idaho Dairy, where the Company also grows organic feed and
performs first stage farm milk processing. The Idaho Dairy encompasses over
3,800 acres, including almost 2,000 acres of certified organic cropland, and has
approximately 5,000 certified organic milking cows. The Company uses a farm milk
separator at its Idaho Dairy to capture excess butterfat, or "cream", which is
then used to make value-added organic dairy products such as butter and cream
cheese. The separator also enables the Company to inventory the organic premium
of the organic farm milk for later sale in products such as butter, cheese and
non-fat dry milk powder.
In 1997, Horizon Organic completed construction of the Maryland Dairy, a
strategically located milk supply, from which Horizon Organic supplies a portion
of the farm milk for products sold in the eastern United States. The Maryland
Dairy encompasses over 450 acres, of which 321 acres started to produce
certified organic feed on the farmland in the third quarter of 2000. The
Maryland Dairy began milking its first certified organic cows in March 1998, and
currently the Company has a permit to maintain 556 certified organic cows at
that location.
In late 1999, Horizon Organic acquired a dairy herd of approximately 1,150
cows and contracted for the management of the herd by a subsidiary of Aurora
Dairy Corporation, a company controlled by Marc Peperzak, a former director of
the Company that is located near Longmont, Colorado.
The Company sources the remainder of its farm milk supply from small
independent farmers and dairy cooperatives, including CROPP, a dairy cooperative
consisting of over 100 independent dairy farmers located principally in
Wisconsin. CROPP sells organic fluid milk and other dairy products in
competition with the Company under the Organic Valley Brand. In November 2000,
the Company allowed its CROPP milk supply agreement to expire. The CROPP milk
supply agreement continues for two years at progressively reducing quantities.
The Company also sources organic milk from over 200 independent farmers
throughout the United States, with a concentration in the northeastern United
States.
During 2000 the Company refocused its strategy to concentrate on procuring
organic milk from outside sources. Due to the growth in retail sales of organic
milk and recent low prices of conventional milk at the farm level, the Company
has begun to see an increased interest in the production of organic milk. The
Company continues to believe that this increased interest will enable it to
acquire additional organic milk from outside sources and will not require it to
continue to invest substantial capital in its existing or new farms.
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In the United Kingdom, the Company sources all of its milk supply from over
225 independent organic dairy farmers in the production of all of its organic
fluid milk and other organic dairy products. See "--Products."
As with most agricultural products, the supply of organic farm milk used by
the Company can be affected by a number of factors beyond the Company's control.
The Company is particularly susceptible to these factors because there are
relatively few qualified suppliers and because the majority of the Company's
current milk supply is purchased from suppliers other than the Company's dairy
herds. See "Risk Factors--Risks Related to Organic Farm Milk Cost and Supply."
PROCESSING. Organic fluid milk is produced to order and must be shipped
immediately so that it arrives at retail stores with the maximum shelf life.
Deliveries of organic farm milk to dairy processors must be timed to arrive when
the dairy processors have cleaned their equipment of all conventional milk
residue. The Company's other organic dairy products have longer shelf lives and
therefore do not have the same timing requirements as the Company's organic
fluid milk products; however processors must be located within a reasonable
distance from the Company's sources of organic farm milk. To address processing
logistics, Horizon Organic has a strategically located, nationwide network of
processors who manufacture and package the organic fluid milk and other organic
dairy products for distribution to Horizon Organic's customers. During late 1999
and throughout 2000 the Company significantly expanded the production and sale
of UP milk products, and by the end of 2000 UP milk accounted for 34% of the
Company's fluid milk sales. UP milk has a much longer shelf life (55 days versus
17 days for traditionally pasteurized milk), and as a result it is a much more
desirable introductory product for new retail customers. Consequently, UP milk
products have been the Company's strongest product line for expanding milk
distribution into new grocery chains. See "--Products."
In the US, Horizon Organic has a network of 27 dairy processors (7 fluid
milk processors and 20 non-fluid milk dairy product processors) which process
the Company's organic farm milk into refrigerated organic fluid milk and other
organic dairy products. In addition, it has 6 processors which produce organic
citrus juices. The Company also uses two refrigerated warehouses where it
inventories organic dairy products. The costs associated with processing
arrangements are included in the cost of sales. These costs include the cost of
processing as well as payments which Horizon Organic makes to processors which
are then paid into the Federal Milk Market Order System. The Company's product
sales mix affects its overall gross margin since processing costs vary by
product. Although the Company has long-term processing agreements with Steuben
Foods Incorporated ("Steuben") and one of its affiliates, and processing and
distribution agreements with certain Suiza Foods Corporation ("Suiza")
subsidiaries, it does not have long-term agreements with its other processors.
In the United Kingdom, the Company processes its products primarily at its
Rachel's and Meadow Farms plants. The balance of the products (less than 5%) are
processed at four third-party plants.
TRANSPORTATION. Transportation costs represent a significant portion of the
Company's cost of sales. Horizon Organic out-sources all of the inbound and
outbound transportation of organic farm milk from the producers to the
processing plants as well as the transportation of finished goods from the
processing plants to the point of distribution. Horizon Organic continuously
strives to reduce transportation costs by strategically locating producers and
processors as close as possible to customers.
INTELLECTUAL PROPERTY RIGHTS
The Company's logo and product packaging are integral to the success of the
Company, and the Company intends to take action to protect against imitation of
its logo and packages and to protect its trademarks and copyrights as necessary.
The Company currently has five registered trademarks with the United States
Patent and Trademark Office. The Company's United States trademark registrations
can be renewed perpetually provided that the Company files an
8
affidavit with the United States Patent and Trademark Office between the fifth
and sixth year anniversary of the trademark registration date which states that
the Company has been using the registered trademark on a continual basis in
interstate commerce; and further provided that the Company files a renewal
notice at the end of each ten year anniversary of the trademark registration
date. The Company's five United States trademark registrations were obtained
between 1994 and 1996 and will be able to be renewed beginning 2004. There can
be no assurance that other third parties will not infringe or misappropriate the
Company's trademarks, trade dress and other proprietary rights. In addition, the
Company has seventeen registered trademarks in other countries.
In addition, the Company has developed substantial trade secrets and
know-how regarding the operation of organic dairy farms and caring for livestock
without the use of antibiotics or other drugs. Horizon Organic also has
proprietary product formulations and processes and has built up proprietary
sources of organic ingredients. However, there can be no assurances that some or
all of the trade secrets and other know-how that Horizon Organic considers
proprietary could be independently developed, could otherwise become known by
others or could be deemed to be public domain.
GOVERNMENT REGULATION
UNITED STATES DAIRY SUPPORT PROGRAM AND FEDERAL MILK MARKETING ORDER
PROGRAM. The wholesale price of farm milk purchased from dairy producers by
dairy processors and manufacturers is based on a combination of factors
including supply and demand and federal and state regulations. The federal
government regulates minimum farm milk pricing through federal market orders and
price support programs, and state governments can regulate farm milk pricing by
establishing their own market order programs or by forming compacts that
establish minimum prices for milk. Organic farm milk, the Company's primary raw
ingredient for its organic dairy products, is presently considered to be the
same as conventional farm milk for federal and state minimum pricing purposes.
As a practical matter, however, the Company pays the organic dairy producers
amounts significantly in excess of the minimum prices required by federal, state
or regional authorities.
On a monthly basis federal and state market orders determine the minimum
price processors and manufacturers are required to pay for farm milk. The
minimum prices vary according to how the milk was used. Class I milk is used for
fluid milk processing. Class II milk is used for fluid cream products and soft
manufactured products such as yogurt and ice cream. Class III milk is used for
the production of hard cheeses. Class IV milk is used for manufacturing butter
and dry milk products. Class I milk receives the highest price and the Class I
price varies by location. Class II, III and IV prices are the same in the 11
federal orders. In each order, total value of milk in all classes is "pooled"
together to determine the minimum average or "blend" milk price that must be
paid by the processors and manufacturers to the dairy producers for farm milk.
Like the Class I price, the minimum producer price is adjusted for location.
Dairy processors and manufacturers with a class value above the blend value pay
into the pool while processors and manufacturers with a class value below the
blend value draw from the pool. This process equalizes dairy producer payments
and allows all of the dairy producers within the order to share in the high
value Class I utilization.
In addition, states in New England have established, and certain other
states are in the process of attempting to form, regional milk-price compacts
that are designed to enhance dairy producer income. For example, the Northeast
Interstate Dairy Compact raises the minimum farm milk for producers in
Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont by
setting a floor for the Class I price. If the Class I price is below the compact
floor price, then Class I processors are assessed a compact over-order
obligation. As with the federal milk market orders, these charges are not known
or predictable in advance and may increase the Company's costs and may
materially adversely affect its business, financial condition and results of
operations.
The Company contracts with milk processors to process its organic fluid
milk products and is responsible through those processors for pooling charges,
compact over-order charges and administrative assessments, the costs of
9
which are passed through to the Company by the processors of the organic milk.
These pooling, compact and administrative assessment charges are assessed
retroactively on a monthly basis, and the pooling and compact charges are not
known or predictable in advance. Should the amount of such charges increase to
levels higher than anticipated by the Company, or should the Company become
obligated to pay charges under other state programs, like it does in New
England, its business, financial conditions and results of operations may be
materially adversely affected. For 2000 and 1999, the Company expensed over
$2,435,000 and $1,734,000, respectively, for pooling, compact and administrative
assessment charges. See "Business-Government Regulation-United States Federal
Milk Marketing Order.
ORGANIC CERTIFICATION. The federal government has adopted national
regulations to be implemented by October 2002 which will standardize organic
certification requirements as part of the Organic Foods Production Act which was
enacted as part of the 1990 United States Farm Bill. The Company believes that
its own long-standing rigorous standards will be in full compliance with the
Organic Regulations by the effective date of October 2002. The Company will need
to revise certain of its programs to be in full compliance. Those aspects of the
Company's programs that will need to be revised include: (a) the Company will
either have to raise its own heifer calves or purchase replacement heifers that
have been raised organically from the last third of gestation; and (b) the
Company will need to provide managed pastures for lactating cows. The Company
believes that it will incur costs in connection with compliance with the Organic
Regulations. At this time the exact nature and amount of those costs have not
been quantified, although they are expected to be minimal.
The Organic Regulations allow those producers who are in compliance with
the Organic Regulations to use the "USDA Organic" seal once the Organic
Regulations are implemented. The Organic Regulations specify the feed ration and
time periods for distinct organic dairy herds, replacement animal management
requirements, access to pasture requirements for organic animals, a list of
allowed and prohibited substances that can be introduced to organic animals (the
"National List"), a process for petitioning the inclusion or removal of allowed
and prohibited substances from the National List, a list of prohibited vaccines
for organic animals, and regulations as to whether a product can be labeled
organic, made with organic products, or 100% organic.
CAFO REGULATIONS. The United States Environmental Protection Agency (EPA)
and various state environmental agencies regulate Concentrated Animal Feed
Operations (CAFOs) to ensure compliance with animal waste management
limitations. CAFOs with more than 1,000 Animal Units (AUs) or those with more
than 300 AUs discharging directly into the waters of the United States are
required to obtain a National Pollution Discharge Elimination System (NPDES)
permit. CAFOs are required to limit discharge of animal waste through lined
wastewater retention structures (i.e., lagoons) and are subject to site
investigation for analysis of compliance. Horizon Organic management believes
that those of its farms which qualify as CAFOs are presently in compliance with
CAFO regulations. These regulations have not had a material impact on the
Company's level of capital expenditures, earnings or competitive position, but,
because of the evolving nature of such regulations, management is unable to
predict the impact such regulations may have on the Company's business in the
foreseeable future.
OTHER ENVIRONMENTAL REGULATIONS. The Company is subject to certain federal,
state and local environmental laws and regulations. These laws include, but are
not limited to, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended; the Resource Conservation and Recovery Act,
as amended; the Federal Water Pollution Control Act; and their state and local
counterparts and equivalents.
The Company maintains aboveground or underground petroleum storage tanks at
two of its facilities. These tanks are periodically inspected to determine
compliance with applicable regulations. The Company may be required to make
expenditures from time to time in order to remain in compliance with such
regulations.
PUBLIC HEALTH REGULATIONS. Horizon Organic is extensively regulated under
federal, state and local laws. Regulation at the federal, state and local levels
is subject to change. As a manufacturer and distributor of food products,
10
the Company is subject to the Federal Food, Drug and Cosmetic Act and
regulations promulgated thereunder by the Food and Drug Administration (FDA).
This comprehensive regulatory scheme governs manufacturing (including
composition and ingredients), labeling, packaging and food safety. The FDA
regulates manufacturing practices, including quality assurance programs, for
foods through its current good manufacturing practices and regulations. In
addition, the FDA specifies the standards of identity for certain foods,
including many of the products sold by the Company, prescribes the format and
content of certain nutrition information required to appear on food product
labels and approves and regulates claims of health benefits of food products.
In addition, the FDA enforces the Public Health Services Act and
regulations issued thereunder, which authorize regulatory activity necessary to
prevent the introduction, transmission or spread of communicable diseases. These
regulations require, for example, pasteurization of milk and milk products. The
Company and its products are also subject to state and local regulation through
such measures as the licensing of dairy manufacturing facilities, enforcement by
state and local health agencies of state standards for the Company's products,
inspection of the Company's facilities and regulation of the Company's trade
practices in connection with the sale of dairy products.
Each of the Company's processors maintains quality control laboratories to
test milk, other ingredients and finished products, including Horizon Organic's
products. Product quality and freshness are essential to the successful retail
distribution of dairy and refrigerated dairy products. To monitor product
quality at its facilities, the Company maintains quality control programs to
test products during various processing and packaging stages. Each dairy
manufacturing facility has its own staff of technicians who monitor products to
maintain high quality formulations and to protect against contamination.
EMPLOYEE SAFETY REGULATIONS. The Company is subject to certain health and
safety regulations, including regulations issued pursuant to the Occupational
Safety and Health Act of 1970, as amended (OSHA). These regulations require the
Company to comply with certain manufacturing, health and safety standards.
Compliance with existing or new regulations may require the Company to make
significant capital expenditures and otherwise to incur higher costs, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company may be subject to
additional laws or regulations administered by the USDA or other federal, state,
foreign or local regulatory authorities, the repeal of laws or regulations, or
more stringent interpretations of current laws or regulations, from time to time
in the future. The Company cannot predict the nature of such future laws,
regulations, interpretations, or applications, nor can it predict what effect
additional government regulations or administrative orders, when and if
promulgated, would have on its business in the future. Such laws could, however,
require the reconfiguration of production, processing and transportation methods
of the Company's products, including but not limited to more onerous food
safety, labeling, and packaging requirements; increased compliance regulations
for waste management; increases in transportation costs; higher costs under the
Federal Milk Marketing Order System or similar state or regional programs; and
greater uncertainty in production and sourcing estimates. Any or all such
government actions could have a material adverse effect on the Company's
business, financial condition and results of operations.
ACQUISITIONS
ACQUISITION OF JUNIPER VALLEY FARMS BRAND. On April 8, 1998, the Company
completed the acquisition of the Juniper Valley Farms brand of organic dairy
products from Worcester Creameries Corp. As a result of the acquisition, the
Company acquired approximately $6.3 million of intangible assets, which are
being amortized over 15 years.
ACQUISITION OF RACHEL'S DAIRY, LTD. In April 1999, the Company acquired all
of the assets and liabilities of Rachel's, a private company incorporated in
England and Wales, for approximately $2.4 million in cash plus acquisition costs
of $.4 million. The acquisition was accounted for as a purchase and the $2.5
million excess of cost over the fair
11
value of acquired net assets is recognized as intangible assets and is being
amortized on a straight-line basis over 15 years. The results of operations of
Rachel's have been included in the Company's consolidated statement of income
beginning April 1, 1999.
CALIFORNIA FARM PURCHASE. On March 2, 2000, the Company purchased a dairy
farm consisting of 607 acres in Wilton, California. The price paid
(approximately $1.4 million) is net of conservation easements sold to The Nature
Conservancy and includes existing residences. The land is considered to be
immediately organically certifiable and the environmental permits have already
been granted to the Company. The Company has engaged a realtor to sell this
farmland.
ACQUISITION OF THE ORGANIC COW OF VERMONT BRAND NAME. On April 30, 1999,
the Company acquired certain intangible assets including The Organic Cow of
Vermont brand name for $10.9 million. The acquisition was financed with an $8.5
million promissory note payable to the seller, bearing interest at 5.3%, and
payable in annual installments over 4 years. The intangible asset of $10.9
million plus acquisition costs of $0.3 million are being amortized on a
straight-line basis over 15 years.
ACQUISITION OF MEADOW FARMS LIMITED. On June 1, 2000, the Company acquired
all of the outstanding and issued common stock of Meadow Farms, a private
company incorporated in England and Wales, for approximately $24.2 million in
cash plus acquisition costs of approximately $1.7 million. The acquisition
included Meadow Farms' wholly owned subsidiary, ODL, which operates a processing
and packaging plant that produces fluid milk which is marketed and sold by
Meadow Farms. The acquisition was accounted for as a purchase and the
approximately $24.4 million excess of cost over the fair value of acquired net
assets is recognized as intangible assets and is being amortized on a
straight-line basis generally over 15 years. The Meadow Farms acquisition was
financed with a $25.0 million Senior Secured Term Note. Operating results of
Meadow Farms have been included in the Company's consolidated statement of
income beginning June 1, 2000.
ACQUISITION OF ORGANIC MATTERS LIMITED. On June 1, 2000, the Company
acquired all of the outstanding and issued common stock of Organic Matters, a
private company incorporated in England and Wales, for approximately $2.1
million in cash. The acquisition was accounted for as a purchase and the $2.1
million excess of cost over the fair value of acquired net assets is recognized
as intangible assets and is being amortized on a straight-line basis over 15
years. Operating results of Organic Matters have been included in the Company's
consolidated statement of income beginning June 1, 2000.
STRATEGIC RELATIONSHIPS
In 1998, Horizon Organic entered into agreements with Suiza, a leading
manufacturer and distributor of fresh milk and related dairy products. The
Company's relationship with Suiza provides it with opportunities to enhance the
Company's market penetration in a number of key markets nationally. The
Company's arrangement with Suiza includes processing and distribution agreements
with certain of Suiza's subsidiaries. Horizon Organic's relationship with Suiza
includes five-year processing and distribution agreements with three of Suiza's
subsidiaries: Model Dairy, a fluid milk processor located in Reno, Nevada, which
currently processes organic fluid milk for Horizon Organic; Robinson Dairy, a
fluid milk processor located in Colorado, which currently processes organic milk
for Horizon Organic; and Garelick Farms, a fluid milk processor and distributor
with several locations in the northeastern United States, which does not
currently process any products for Horizon Organic. The processing and
distribution agreement with Model Dairy provides that it will distribute all
SKUs of Horizon Organic's organic fluid milk products which are available for
sale in its territory. The Company also moved the processing of its organic
chocolate milk, its organic yogurt and sour cream and its organic cottage cheese
to three Suiza owned facilities in California.
EMPLOYEES
12
As of December 31, 2000, the Company had 215 full-time employees and two
part-time employees domestically and 120 full-time employees in the UK.
Management believes that the Company's relations with its employees are good.
RISK FACTORS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
REPORT.
RISKS RELATED TO ORGANIC FARM MILK COST AND SUPPLY. Approximately half of
the Company's current US milk supply originates from the three Company owned
herds. The balance of the Company's US and UK farm milk is sourced from third
parties. The Company cannot maintain any significant inventory of its farm milk
or fluid milk finished goods because they are perishable and have a short shelf
life. In the event that production at or transportation from the Idaho Dairy,
the Maryland Dairy or from the Company owned Colorado milking herd were
interrupted by fire, floods or other natural disasters, disease, work stoppages,
regulatory actions or other causes, the Company would be unable to continue to
produce its products at such facilities. An interruption in operations due to
any of the foregoing could materially and adversely affect the Company's
business, financial condition and results of operations.
As with most agricultural products, the supply of the organic farm milk
used by the Company can be affected by a number of factors beyond the Company's
control, including various livestock diseases and other acts of nature. The
Company is particularly susceptible to these factors because there are
relatively few qualified suppliers and because of the long lead time required to
convert conventional dairy farms to organic. Should the Company be unable to
obtain a sufficient supply of organic milk from its existing suppliers, it may
be difficult to procure alternative sources of supply. The inability of the
Company to procure sufficient quantities of organic milk on acceptable terms
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Production and Processing."
RISKS RELATED TO ORGANIC FEED COST AND SUPPLY. The Company requires a
substantial amount of organic feed to supply the Idaho Dairy, the Maryland Dairy
and the Company owned Colorado milking herd, which together produce
approximately half of the Company's US organic farm milk requirements. The cost
of organic feed represents a material portion of the Company's cost of
production. Although the Company produces a significant portion of its organic
feed requirements at the Idaho Dairy, the Company currently purchases the
majority of its organic feed requirements from third party organic farms and
expects to continue to do so in the future. As with most agricultural products,
the cost and supply of the organic feed used by the Company can be affected by a
number of factors beyond the Company's control, including various adverse
weather conditions, various plant diseases, pests and other acts of nature. In
addition, because of the three-year lead time required to convert conventional
farms to organic, alternative sources of supply may not be immediately
available. To be certified as organic, feed must be grown on land that has been
free of synthetic fertilizers, pesticides and herbicides for at least three
years. The inability of the Company to procure sufficient quantities of organic
feed on acceptable terms would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Production and Processing."
RISKS ASSOCIATED WITH CONVENTIONAL DAIRY PRICES. In order to augment its
internal supply of organic farm milk, the Company contracts with various organic
farmers and cooperatives throughout the United States. All production contracts
require that the Company purchase minimum quantities of organic farm milk. If
the Company cannot use the minimum amount as organic fluid milk or other organic
products, the Company sells the organic milk as conventional milk and records
the difference between the Company's purchase price and the conventional price
in cost of sales. Changes in the price of conventional farm milk directly affect
the Company's cost of organic farm milk. To the extent that conventional prices
increase or decrease due to external factors, (e.g., availability, regulation)
the Company's results of operations may be materially impacted.
13
During 2000, conventional milk prices at the farm level were lower than in
most years since 1984 when the USDA began tracking milk prices. Partly as a
result of the greater percentage growth in organic milk, and partly as a result
of the lower conventional milk prices, the Company began to see increased
interest by dairy farmers in producing organic milk. The Company believes that
this increased interest in the production of organic milk may help to mitigate
some of the prior risks associated with its business, and, due to the possible
increase in supply, may enable the Company to lower its cost of organic milk.
RISKS RELATED TO THE IMPLEMENTATION OF THE FEDERAL ORGANIC CERTIFICATION
REGULATIONS. Currently, there is a wide range of organic standards which are
applied by a variety of state agencies and private certification organizations.
In December 2000, the federal government adopted final national regulations to
become effective October 2002 to standardize organic certification requirements
as part of the Organic Foods Production Act of 1990 (the "Organic Foods
Production Act") which was enacted as part of the 1990 United States Farm Bill.
There can be no assurances as to how the Organic Regulations will affect the
Company. The Company believes that its own long-standing rigorous standards will
be in full compliance with the final Organic Regulations by the effective date
of October 2002. The Company will need to revise certain of its programs to be
in full compliance. Those aspects of the Company's programs that will need to be
revised include: (a) the Company will either have to raise its own heifer calves
or purchase replacement heifers that have been raised organically from the last
third of gestation; and (b) the Company will need to provide managed pastures
for lactating cows. The Company believes that it will incur costs in connection
with compliance with the Organic Regulations, however, at this time the exact
nature and amount of those costs have not been quantified. The Company expects
these costs to be minimal. See "Business--Horizon Organic Dairy Standards."
RISKS RELATED TO DIFFICULTIES OF MANAGING GROWTH. To date, the Company has
experienced substantial growth in its revenues, operations and employee base,
and has undergone substantial changes in its business that have placed
significant demands on the Company's management, working capital and financial
and management control systems. There can be no assurance that the Company's
existing systems or that any new systems it acquires will be adequate to meet
the Company's future needs. In addition, any future growth also will impose
significant added responsibilities on senior management. The Company believes
that it has put in place qualified senior management that is capable of managing
the substantial growth. To the extent that the Company is unable to manage its
growth effectively, or is unable to retain qualified management, the Company's
business, financial condition and results of operations may be materially
adversely affected. The Company's results of operations also will be adversely
affected if revenues do not increase sufficiently to compensate for the increase
in operating expenses resulting from any expansion. See "Business--Sales and
Distribution," and "--Production and Processing."
RISKS ASSOCIATED WITH CHANGES IN CONSUMER PREFERENCES. The market for
organic food products, including the Company's products, is subject to changing
consumer trends, demands and preferences. Trends within the organic and natural
foods industry are constantly evolving, and the failure of the Company to
anticipate, identify or react to changes in these trends could lead to, among
other things, reduced demand and price reductions, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's success depends, in part, on its ability to anticipate
the tastes and dietary habits of consumers and to offer products that appeal to
their preferences on a timely and affordable basis. The Company believes that
its growth to date has been due, in large part, to increased awareness as to
food safety issues and a growing consumer preference for a healthy lifestyle.
All of the Company's current and planned future products are organic. The
Company's business, financial condition and results of operations would be
materially adversely affected if consumer interest in organic foods were to
decline.
RISKS RELATED TO INTERNAL GROWTH STRATEGY AND POSSIBLE ACQUISITIONS. The
Company's continued growth depends in part upon its ability to expand into new
geographic areas, either through internal growth or by acquisition. There can be
no assurance that the Company will be successful in such expansion or that such
expansion can be accomplished on a profitable basis. The Company's ability to
increase net sales of its existing business and the net sales of any
subsequently acquired businesses will be affected by various factors, including
demand for its products, the
14
availability of farm milk, the cost of expanding and upgrading its facilities,
managing its supply and distribution logistics, the Company's ability to expand
the range of products offered to customers, its success in implementing
strategies necessary to attract new customers and attract and retain necessary
personnel and its ability to obtain necessary financing. Many of these factors
are beyond the Company's control, and there can be no assurance that the
Company's operating and internal growth strategies will be successful or that
the Company will be able to generate cash flows adequate for its operations and
sufficient to support internal growth.
The Company may seek to expand its operations through future acquisitions
of processing facilities or other complementary businesses or operations. There
can be no assurance that the Company will be able to identify or acquire
additional businesses, or to successfully integrate and profitably manage
acquired businesses. In addition, increased competition for acquisition
candidates may develop; in which event there may be fewer acquisition
opportunities available to the Company as well as higher acquisition prices.
Further, acquisitions involve a number of risks, including possible adverse
effects on the Company's operating results, diversion of management's attention,
risks related to having adequate corporate and financial controls and procedures
to manage and monitor the Company's operations as they expand, risks associated
with unanticipated events or liabilities and amortization of acquired intangible
assets, some or all of which could have a material adverse effect on the
Company's business, financial condition and results of operations, particularly
in the fiscal quarters immediately following the consummation of such
transactions. Customer dissatisfaction or performance problems at a single
acquired company could also have an adverse effect on the reputation of the
Company. There also can be no assurance that businesses acquired in the future
will achieve anticipated revenues and earnings. In addition, margins may be
negatively impacted to the extent that margins on acquired product lines are
lower than Horizon Organic's average margins. There can be no assurance that
acquisitions can be consummated on acceptable terms, that any acquired companies
can be integrated successfully into the Company's operations, or that any such
acquisitions will not have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business--Acquisitions."
RISKS RELATED TO THE COMPANY'S RELATIONSHIP WITH SUIZA FOODS CORPORATION.
Horizon Organic's relationship with Suiza includes five-year processing and
distribution agreements with Model Dairy, Robinson Dairy, and Garelick Farms and
processing arrangements with other facilities owned by Suiza or its affiliates.
Certain of these processing and distribution agreements also require that the
organic fluid milk processors distribute all SKUs of the Company's organic fluid
milk which are available in their respective territories. There can be no
assurance that Suiza or its subsidiaries who undertake the distribution of
Horizon Organic products will be successful in increasing market penetration and
sales of Horizon Organic products in their territories. In addition, the Company
is unable to predict what effect, if any, its relationship with Suiza will have
on relationships with processors and distributors, some of whom may be
affiliated with Suiza's competitors.
Pursuant to the Stockholder Agreement with the Company and the Major
Stockholder Agreement with certain of the Company's principal stockholders,
Suiza has certain preemptive rights, registration rights, board of directors
representation rights, rights of first negotiation to acquire the Company and
rights of first refusal on certain transfers. Such provisions could interfere
with the Company's ability to raise additional capital or enter into business
combinations or strategic alliances with other business entities. The
Stockholder Agreement contains a variety of provisions designed to delay, deter
or prevent a hostile takeover of the Company by Suiza arising out of Suiza's
stock ownership position, including standstill provisions and transfer
restrictions. These negotiated provisions are, however, subject to various
exceptions and time limitations, and there can be no assurance that these
provisions would prevent Suiza from participating in a takeover attempt of the
Company, or facilitating a third-party takeover attempt at some time in the
future.
15
POSSIBILITY OF ADVERSE EFFECTS RESULTING FROM UNITED STATES DAIRY SUPPORT
PROGRAM AND FEDERAL MILK MARKETING ORDER PROGRAM. The federal government
regulates minimum farm milk pricing through federal market orders and price
support programs, and state governments can regulate farm milk pricing by
establishing their own market order programs or by forming compacts that
establish minimum prices for milk. As a result of these regulations, the Company
must pay "pooling charges" and "compact over-order charges" under the support
programs and administrative assessments for government mandated marketing
programs. These pooling, compact and administrative assessment charges are
assessed retroactively on a monthly basis and are not known or predictable in
advance. Should the amount of such charges increase to levels higher than
anticipated by the Company, or should the Company become obligated to pay
charges under other state programs, as it does in New England, its business,
financial condition and results of operations may be materially adversely
affected. For fiscal 2000 and 1999, the Company expensed over $2,435,000 and
$1,734,000, respectively, for pooling, compact and administrative assessment
charges. See "Business--Government Regulation--United States Dairy Support
Program and Federal Milk Marketing Order Program."
POSSIBILITY OF ADVERSE EFFECTS DUE TO PUBLIC HEALTH, SAFETY AND
ENVIRONMENTAL REGULATIONS. Horizon Organic is extensively regulated under
federal, state and local laws. Regulation at the federal, state and local levels
is subject to change. Compliance with existing or new regulations may require
the Company to make significant capital expenditures and otherwise to incur
higher costs, either of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company may be subject to additional laws or regulations administered by the
USDA or other federal, state, foreign or local regulatory authorities, the
repeal of laws or regulations, or more stringent interpretations of current laws
or regulations, from time to time in the future. The Company cannot predict the
nature of such future laws, regulations, interpretations, or applications, nor
can it predict what effect additional government regulations or administrative
orders, when and if promulgated, would have on its business in the future. Such
laws could, however, require the reconfiguration of production, processing and
transportation methods of the Company's products, including, but not limited to,
more onerous food safety, labeling and packaging requirements; increased
compliance regulations for waste management; increases in transportation costs;
higher costs under the Federal Milk Marketing Order Program or similar state
programs; and greater uncertainty in production and sourcing estimates. Any or
all such government actions could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Government Regulation."
RISKS ASSOCIATED WITH DEPENDENCE ON KEY PERSONNEL. The Company's future
prospects depend to a significant extent upon the continued service of its key
executives. The loss of any of the key executives could have a material adverse
effect on the Company's business, financial condition or results of operations.
Furthermore, the Company's continued growth depends on its ability to identify,
recruit and retain key management personnel. The competition for such employees
is intense, and there can be no assurance the Company will be successful in such
efforts. The Company is also dependent on its ability to continue to attract,
retain and motivate its sourcing, production, distribution, sales, marketing and
other personnel, of which there can be no assurance.
COMPETITION. The dairy business is highly competitive. It consists of a
range of competitors, including large, conventional dairies, large food
companies with well-established dairy product brands and retailers with
private-label fluid milk and other dairy products, which together occupy a
significant portion of the available shelf space in Horizon Organic's target
retail markets. Most of these competitors have greater financial, operational
and marketing resources than Horizon Organic. The Organic Regulations, as
adopted, will require all organic dairy production in the US to meet the same
minimum standards when they become effective in October 2002. Until then,
competitors that produce "organic" products under less rigorous standards may
have lower production costs than Horizon Organic and may be able to undercut
Horizon Organic's prices.
The Company's principal competitors for organic fluid milk vary by region
and include Organic Valley (which is marketed by CROPP, a dairy cooperative
located in Wisconsin), Alta Dena Certified Dairy (a regional dairy located
16
in southern California) and Straus Family Creamery (a regional organic dairy
located in northern California). Certain of these competitors also sell other
organic dairy products in competition with Horizon Organic on a national basis.
The Company's principal competitors for organic dairy products also vary by
region, and include the competitors who sell organic fluid milk as well as
Stonyfield Farm (a national organic and conventional dairy located in New
Hampshire), Echo Springs (a regional organic and conventional dairy located in
Oregon) and Brown Cow West, Inc. (a regional organic and conventional dairy
located in northern California). The Company's principal competitor for organic
citrus juices is Odwalla, a national brand which is mostly non-organic. Organic
Valley recently announced the introduction of not-from-concentrate juices, the
competitive impact of which is still being evaluated. In addition, Horizon
Organic expects increased competition from new and existing competitors in its
market, along with competitive private label juices from natural food retailers.
The Company is well-positioned to grow its milk, dairy product, and juice
businesses and maintain organic leadership, but there can be no assurance that
the Company will be able to compete effectively in the future.
RISKS RELATED TO COMPANY OWNED ORGANIC DAIRY FARMS. The Company has
undertaken two major expansions in its organic dairy farming activities by
acquiring the remainder of the Idaho Dairy and converting it to 100% organic and
by acquiring a large conventional dairy farm in Maryland and converting it into
organic. The Company did not operate a dairy prior to the 1997 acquisition of
the Idaho Dairy; however, it had previously owned organic cows and had held a
substantial equity interest in a dairy farm since 1995. The Company estimates
that it has incurred costs of approximately $1.9 million related to converting
the Idaho Dairy and the Maryland Dairy to organic. Although the Company has
begun to generate operating income at the Idaho and Maryland Dairies, there can
be no assurance that future revenues from milk produced at either the Idaho
Dairy or the Maryland Dairy will be sufficient to recover the Company's
investment in the expansion. During 2000 the Company concluded that, due to the
increased interest in the production of organic milk by conventional dairy
farmers, it no longer needs to commit capital to the expansion of its own farms
or to build new ones.
RISKS ASSOCIATED WITH PERISHABLE PRODUCTS. Although the Company's products
are pasteurized, they are perishable and contain certain naturally occurring
microorganisms. As a result, the Company's dairy products must be transported in
a timely and efficient manner within a precise temperature range and the Company
is always subject to risk of spoilage or contamination of its dairy products. In
addition, food producers, such as the Company, may be subject to claims for
damages if contaminated food causes injury to consumers. See "--Product
Liability Risks" and "--Risk of Adverse Publicity."
The Company is able to hold farm milk or fluid milk finished goods
inventory for only a limited period of time and must sell its products in a
timely manner or risk having to write the inventory off as outdated. Therefore,
the Company's results of operations are highly dependent on its ability to
accurately forecast its near term sales in order to adjust processing
accordingly. For example, the Company must make an estimate of the approximate
mix of fat free, reduced fat and 2% milk, cheese, butter and other products to
process from each lot of farm milk. Forecasting product demand has been
difficult, and the Company expects it to be an ongoing challenge. Failure to
accurately forecast product demand could result in the Company either being
unable to meet higher than anticipated demand or producing excess inventory that
cannot be sold at a profit or at all. In addition, many retail customers expect
to be able to return any products that are not sold by their expiration date.
There can be no assurance that excess production or product returns will not
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Business--Production and Processing."
PRODUCT LIABILITY RISKS. The Company has from time to time received
complaints from consumers regarding ill effects allegedly caused by its
products. While such claims have not resulted in any material liability to date,
there can be no assurance that future claims will not be made or that any such
claim will not result in adverse publicity for the Company or monetary damages,
either of which could materially and adversely effect the Company's business,
financial
17
condition and results of operations. The Company has an umbrella insurance
policy and carries product liability insurance. The Company's umbrella insurance
policy supplements the underlying general liability and product liability
insurance. There can be no assurance that this insurance will be adequate to
protect the Company against product liability claims, or that such insurance
will continue to be available to the Company on reasonable terms. A product
recall or a product liability judgment against the Company (regardless of
whether it is covered by insurance) could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Production and Processing."
RISK OF ADVERSE PUBLICITY. The Company is highly dependent upon consumers'
perception of the safety, quality, and possible dietary benefits of its
products. As a result, substantial negative publicity concerning organic
products, one or more of the Company's products, or other organic foods similar
to the Company's products could lead to a loss of consumer confidence in the
Company's products, removal of the Company's products from retailers' shelves
and reduced sales and prices of the Company's products. Any of these events
could have a material adverse effect on the Company's business, financial
condition or results of operations.
RISK OF LOSS OF ORGANIC CERTIFICATION. Horizon Organic relies on its
organic certification to differentiate its products. The Company has built its
brand image on the basis that its organic products are high quality, healthy,
environmentally responsible and animal-friendly. In order to claim that its
fluid milk and other dairy products are organic, Horizon Organic must be able to
demonstrate that all of the farm milk, processing and transportation steps
involved in the production of the finished goods are certified organic. The
organic status of the Company's products is currently certified by Quality
Assurance International, Oregon Tilth Certified Organic, Organic Growers and
Buyers Association and the Organic Crop Improvement Association. Organic
certification typically includes inspections of farm fields and operations,
processing and distribution facilities; detailed record keeping and periodic
testing of soil and water; and review of the organic producer's comprehensive
"organic plan" which details farm practices, documents product inputs and
discusses all procedures. These procedures are designed to ensure that all
producers, processors and transporters are meeting the applicable organic food
standards. Since Horizon Organic outsources to third parties a significant
amount of the production, substantially all of the processing and all of the
transportation of its organic products, there is a risk that a third party in
this supply and distribution chain could cause the Company to lose its organic
certification with regard to some of the Company's product lots. If Horizon
Organic or any of these third parties lose their organic certification with
regard to any particular product lot, consumers could lose confidence in the
Company's products which could adversely impact the integrity of the Company's
brand. Such a loss could have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Horizon Organic
Dairy Standards", "--Sales and Distribution" and "--Production and Processing."
RISKS ASSOCIATED WITH POSSIBLE INCREASES IN TRANSPORTATION COSTS.
Transportation costs have in the past and are expected in the future to
represent a significant portion of Horizon Organic's costs of sales. As a
result, the Company's results of operations are especially sensitive to
transportation costs. Transportation costs include the cost of transporting
organic feed to the Company-owned dairy farms, the cost of transporting organic
farm milk from the Company-owned dairy farms and other producers to processing
plants, and the cost of transporting finished products from the processors to
the distributors and retailers. Because of the Company's national pricing
policy, the Company bears the risk of unanticipated increases in the cost of
transporting finished products to the Company's distributors and retailers. The
cost of transportation has in the past, and is expected in the future, to be
volatile, as a result of many factors that the Company cannot control. For
example, transportation costs have in the past, and may in the future, be
subject to significant upward pressure as a result of labor disturbances or the
cost of petroleum products such as diesel fuel. Petroleum product prices
continue to be subject to unpredictable economic, political and market factors,
and the price and availability of diesel fuel continue to be unpredictable.
Significant increases in diesel fuel costs could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company relies on third parties for all of its transportation needs. A local,
regional or national labor disturbance affecting the Company's third party
transportation providers could disrupt the Company's ability to supply
products. Should such a labor disturbance
18
occur, there can be no assurance that the Company would be able to secure
suitable alternative transportation services on terms acceptable to the
Company, if at all. Accordingly, a labor disturbance affecting local,
regional or national transportation providers could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Sales and Distribution" and "--Production and
Processing."
POSSIBLE ADVERSE EFFECT DUE TO FUTURE CAPITAL REQUIREMENTS. In the future,
the Company may require significant amounts of additional capital to fund the
internal expansion of its operations, the acquisition of other businesses and
its working capital requirements. The exact amount of the Company's future
capital requirements will depend upon many factors, including the cost, timing
and extent of any upgrade or expansion of its operations, the Company's ability
to penetrate new markets, regulatory changes, the status of competing
businesses, the magnitude of potential acquisitions and the Company's results of
operations. Variances in these and other factors could cause material changes in
the Company's actual capital requirements. The sale of additional equity
securities or convertible securities would result in dilution to existing
stockholders, and the incurrence of additional indebtedness could subject the
Company to additional or more restrictive financial covenants. There can be no
assurance that additional financing will be available on acceptable terms or at
all. To the extent unplanned expenditures arise or the Company's estimates of
its capital requirements prove to be inaccurate, the Company may require such
additional financing sooner than anticipated and in amounts greater than current
expectations. If such funds are not available or are available on terms that the
Company views as unfavorable, the Company may be required to limit or abandon
certain of its expansion strategies. The delay or abandonment of some or all of
the Company's development and expansion plans or the incurrence by the Company
of additional debt could have a material adverse effect on the business,
financial condition and results of operations of the Company and on the market
price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
RISKS ASSOCIATED WITH CUSTOMER CONCENTRATION. In fiscal 2000, the Company's
two largest accounts were United Natural Foods and H.P. Hood, which accounted
for a total of approximately 24% of the Company's sales. United Natural Foods is
a national distributor comprised of five regional distributors which have
independent purchasing arrangements with the Company. There can be no assurance
that United Natural Foods will not adopt uniform buying practices and that sales
to these accounts will not decrease or that this customer will not choose to
replace the Company's products with those of competitors. The Company has a
distribution contract with H.P. Hood which expires in 2004 and may be renewed by
either party for an additional two years. The loss of these accounts or any
significant decrease in the volume of products purchased by these customers or
any other large customer would materially and adversely effect the Company's
business, financial condition and results of operations. Continuity of customer
relationships is important, and events that impact the Company's customers, such
as labor disputes, may have an adverse impact on the Company's business,
financial condition and results of operations. See "Business--Sales and
Distribution."
RISKS ASSOCIATED WITH RELIANCE ON INTELLECTUAL PROPERTY RIGHTS. The
Company's product packaging and merchandising designs are integral to the
success of the Company, and the Company intends to take action to protect
against imitation of its products and packages and to protect its trademarks and
copyrights as necessary. The Company currently has five US registered trademarks
and seventeen registered trademarks in other countries. There can be no
assurance that other third parties will not infringe or misappropriate the
Company's trademarks, trade dress and other proprietary rights.
In addition, Horizon Organic has developed substantial trade secrets and
know-how regarding the operation of organic dairy farms and caring for livestock
without the use of antibiotics or other drugs. However, there can be no
assurance that some or all of the trade secrets and other know-how that Horizon
Organic considers proprietary will not be independently developed, will not
otherwise become known by others or will not be deemed to be in the public
domain.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS. The Company has in place a
trademark licensing agreement
19
with Takanashi Milk Products, Ltd. in Japan. In addition, in the last two years
the Company has acquired Rachel's, Meadow Farms and Organic Matters in the
United Kingdom which provides the Company with a substantial presence in the UK.
The Company has only recently introduced Horizon Organic branded products in the
UK. There can be no assurance that the Company will be successful in attracting
consumers in foreign demographic and geographic markets. There may not be a
demand in foreign countries with respect to the Company's existing products and
new products, if any, that the Company may offer in the future. In addition, the
Company is subject to the normal risks of conducting business internationally,
which include unexpected changes in regulatory requirements (including changes
to organic certification standards), imposition of government controls,
political and economic instabilities, export license requirements, foreign
exchange risks, tariffs and other barriers, and potentially adverse tax
consequences. In addition, the laws of certain foreign countries may not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. Other risks inherent in the Company's international business include
greater difficulties in accounts receivable collection, the potential of
protective trade activities or laws and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that these factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.
RISKS ASSOCIATED WITH EXCHANGE RATES. The Company may, from time to time,
need to exchange currency from income generated by the Company's foreign
subsidiary in the United Kingdom. In addition, the Company will convert its UK
financial statements from UK to US currency. Foreign exchange rates are volatile
and can change in an unknown and unpredictable fashion. Should the foreign
exchange rates change to levels different than anticipated by the Company, its
business, financial condition and results of operations may be materially
adversely affected.
RISKS ASSOCIATED WITH LICENSING AGREEMENTS WITH OTHER PRODUCERS. From time
to time the Company has and may enter into licensing agreements with various
producers granting them the right to use portions or all of the Company's
distinctive brand name, trademarks including the "Happy Cow" logo, or the red,
yellow and blue colors which are part of the Company's trade dress theme. Once
associated with the Company, actions taken by the licensees can potentially have
an adverse effect on the Company. Customer dissatisfaction or performance
problems with a single licensee could also have an adverse effect on the
reputation of the Company. There can be no assurance that these factors will not
have a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 2. PROPERTIES
Horizon Organic has two production facilities, the Idaho Dairy and the
Maryland Dairy. The Idaho Dairy consists of over 3,800 acres, including 22,755
square feet of production and office space. Horizon Organic owns this property,
which serves as security for the Idaho Dairy loan with Farm Credit Services. The
Maryland Dairy consists of over 450 acres, including 109,059 square feet of
production and office space (including barns). Horizon Organic owns this
property which serves as security for two notes payable with Peoples Bank of
Kent County, Maryland. Horizon Organic also leases a 26,000 square foot facility
in Longmont, Colorado for its corporate headquarters. In March of 2000, the
Company purchased the California Farm which consists of 607 acres in Wilton,
California. The Idaho Dairy, the Maryland Dairy and the California Farm also
serve as security for Horizon Organic's $25 million term loan and $25 million
line of credit with US Bank. As a result of the Meadow Farms purchase, the
Company leases approximately 1,000 square feet of office space and 19,645 square
feet of factory space in the UK. Finally, the Company leases the US Naval
Academy Dairy near Annapolis, Maryland where the Company has built and maintains
the Center. The Company believes that its facilities are suitable for the
Company's purposes.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may become involved in or subject to various
litigation and legal proceedings incidental to the normal conduct of the
Company's business. The Company is not involved in any material legal
proceedings.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading publicly in the over-the-counter
market through the NASDAQ National Market under the symbol "HCOW" on July 2,
1998. Prior to that date, there was no public market for the Common Stock. The
closing price of the Company's Common Stock as reported on the NASDAQ National
Market as of March 1, 2001 was $5 per share. The following table sets forth for
the periods indicated the high and low closing sale quotations for the Common
Stock as reported on the NASDAQ National Market. The prices reported do not
include retail mark-ups, markdowns or commissions.
High Low
---- ---
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter $ 17.50 $ 13.75
Second Quarter $ 17.25 $ 12.00
Third Quarter $ 14.62 $ 11.12
Fourth Quarter $ 11.12 $ 7.25
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter $ 11.31 $ 7.37
Second Quarter $ 12.00 $ 8.25
Third Quarter $ 11.68 $ 8.06
Fourth Quarter $ 8.12 $ 4.43
The Company has not declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate paying
cash dividends in the foreseeable future. The payment of any future dividends
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements and
financial condition of the Company. In addition, the Company's line of credit
and term loan with US Bank National Association prohibit the payment of
dividends.
As of March 14, 2001, there were approximately 4,500 holders of the
Company's common stock. This number is based on the understanding that as of
March 14, 2001, there were approximately 283 holders of record of the Company's
Common Stock.
Since January 1, 2000, the Company has not sold or issued any unregistered
securities.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data below presents consolidated financial
information of the Company. The selected consolidated financial data should be
read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and related notes, included elsewhere herein. The
financial data pertaining to 2000, 1999 and 1998 is derived from the
consolidated financial statements of the Company included herein. The financial
data pertaining to 1997 and 1996 is derived from audited financial Company
statements not included herein.
21
FISCAL YEAR ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 28,
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $ 127,206 $ 84,771 $ 49,360 $ 29,565 $ 15,986
Cost of sales(1) 86,903 56,591 32,615 22,639 11,425
--------- -------- -------- -------- --------
Gross profit 40,303 28,180 16,745 6,926 4,561
Selling expenses 25,387 18,399 11,007 5,656 3,270
General and administrative expenses 8,964 6,185 2,871 2,259 1066
Goodwill amortization 2,545 1,215 467 125 0
--------- -------- -------- -------- --------
Operating income (loss) 3,407 2,381 2,400 (1,114) 225
Other income (expense), net (2,495) 58 (825) (1,108) (184)
--------- -------- -------- -------- --------
Income (loss) from continuing operations before income
taxes, minority interest and extraordinary item 912 2,439 1,575 (2,222) 41
Income tax benefit (expense) (393) (1,037) (675) 513 (14)
Minority interest in loss of subsidiary(2) -- -- -- 687 --
--------- -------- -------- -------- --------
Income (loss) from continuing operations 519 1,402 900 (1,022) 27
Extraordinary item, net of income tax(3) -- -- (414) -- --
--------- -------- -------- -------- --------
Net income (loss) $ 519 $ 1,402 $ 486 $ (1,022) $ 27
========= ======== ======== ======== ========
Net income (loss) per basic share(4) $ .05 $ .15 $ .07 $ (.23) $ .01
========= ======== ======== ======== ========
Net income (loss) per diluted share(4) $ .05 $ .14 $ .06 $ (.23) $ .01
========= ======== ======== ======== ========
Weighted average shares outstanding:
22
Basic 9,796 9,668 7,339 4,488 3,264
Diluted 10,030 9,992 7,742 4,488 3,283
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 2,438 $ 3,693 $ 14,384 404 $ 600
Working capital 23,714 18,436 28,298 2,935 414
Total assets 132,164 84,612 69,356 32,737 5,232
Long-term debt, less current portion 45,685 11,337 4,923 17,960 --
Total stockholders' equity 58,644 57,888 55,970 8,886 3,264
(1) Prior to fiscal 1997, the Company recorded its share of the losses of
Sunrise Organic Farms, Inc. ("Sunrise") in other income (expense), net. As a
result of the acquisition of the remainder of Sunrise in May 1997, a loss of
$1.3 million is included in cost of sales for fiscal 1997.
(2) The results of operations of Sunrise have been included in the Company's
consolidated statements of operations from January 1, 1997, with an offsetting
minority interest recorded, covering the period in which Sunrise was not 100%
owned by the Company, of $687,000 during fiscal 1997.
(3) The extraordinary item relates to the early extinguishment of the senior
subordinated promissory notes and is comprised of the write off of unaccreted
discount of $667,000. The write off was charged to expense and is classified as
an extraordinary item net of tax benefit of $253,000, in the Company's
consolidated statements of operations for the year ended December 31, 1998.
(4) Net income (loss) per share is computed using the weighted average number
of common shares (basic) and common and common equivalent shares (diluted)
outstanding during the period. See note 2 to the Company's Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THIS SECTION, THE SECTION ENTITLED "BUSINESS-RISK
FACTORS" AND OTHER SECTIONS IN THIS REPORT.
The following should be read in conjunction with Item 1 of the Company's
report on Form 10-K for the year ending December 31, 2000 and the consolidated
financial statement and accompanying notes attached to that report on Form 10-K.
OVERVIEW
REVENUE RECOGNITION. Revenue is recognized at the time of shipment or pick
up. Sales to new customers are at times made on a 90-day guaranteed basis; if
the customer is unable to sell all of the Company's products during the first 90
days after it becomes a Horizon Organic customer, the Company buys back the
excess inventory. Historically,
23
the Company has experienced a return rate on guaranteed sales of less than 1% of
total sales. Sales under this provision are not significant.
FARM ACCOUNTING. The Company follows generally accepted accounting
principles for farm accounting. Cows are depreciated using the straight-line
method over five years commencing with their first milking. The capitalized cost
of each cow is based on the purchase price plus pre-production costs. The Idaho
Dairy and the Maryland Dairy sell organic farm milk to Horizon Organic at an
inter-company transfer price which the Company believes approximates fair value.
All inter-company sales have been eliminated in the Company's consolidated
financial statements.
PURCHASE OF ORGANIC MILK FROM THIRD-PARTY PRODUCERS. In order to augment
its internal supply of organic farm milk, the Company contracts with various
organic farmers and cooperatives throughout the United States and the United
Kingdom. In the US, these contracts are generally for twelve to twenty-four
months and are renewable upon agreement by the Company and the producer. In the
United Kingdom, these contracts are three months to four years and are renewable
upon agreement by the Company and the producer. All US and UK production
contracts require that the Company purchase minimum quantities of organic farm
milk and are priced using butterfat differentials and quality testing. If the
Company cannot use the minimum amount as organic fluid milk or in other organic
products, the Company sells the organic milk as conventional milk and records
the difference between the Company's purchase price and the conventional price
in cost of sales.
PROCESSING. In the US, Horizon Organic has a network of 27 dairy processors
(7 fluid milk processors and 20 non-fluid milk dairy product processors) which
process the Company's organic farm milk into refrigerated organic fluid milk and
other organic dairy products. In addition, it has 6 processors which produce
organic citrus juices. The Company also uses two refrigerated warehouses where
it inventories organic dairy products. The costs associated with processing
arrangements are included in the cost of sales. These costs include the cost of
processing as well as payments which Horizon Organic makes to processors which
are then paid into the Federal Milk Market Order System. The Company's product
sales mix affects its overall gross margin since processing costs vary by
product. Although the Company has long-term processing agreements with Steuben
Foods Incorporated ("Steuben") and one of its affiliates, and processing and
distribution agreements with certain Suiza Foods Corporation ("Suiza")
subsidiaries, it does not have long-term agreements with its other processors.
In the United Kingdom, the Company processes its products primarily at its
Rachel's and Meadow Farms plants. The balance of the products (less than 5%) are
processed at four third-party plants.
SALES. Horizon Organic's sales of domestic organic fluid milk products
comprise approximately 59%, 68% and 72% of its total net sales, with $74.7
million, $57.5 million and $35.6 million in sales in 2000, 1999 and 1998,
respectively. This trend reflects the overall increase in sales from the
Company's other dairy and juice products. The Company's next largest product
line, its organic yogurt products, has been declining as a percentage of total
net sales as the Company has introduced additional organic dairy products.
Horizon Organic's sales of domestic organic yogurt products comprise
approximately 6%, 8% and 10% of its net sales, with $7.7 million, $6.4 million
and $5.1 million in sales in 2000, 1999 and 1998, respectively. Horizon
Organic's sales of organic butter products comprise approximately 6%, 7% and 7%
of its total net sales, with $7.5 million, $6.0 million and $3.3 million in
2000, 1999 and 1998, respectively. The Company's domestic organic juice line
products comprise approximately 5%, 5% and 2% of the Company's net sales, with
$6.8 million, $4.0 million and $.7 million in sales in 2000, 1999 and 1998,
respectively. International sales, which includes sales of Rachel's during both
2000 and 1999, and includes sales of Meadow Farms and Organic Matters products
in the United Kingdom beginning on June 1, 2000, amounted to $22.2 million and
$4.4 million or 18% and 5% of sales in 2000 and 1999, respectively. There were
no international sales prior to 1999. The remainder of the Company's total net
sales includes sales of its cheeses, cottage cheese, cream cheese, sour cream,
organic egg royalties and consulting income. The Company anticipates that its
product mix will change over time as it introduces other organic dairy products
in accordance with its business strategy. In addition, international sales are
24
expected to increase as a result of the June 2000 acquisitions of Meadow Farms
and Organic Matters.
GOVERNMENT REGULATION OF MILK PRICING. The Federal Milk Market Order System
was developed to ensure the availability of farm milk for certain products, such
as fluid milk, and to provide minimum prices for farm milk regardless of how the
farm milk is actually used (i.e., whether it is used for a high value product
like fluid milk or a lower value product like non-fat dry milk powder). The
processor is responsible for paying fees to the Federal Milk Market Order
System. Dairy processors pass through these "pooling" charges to dairies, like
the Company, through their prices for processing farm milk. These payments are
determined by the Federal Milk Market Order System Administrators on a monthly
basis, are billed to the Company in the month after they are determined, are
generally related to conventional farm milk prices, and can vary materially from
period to period. For 2000, 1999 and 1998, the Company expensed over $2,435,000,
$1,734,000 and $750,000, respectively, for pooling, compact and administrative
assessment charges.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
NET SALES. Net sales include product sales, royalties and consulting
revenue, less returns and allowances. Net sales increased 50% to $127.2 million
in 2000 from $84.8 million in 1999. Of this total net sales increase of $42.4
million, increased net sales from US operations were $24.5 million and increased
net sales from international operations were $17.9 million. The increase in US
net sales was primarily due to the increased sales of existing products to
existing accounts and the continued expansion of conventional grocery
distribution channels. Also, this increase in US net sales was due in part to a
full year of operations from the April 1999 acquisition of The Organic Cow brand
in the northeastern US The increase in international net sales was primarily due
to seven months of operations from the Meadow Farms and Organic Matters
acquisitions in the United Kingdom and partly due to a full year of operations
from the April 1999 Rachel's acquisition in the United Kingdom.
GROSS PROFIT. Gross profit consists of net sales, less cost of sales. Cost
of sales includes the cost of raw materials, processing fees, inbound freight,
milk pooling charges, losses of organic premiums and operating income or loss
before goodwill amortization from farm operations. Gross profit increased 43% to
$40.3 million in 2000 from $28.2 million in 1999. As a percentage of net sales,
gross profit decreased to 31.7% in 2000 from 33.2% in 1999. This decrease was
due to an increase of 411%, or $17.9 million, in lower margin international
sales. In 2000 these international sales had gross margins of 24.6% overall
compared to 34.7% in 1999. The lower international gross margins reflect the
results of a change in product mix to primarily private label products as a
result of the Meadow Farms acquisition. The Company launched branded milk sales
in its international operations in late 2000. The US gross profit margins
remained unchanged from 1999 at 33.2% in 2000.
SELLING EXPENSES. Selling expenses include direct selling, marketing and
distribution costs. Selling expenses increased 38% to $25.4 million in 2000 from
$18.4 million in 1999. As a percentage of net sales, selling expenses decreased
to 20.0% in 2000 from 21.7% in 1999. This decrease was due primarily to the
international selling expenses decreasing to 11.2% in 2000 from 14.7% in 1999,
as a result of lower selling costs associated with private label products.
Additionally, the US selling costs decreased to 21.8% in 2000 from 22.1% in
1999, as a result of warehouse consolidation and direct delivery shipments,
partially offset by increased fuel costs. Also, the overall decrease in selling
expenses as a percentage of net sales was partially due to the increased
leverage of selling expenses over a larger revenue base, partially offset by
increased logistics costs for expanded distribution.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include operations and corporate support. These expenses increased 45% to $9.0
million in 2000 from $6.2 million in 1999. As a percentage of net sales, general
and administrative expenses decreased to 7.0% in 2000 from 7.3% in 1999. This
decrease as a percent of net sales was due to improved productivity in the US
The US general and administrative expenses as a percentage of net sales
decreased to 6.5% in 2000 from 7.0% in 1999. The international general and
administrative expenses as a percentage of net sales decreased to 9.8% in 2000
from 12.7% in 1999 due to the increased leverage of general and administrative
expenses over a larger revenue base.
25
GOODWILL AMORTIZATION. Goodwill amortization expenses include amortization
of acquisition costs over net assets acquired. These expenses increased 109% to
$2.5 million in 2000 from $1.2 million in 1999. As a percentage of net sales,
goodwill amortization expenses increased to 2.0% in 2000 from 1.4% in 1999. This
increase in goodwill amortization was due to amortization of intangible assets
associated with the June 2000 acquisitions of Meadow Farms and Organic Matters
and a full year of goodwill amortization on the April 1999 Rachel's and The
Organic Cow acquisitions.
OTHER INCOME (EXPENSE), NET. Other income (expense), net decreased to an
expense of $2.5 million in 2000 from income of $.1 million in 1999. This
decrease was primarily attributable to an increase in interest expense on the
$25 million term note used to finance the June 2000 Meadow Farms and Organic
Matters acquisitions and the increase in amounts outstanding under the Company's
line of credit.
INCOME TAX EXPENSE. Income tax expense decreased 62% to $.4 million, or 43%
of income before income taxes, in 2000 from $1.0 million, or 43% of income
before income taxes, in 1999. The relationship between the expected income tax
expense computed by applying the United States federal statutory rate of 34% to
income before income taxes and actual income tax expense results primarily
because of (i) foreign income tax expense provided on foreign earnings, (ii)
state and local income taxes and (iii) amortization of certain goodwill not
deductible for United States and United Kingdom tax purposes.
NET INCOME. The Company generated net income of $.5 million in 2000, a
decrease of $.9 million compared to net income of $1.4 million for 1999. The
decrease in net income was due to increased goodwill amortization and interest
expense associated with the June 2000 acquisitions of Meadow Farms and Organic
Matters and a full year of goodwill amortization from the April 1999 Rachel's
and The Organic Cow acquisitions. Net income for the US operations increased $.4
million, or 30%, to $1.8 million in 2000 from $1.4 million in 1999. Net income
for the international operations decreased $1.3 million to a net loss of $1.3
million from just over breakeven in 1999 primarily due to the increased goodwill
amortization and interest expense associated with the June 2000 acquisitions of
Meadow Farms and Organic Matters. This decrease in net income for the
international operations was partly due to the loss of a UK customer, Tesco,
which changed to a different organic milk supplier resulting in the Company
experiencing lower overall growth in international operations than anticipated.
COMPREHENSIVE INCOME. Comprehensive income decreased to income of $.3
million for 2000, a decrease of $1.1 million compared to comprehensive income of
$1.4 million for 1999. This decrease in comprehensive income was primarily due
to decreased net income resulting from increased goodwill amortization and
interest expense associated with the June 2000 acquisitions of Meadow Farms and
Organic Matters. This decrease in comprehensive income was partly due to the
translation of the Company's investment in its UK subsidiaries to US dollars
from pound sterling ($.3 million). The Company translates its UK assets and
liabilities at the exchange rate in effect at the end of the period. At December
31, 2000 and December 31, 1999, UK pound sterling translated to US dollars at
approximately 1.494 and 1.617 dollars to the pound sterling, respectively.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
NET SALES. Net sales include product sales, royalties and consulting
revenue, less returns and allowances. Net sales increased 72% to $84.8 million
in 1999 from $49.4 million in 1998. This increase was primarily due to the
acquisition of The Organic Cow of Vermont brand in the northeastern United
States and Rachel's in the UK, as well as increased sales of existing products
to existing accounts, continued development of conventional grocery food
channels and the introduction of several new products, including organic citrus
juices.
GROSS PROFIT. Gross profit consists of net sales, less cost of sales; cost
of sales includes the cost of raw materials, processing fees, inbound freight,
milk pooling charges, losses of organic premiums and operating income or loss
before goodwill amortization from farm operations. Gross profit increased 68% to
$28.2 million in 1999 from $16.7 million in 1998. As a percentage of sales,
gross profit decreased to 33.2% in 1999 from 33.9% in 1998. This decrease
26
was due primarily to an increase in the sale of excess organic milk at
conventional prices, reduced salvage of excess milk capacity due to lower
conventional milk prices in 1999 as compared to 1998, and accrual of producer
promotion fees. This was partially offset by increased income at the Idaho
Dairy.
SELLING EXPENSES. Selling expenses include direct selling, marketing and
distribution costs. Selling expenses increased 67% to $18.4 million in 1999 from
$11.0 million in 1998. As a percentage of net sales, selling expenses decreased
to 21.7% in 1999 from 22.3% in 1998, due primarily to costs relating to the
support of growth initiatives and increased levels of marketing expenses
including hiring additional marketing personnel as well as increased costs for
expanded distribution.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include operations and corporate support. These expenses increased 114% to $6.2
million in 1999 from $2.9 million in 1998. As a percentage of net sales, general
and administrative expenses increased to 7.3% in 1999 from 5.9% in 1998. This
increase was due primarily to the development of corporate infrastructure to
support the Company's growth, costs associated with changes in senior
management, hiring of additional operations personnel and increased costs
associated with becoming a public company.
GOODWILL AMORTIZATION. Goodwill amortization expenses include amortization
of acquisition costs over net assets acquired. These expenses increased 160% to
$1.2 million in 1999 from $.5 million in 1998. As a percentage of net sales,
goodwill amortization expenses increased to 1.4% in 1999 from .9% in 1998. This
increase in goodwill amortization was due to amortization of intangible assets
associated with the April 1999 acquisitions of Rachel's and The Organic Cow and
to a full year of amortization associated with the Juniper Valley Farms brand
acquisition.
OTHER INCOME (EXPENSE), NET. Other income (expense), net increased to
income of $58,000 in 1999 from expense of $825,000 in 1998. This increase was
primarily attributable to an increase in interest income on invested cash
combined with reduced interest expense in 1999 due to early extinguishment of
debt in 1998.
INCOME TAX EXPENSE. Income tax expense increased 54% to $1.0 million, or
43% of income before income taxes, in 1999 from $.7 million, or 43% of income
before income taxes, in 1998. The relationship between the expected income tax
expense computed by applying the United States federal statutory rate of 34% to
income before income taxes and actual income tax expense results primarily
because of (i) foreign income tax expense provided on foreign earnings, (ii)
state and local income taxes and (iii) amortization of certain goodwill not
deductible for United States tax purposes.
NET INCOME. The Company generated net income of $1.4 million in 1999, an
increase of $.9 million compared to net income of $.5 million for 1998. The
increase in net income was due to efficiencies gained in the supply chain
including the farm operations as well as continued strong growth of product
sales.
COMPREHENSIVE INCOME. Comprehensive income increased to income of $1.4
million for 1999, an increase of $.9 million compared to comprehensive income of
$.5 million for 1998. This increase in comprehensive income was due to
efficiencies gained in the supply chain including the farm operations as well as
continued growth of product sales. This increase in comprehensive income was
partially offset due to the translation of the Company's investment in its
United Kingdom subsidiaries to US dollars from pound sterling ($31,000). The
Company translates its UK assets and liabilities at the exchange rate in effect
at the end of the period. At December 31, 1999, UK pound sterling translated to
US dollars at approximately 1.617 dollars to the pound sterling.
LIQUIDITY AND CAPITAL RESOURCES
Horizon Organic's primary sources of capital have been cash flows from
operations, trade payables, bank indebtedness, and the sale of debt and equity
securities. Primary uses of cash have been the financing of the Idaho Dairy and
Maryland Dairy operations and acquisitions of companies, brand names and
distribution networks domestically as well as in the United Kingdom. The
following table presents a summary of the Company's cash flows for 2000, 1999
27
and 1998:
Year
--------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Net cash provided by (used in) operating
activities $ (7,116) $ 2,501 $ 3,667
Net cash used in investing activities (33,368) (12,530) (19,249)
Net cash provided by (used in)
financing activities 39,214 (662) 29,562
Effect of exchange rate changes on cash 15 0 0
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents $ (1,255) $(10,691) $ 13,980
======== ======== ========
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. Net cash provided by
(used in) operating activities was $7.1 million used in operations, $2.5 million
provided by operations and $3.7 million provided by operations in 2000, 1999 and
1998, respectively. This decrease of $9.6 million in 2000 was primarily
attributable to an increase in powdered milk, butter and raw citrus inventories
and an increase in accounts receivable from sales growth, partially offset by an
increase in accounts payable, accrued expenses and an increase in non-cash
goodwill amortization charges associated with the Meadow Farms and Organic
Matters acquisitions. The decrease in 1999 was primarily attributable to an
increase in accounts receivable and inventories, partially offset by an increase
in net income, accounts payable and accrued expenses.
NET CASH USED IN INVESTING ACTIVITIES. Net cash used in investing
activities was $33.4 million, $12.5 million and $19.2 million in 2000, 1999 and
1998, respectively. The expenditures in 2000 were primarily attributable to the
acquisitions of Meadow Farms and Organic Matters in the United Kingdom as well
as domestic routine cattle and farm equipment purchases. Also, in part, the 2000
expenditures included leasehold improvements at the Horizon Organic Dairy Farm
and Education Center at the former Naval Academy Dairy in Gambrills, Maryland,
as well as an increase in other assets purchased including enterprise resource
planning software. The expenditures in 1999 were attributable to the
acquisitions of The Organic Cow of Vermont brand name and Rachel's, an increase
in cattle purchases, and marketable securities. The expenditures in 1998
primarily related to the net investment in marketable securities, the
acquisition of the Juniper Valley brand, and expenditures related to the
purchase of property and equipment at the Maryland Dairy and the purchases and
costs of raising cattle at the Maryland Dairy and the Idaho Dairy.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash provided by
(used in) financing activities was $39.2 million provided by, $.7 million used
in and $29.6 million provided by financing activities in 2000, 1999 and 1998,
respectively. The increase in cash provided by financing activities in 2000 was
due primarily to the Company entering into a $25.0 million term loan with US
Bank to finance the Meadow Farms acquisition. Additionally, the Company began to
utilize its line of credit with US Bank for operating needs as working capital
grew from $18.4 million to $23.7 million. The decrease in cash provided by
financing activities in 1999 was due primarily to the decrease in proceeds from
the sale of common stock. The increase in 1998 was due primarily to the Company
receiving net proceeds of $46.3 million from the sale of common stock through an
initial public offering and a concurrent private placement, offset by the
repayment of indebtedness.
28
Company management believes that cash and cash equivalents, cash expected
to be generated from operations and the availability of funds under the line of
credit will be sufficient to meet the Company's foreseeable operating and
capital expenditure needs.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"),
which is effective for fiscal years beginning after June 15, 2000. FAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies under the standard for hedge accounting.
The Company does not anticipate any impact on its financial condition or results
of operations as a result of implementing this standard in 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE MARKET RISK
The Company's primary market risks include changes in foreign currency
exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign currency
exchange and interest rates. The Company occasionally enters into forward
financial instruments, to manage and reduce the impact of changes in foreign
currency rates, with major financial institutions. The Company does not use
financial instruments to manage changes in commodity prices. The Company does
not hold or issue financial instruments for trading purposes.
QUANTITATIVE MARKET RISK: VALUE AT RISK
FOREIGN EXCHANGE CONTRACTS. The Company occasionally enters into forward
financial instruments to manage and reduce the impact of changes in foreign
currency rates with a financial institution. Generally, these instruments are
marked-to-market at the end of each month and gains and losses are recorded in
the statement of income.
INTEREST RATES. At December 31, 2000, the Company had approximately $8.1
million of fixed rate long-term debt (including current maturities.) The fair
value of long-term fixed interest rate debt is subject to interest rate risk.
Generally, among other factors including credit ratings, the fair value of fixed
interest rate debt will increase as interest rates fall and decrease as interest
rates rise. The estimated fair value of the Company's total fixed rate long-term
debt with fixed interest rate (including current portion) at December 31, 2000
was $7.6 million, which was less than the carrying value by $0.5 million. Fair
values were determined primarily from quoted market rates. A 1% point decrease
from prevailing interest rates at December 31, 2000, would result in an
estimated increase in fair value of total fixed interest rate long-term debt of
approximately $0.4 million.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes thereto required by
this item are listed and set forth herein beginning on page F-1.
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the section of the Company's 2000 Definitive
Proxy Statement anticipated to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2000 entitled "Proposal 1 - Election
of Directors" and the section entitled "Management."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the section of the Company's 2000 Definitive
Proxy Statement anticipated to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2000 entitled "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section of the Company's 2000 Definitive
Proxy Statement anticipated to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2000 entitled "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section of the Company's 2000 Definitive
Proxy Statement anticipated to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2000 entitled "Certain Relationships
and Related Transactions."
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS ANNUAL REPORT ON
FORM 10-K.
1. Consolidated Financial Statements: The consolidated financial
statements of Horizon Organic Holding Corporation are included as
Appendix F of this report. See Index to Consolidated Financial
Statements on page F-1.
2. Financial Statement Schedules: The information is presented in
the consolidated financial statements or related notes.
3. Exhibits.
30
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1+ Amended and Restated Certificate of Incorporation.
3.2+ Amended and Restated Bylaws of the Company.
4.1+ Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen stock certificate representing shares of Common Stock of
the Company.
10.1* 1998 Equity Incentive Plan, as amended.
10.2* Form of Company's Stock Option Agreement, as amended.
10.3+* 1998 Employee Stock Purchase Plan.
10.4+ Form of Indemnity Agreement.
10.5+ Form of Warrant to Purchase Common Stock
10.6+ Warrant to Purchase Common Stock issued to McCabe Mintz & Co.
10.7+ Restatement, Amendment and Assumption Agreement, dated as of
March 20, 1997 among Farm Credit Services, Sunrise, HOD, Marcus
B. Peperzak and Farm Credit Bank of Wichita and the Modification
to Note and Loan Agreement dated June 23, 1995 and addressed in
the Restatement, Amendment and Assumption Agreement dated March
20, 1997 pertaining to Farm Credit Bank of Wichita Loan 2371719.
10.8+ Amended Executive Employment Agreement effective January 1, 1998
between the Company and Barnet Feinblum.
10.9+ Amended Executive Employment Agreement, effective January 1,
1998, between the Company and Mark A. Retzloff.
10.10+ Office Lease for Horizon Building, dated October 10, 1996,
between HOD and MUM II, LLC, as amended by the Addendum to Lease
and Second Addendum to Lease, dated October 10, 1996 and Third
Addendum to Lease, dated March 31, 1997, as amended by Exhibit
10.18.
10.11+ Stock Purchase Agreement, dated as of June 5, 1998, between the
Company and Suiza Foods Corporation.
10.12+ Stockholder Agreement, dated as of June 5, 1998, between the
Company and Suiza Foods Corporation.
10.13+++ Horizon Organic Holding Corporation Dairy Business Agreement by
and among Horizon Organic Holding Corporation, H.P. Hood Inc. and
The Organic Cow L.L.C. dated April 30, 1999.
10.14++++* Amended and Restated Employment Agreement, effective November 29,
1999, between Company and Charles F. Marcy.
10.15+++++ Share Sale Agreement Dated May 31, 200 among Roger Persey &
Others, Peter Dunsford and Horizon Organic Dairy Limited.
10.16 Amended and Restated Loan and Security Agreement, dated as of May
30, 2000, among US Bank National Association and Horizon Organic
Holding Corporation.
10.17 First Amendment to Amended and Restated Loan and Security
Agreement, dated as of September 28, 2000, among US Bank National
association and Horizon Organic Holding Corporation.
10.18 Fourth Addendum to Lease, dated May 14, 1999 and Fifth Addendum
to Lease, dated June 21, 2000, reference to Exhibit 10.10.
21.1 Statement re: Subsidiaries of the Company.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney. Reference is made to the signature page
contained herein.
99.1++* Form of Non-Qualified Stock Option Agreement dated January 10, 1998.
99.2++* Stock Option Agreement between the Company and Barnet M. Feinblum
dated June 1, 1995.
99.3++* Stock Option Agreement between the Company and Barnet M. Feinblum
dated June 1, 1995.
Exhibits identified above are incorporated by reference as follows:
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-1 No. 333-51465.
++ Incorporated by reference to the Registrant's Registration Statement on
Form S-8, No. 333-64905.
31
+++ Incorporated by reference to the Registrant's Annual Report on Form 10-Q
for the quarter ended June 30, 1999
++++ Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999.
+++++ Incorporated by reference to the Registrant's Current Report on Form 8-K
dated June 1, 2000 and filed on June 15, 2000, as amended on August 14,
2000.
* Indicates each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(b) REPORTS ON FORM 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 19th day of
March, 2001.
HORIZON ORGANIC HOLDING CORPORATION
By: /s/ CHARLES F. MARCY
-----------------------------
Charles F. Marcy
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles F. Marcy and Thomas P. Briggs, or any of
them, his or her attorney-in-fact, each with the power of substitution, for him
or her in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connections
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ THOMAS D. MCCLOSKEY, JR. Chairman of the Board of Directors March 19, 2001
----------------------------
THOMAS D. MCCLOSKEY, JR.
/s/ CHARLES F. MARCY President, Chief Executive March 19, 2001
---------------------------- Officer, Director (Principal
CHARLES F. MARCY Executive Officer)
32
SIGNATURE TITLE DATE
/s/ THOMAS P. BRIGGS Senior Vice President, Finance March 19, 2001
---------------------------- & Administration Chief Financial
THOMAS P. BRIGGS Officer, and Treasurer (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
/s/ PAUL B. REPETTO Director March 19, 2001
----------------------------
PAUL B. REPETTO
/s/ MARK A. RETZLOFF Director March 19, 2001
----------------------------
MARK A. RETZLOFF
/s/ BARNET M. FEINBLUM Director March 19, 2001
----------------------------
BARNET M. FEINBLUM
/s/ CLARK R. MANDIGO II Director March 19, 2001
----------------------------
CLARK R. MANDIGO II
/s/ RICHARD L. ROBINSON Director March 19, 2001
----------------------------
RICHARD L. ROBINSON
/s/ G. IRWIN GORDON Director March 19, 2001
----------------------------
G. IRWIN GORDON
/s/ MICHELLE GOOLSBY Director March 19, 2001
----------------------------
MICHELLE GOOLSBY
33
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2000 and 1999
(With Independent Auditors' Report Thereon)
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders'
Equity and Comprehensive Income F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Horizon Organic Holding Corporation:
We have audited the consolidated balance sheets of Horizon Organic Holding
Corporation and subsidiaries (Company) as of December 31, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Horizon Organic
Holding Corporation and subsidiaries as of December 31, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three- year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Boulder, Colorado
February 6, 2001
F-2
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31, 2000 and 1999
2000 1999
--------- -------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,438 3,693
Marketable securities -- 8,218
Trade accounts receivable, less allowance
for doubtful accounts of $216 in 2000
and $167 in 1999 18,580 10,168
Inventories 22,410 8,935
Asset held for sale 1,812 --
Deferred income tax assets 439 334
Prepaid and other current assets 3,280 1,313
--------- -------
Total current assets 48,959 32,661
--------- -------
Property, Equipment and Cattle:
Cattle, net 13,965 12,737
Property and equipment, net 23,186 18,076
--------- -------
Total property, equipment and cattle 37,151 30,813
--------- -------
Other Assets:
Intangible assets, net of accumulated
amortization of $4,332 in 2000
and $1,785 in 1999 44,348 20,651
Other assets, net 1,706 487
--------- -------
Total other assets 46,054 21,138
--------- -------
Total Assets $ 132,164 84,612
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 6,752 2,323
Trade accounts payable 11,500 7,756
Other accrued expenses 6,993 4,016
Income taxes payable -- 130
--------- -------
Total current liabilities 25,245 14,225
--------- -------
Long-Term Liabilities:
Long-term debt, less current portion 45,685 11,255
Accrued liabilities -- 82
Deferred income tax liabilities 2,590 1,162
--------- -------
Total long-term liabilities 48,275 12,499
--------- -------
Total liabilities 73,520 26,724
--------- -------
Stockholders' Equity:
Preferred stock, $.001 par value,
authorized 5,000,000 shares;
no shares issued or outstanding -- --
Common stock, $.001 par value;
authorized 30,000,000 shares; 9,899,880
and 9,743,659 shares issued and
outstanding in 2000 and 1999, respectively 10 10
Additional paid-in capital 58,884 58,392
Accumulated other comprehensive loss -
foreign currency translation adjustment (286) (31)
Retained earnings (deficit) 36 (483)
--------- -------
Total stockholders' equity 58,644 57,888
--------- -------
Commitments and contingencies
(notes 9, 13, 15, 16 and 20)
Total Liabilities and Stockholders' Equity $ 132,164 84,612
========= =======
See accompanying notes to consolidated financial statements.
F-3
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------- ------- -------
Net sales $ 127,206 84,771 49,360
Cost of sales 86,903 56,591 32,615
--------- ------- -------
Gross profit 40,303 28,180 16,745
--------- ------- -------
Operating expenses:
Selling 25,387 18,399 11,007
General and administrative 8,964 6,185 2,871
Goodwill amortization 2,545 1,215 467
--------- ------- -------
Total operating expenses 36,896 25,799 14,345
--------- ------- -------
Operating income 3,407 2,381 2,400
--------- ------- -------
Other income (expense), net:
Interest income 299 855 636
Interest expense, net of interest
capitalized of $90 in 2000 (2,647) (704) (1,394)
Other, net (147) (93) (67)
--------- ------- -------
Total other income (expense), net (2,495) 58 (825)
--------- ------- -------
Income before income taxes
and extraordinary item 912 2,439 1,575
Income tax expense (393) (1,037) (675)
--------- ------- -------
Income before extraordinary item 519 1,402 900
Extraordinary item-loss on early
extinguishment of debt, net of income
tax benefit of $253 -- -- (414)
--------- ------- -------
Net income $ 519 1,402 486
========= ======= =======
Net income per basic share:
Income before extraordinary item $ .05 .15 .12
Extraordinary item -- -- (.05)
--------- ------- -------
Net income per share $ .05 .15 .07
========= ======= =======
Net income per diluted share:
Income before extraordinary item $ .05 .14 .11
Extraordinary item -- -- (.05)
--------- ------- -------
Net income per share $ .05 .14 .06
========= ======= =======
Weighted average shares outstanding:
Basic 9,796 9,668 7,339
Diluted 10,030 9,992 7,742
See accompanying notes to consolidated financial statements.
F-4
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(In thousands, except share amounts)
Years ended December 31, 2000, 1999 and 1998
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER TOTAL
------------------ PAID-IN EARNINGS/ TREASURY COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) STOCK INCOME EQUITY INCOME
---------- ------ ---------- --------- -------- ------------- ------------ -------------
Balance at December 31, 1997 5,052,418 $ 5 11,834 (2,371) (582) -- 8,886 --
Issuance of common stock
for services 3,923 -- 25 -- -- -- 25 --
Issuance of common stock for
cash, net of offering costs 4,550,000 5 46,271 -- -- -- 46,276 --
Retirement of treasury stock -- -- (582) -- 582 -- -- --
Issuance of common stock for
director services 745 -- 10 -- -- -- 10 --
Exercise of warrants 43,349 -- 231 -- -- -- 231 --
Issuance of common stock
under ESPP 5,933 -- 56 -- -- -- 56 --
Net income -- -- -- 486 -- -- 486 486
---------- --- ------- ------ ---- ---- ------- ------
Balance at December 31, 1998 9,656,368 10 57,845 (1,885) -- -- 55,970
Total comprehensive income $ 486
======
Issuance of common stock for
director services 2,679 -- 33 -- -- -- 33 --
Exercise of stock options and
warrants, net of tax benefit 74,099 -- 420 -- -- -- 420 --
Issuance of common stock under ESPP 10,513 -- 94 -- -- -- 94 --
Foreign currency translation
adjustment -- -- -- -- -- (31) (31) (31)
Net income -- -- -- 1,402 -- -- 1,402 1,402
---------- --- ------- ------ ---- ---- ------- ------
Balance at December 31, 1999 9,743,659 10 58,392 (483) -- (31) 57,888
Total comprehensive income $1,371
======
Issuance of common stock for
director services 2,895 -- 24 -- -- -- 24 --
Exercise of stock options and
warrants, net of tax benefit 130,374 -- 359 -- -- -- 359 --
Issuance of common stock under ESPP 22,952 -- 110 -- -- -- 110 --
Foreign currency translation
adjustment -- -- -- -- -- (255) (255) (255)
Net income -- -- -- 519 -- -- 519 519
---------- --- ------- ------ ---- ---- ------- ------
Balance at December 31, 2000 9,899,880 $10 58,884 36 -- (286) 58,644
========== === ======= ====== ==== ==== =======
Total comprehensive income $ 264
======
See accompanying notes to consolidated financial statements.
F-5
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------- ------- -------
Cash flows from operating activities:
Net income $ 519 1,402 486
Adjustments to reconcile net income to net
cash from operating activities:
Provision for doubtful accounts 68 49 52
Depreciation and amortization 6,435 3,939 2,727
Loss on sale of cattle and equipment 2,311 1,738 1,509
Accretion on senior subordinated notes
payable and non-interest bearing notes payable -- -- 148
Deferred income tax 1,322 (267) 233
Noncash payments for director services 24 33 10
Change in operating assets and liabilities:
Trade accounts receivable (4,789) (4,920) (2,532)
Inventories (13,124) (3,298) (525)
Prepaid and other current assets (1,429) (744) (244)
Other assets (375) -- --
Trade accounts payable 654 2,639 852
Other accrued expenses 1,398 1,887 864
Income taxes payable (130) 43 87
-------- ------- -------
Net cash provided by (used in) operating activities (7,116) 2,501 3,667
-------- ------- -------
Cash flows from investing activities:
Sale (purchase) of marketable securities 8,218 1,705 (9,923)
Payments for acquisitions, net of cash acquired (28,019) (5,592) (2,140)
Purchases of property and equipment (7,322) (2,620) (2,432)
Proceeds from equipment sales 24 116 246
Purchases of cattle (8,123) (8,517) (5,506)
Proceeds from cattle sales 2,850 2,444 716
Other assets (996) (66) (210)
-------- ------- -------
Net cash used in investing activities (33,368) (12,530) (19,249)
-------- ------- -------
Cash flows from financing activities:
Proceeds from long-term line of credit 16,028 -- 25,691
Repayments of long-term line of credit -- -- (32,644)
Proceeds from long-term debt, other than line of credit 25,636 -- 500
Repayments of long-term debt, other than line of credit (2,919) (1,176) (10,798)
Loan to Aurora Dairy Corporation -- -- 250
Proceeds from issuance of common stock, net -- -- 46,276
Proceeds from exercise of stock options and warrants, net of tax 359 420 231
Proceeds from issuance of common stock under ESPP 110 94 56
-------- ------- -------
Net cash provided by (used in) financing activities 39,214 (662) 29,562
Effect of exchange rate changes on cash 15 -- --
-------- ------- -------
Net increase (decrease) in cash and cash equivalents (1,255) (10,691) 13,980
Cash and cash equivalents at beginning of year 3,693 14,384 404
-------- ------- -------
Cash and cash equivalents at end of year $ 2,438 3,693 14,384
======== ======= =======
F-6
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------- ------ -----
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2,041 408 1,430
======== ====== =====
Cash paid (refunded) during the year for income taxes $ (180) 1,201 101
======== ====== =====
Noncash investing and financing activities:
Additional capital lease obligations $ 636 -- 49
======== ====== =====
Common stock issued for services $ -- -- 25
======== ====== =====
Common stock issued to outside directors $ 24 33 10
======== ====== =====
The Company purchased businesses with assets
acquired and liabilities assumed as follows:
Fair value of assets acquired $ 32,719 4,511 2,140
Cash paid for common stock (27,766) (2,802) --
Debt assumed -- (947) --
-------- ------ -----
Liabilities assumed $ 4,953 762 2,140
======== ====== =====
See accompanying notes to consolidated financial statements.
F-7
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Horizon Organic Holding Corporation (Company or Horizon Organic) produces
and markets organic milk, other organic dairy products and organic not from
concentrate juices, which are sold to natural food stores and supermarkets
nationwide, and processes and markets organic milk and yogurt in the United
Kingdom.
The Company was established in October 1991. The Company has dairy farm
operations located in Idaho, Maryland and Colorado from which Horizon
Organic sources approximately half of its organic farm milk supply. The
Company sources the remainder of its United States organic farm milk supply
through supply arrangements with independent dairy cooperatives and farmers
throughout the United States and the United Kingdom. The Company operates
in and judges its financial performance according to three operating
segments; marketing, dairy farm operations and international. The dairy
farm operations exists solely to be a part of the marketing segment's
supply chain.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all the
Company's subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments and securities
with original maturities of three months or less at the time of
purchase to be cash equivalents.
(c) MARKETABLE SECURITIES
Marketable securities consist of commercial paper and U.S. Treasury
securities maturing within one year. Marketable securities have been
categorized as held-to-maturity and are recorded at amortized cost
which approximates cost. Marketable securities at December 31, 1999
are as follows (in thousands):
Commercial paper $4,548
U.S. Treasury 3,670
------
$8,218
======
(d) INVENTORIES
Inventories are stated at the lower of cost (average cost or first-in,
first-out method) or market.
(e) PROPERTY, EQUIPMENT AND CATTLE
Property, equipment and cattle are stated at cost. Property (other
than land) is depreciated using the straight-line method over the
estimated useful lives which range from 3 to 27 years.
F-8
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Equipment and cattle are depreciated using a straight-line method over
the estimated useful lives which range from three to seven years.
The cost of cattle includes preproduction costs incurred from the time
cattle arrive at the dairy until they enter the milking herd.
(f) OTHER ASSETS
Other assets consist principally of loan origination fees, long-term
processing arrangement prepayment and artwork and plates. The cost of
artwork and plates is amortized using the straight-line method over
three years. Loan origination fees are amortized using the interest
method over the term of the respective loan. The long-term processing
arrangement prepayment is expensed over the processing period not to
exceed five years. Accumulated amortization of loan origination fees,
organization costs and artwork at December 31, 2000 and 1999 totaled
$395,000 and $215,000, respectively.
(g) REVENUE RECOGNITION
Sales are recognized at the time of shipment, and provisions are made
for allowances, returns and guarantees. Sales to new customers are at
times made on a 90-day guarantee basis; if the customer is unable to
sell all of the Company's products during the first 90 days after it
becomes a customer, the Company issues a credit for unsold inventory.
Estimated returns are recognized as a reduction to revenue accounts
receivable.
(h) ADVERTISING COSTS
Advertising costs are expensed in the year incurred. Advertising
costs, which are included in selling expenses, totaled $596,000,
$1,610,000 and $301,000 during 2000, 1999 and 1998, respectively.
(i) FOREIGN EXCHANGE RISK
The accounts of the Company's foreign subsidiaries and affiliates are
generally measured using the local currency as the functional
currency. For those operations, assets and liabilities are translated
into U.S. dollars at period- end exchange rates. Income and expense
accounts are translated at average monthly exchange rates. Net
exchange gains or losses resulting from such translation are excluded
from results of operations and accumulated as a separate component of
stockholders' equity.
The Company occasionally enters into foreign exchange contracts in
order to reduce its economic exposure to fluctuations in currency
exchange rates on certain foreign operations through the use of
forward delivery commitments. Generally, open forward delivery
commitments are marked to market at the end of each accounting period
and corresponding gains and losses are recognized in other income
(expense).
F-9
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(j) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in operations in the period that includes
the enactment date.
(k) EARNINGS PER SHARE
2000 1999 1998
------- ----- ------
(In thousands, except per share amounts)
Income before extraordinary item $ 519 1,402 900
Extraordinary item, net of income tax benefit -- -- (414)
------- ----- ------
Net income $ 519 1,402 486
======= ===== ======
Common and common equivalent shares outstanding:
Historical common shares outstanding
at beginning of year 9,744 9,656 5,052
Weighted average common equivalent
shares issued during year 52 12 2,287
------- ----- ------
Weighted average common shares
issued - basic 9,796 9,668 7,339
Weighted average common equivalent
shares issued during period 234 324 403
------- ----- ------
Weighted average common
shares issued - diluted 10,030 9,992 7,742
======= ===== ======
Earnings per basic share:
Income per share $ .05 .15 .12
Extraordinary item per share -- -- (.05)
------- ----- ------
Net income per share $ .05 .15 .07
======= ===== ======
Earnings per diluted share:
Income per share $ .05 .14 .11
Extraordinary item per share -- -- (.05)
------- ----- ------
Net income per share $ .05 .14 .06
======= ===== ======
F-10
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding increased for potentially dilutive common
shares outstanding during the period. The dilutive effect of stock
options, warrants, and their equivalents is calculated using the
treasury stock method.
Stock options, warrants and their equivalents to purchase 425,900
common shares were excluded from the treasury stock calculation
because they were anti-dilutive.
(l) STOCK OPTION PLAN AND STOCK OPTION AGREEMENTS
The Company accounts for its stock option plan and stock option
agreements in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations including FASB Interpretation No. 44,
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION AN
INTERPRETATION OF APB OPINION NO. 25. As such, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. As permitted by
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company continues to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied.
(m) INTANGIBLES AND LONG-LIVED ASSETS
The excess of purchase price over fair value of net assets acquired,
is amortized on a straight-line basis over the expected period to be
benefited, generally 15 years. The Company reviews long-lived assets
and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows (without interest costs) expected
to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. The Company has
recorded no impairment losses.
(n) EMPLOYEE BENEFIT PLANS
The Company adopted a defined contribution retirement plan (Plan)
during 1997 under which eligible employees may elect to defer current
compensation by up to certain statutorily prescribed annual limits and
contribute such amount to the Plan. Prior to 2000, the Plan provided
for the Company to match an employee's contribution in an amount up to
3% of such employee's compensation. In 2000, the Plan was changed to
provide for the Company to match an employee's contribution in an
amount up to 2% of such employee's compensation.
F-11
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The Company contributed $97,000, $78,000 and $58,000 to the Plan for
the years ended December 31, 2000, 1999 and 1998, respectively.
Additionally, the Company adopted a gain sharing plan (Gain Sharing
Plan) during 2000 under which eligible employees in the Gain Sharing
Plan will be credited annually at year end with the Company's common
stock in an amount equal to 1% of such employee's compensation. The
Company contributed $64,000 of common stock in 2000 based on fair
value at the date of grant to the Gain Sharing Plan.
(o) SIGNIFICANT CUSTOMERS
The Company's two largest customers in 2000 were a national
distributor which is comprised of five regional distributors who have
independent purchasing arrangements with the Company and a dairy
processor and distributor headquartered in Boston. Sales to these
customers are included in the marketing segment. For such period,
these two customers each accounted for approximately 12% of the
Company's sales. Sales to these two customers were approximately 18.0%
and 9.8%, and 20.0% and 0.0% in 1999 and 1998, respectively.
(p) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of sales and expenses during the reporting
period. Actual results could differ significantly from those
estimates.
(q) RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998
financial statements to conform with the 2000 presentation.
(3) ACQUISITIONS
On June 1, 2000, the Company acquired all of the outstanding and issued
common stock of Meadow Farms Limited (Meadow Farms), a private company
incorporated in England and Wales, for approximately $24.2 million in cash
plus acquisition costs of approximately $1.7 million. The acquisition
included Meadow Farms' wholly owned subsidiary, Organic Dairies Limited,
which operates a processing and packaging plant that produces fluid milk
which is marketed and sold by Meadow Farms. The acquisition was accounted
for as a purchase and the excess of cost over the fair value of acquired
net assets of approximately $24.4 million is recognized as intangible
assets and is being amortized on a straight-line basis generally over 15
years. The Meadow Farms acquisition was financed with a $25.0 million
Senior Secured Term Loan. Operating results of Meadow Farms have been
included in the Company's consolidated statement of income beginning June
1, 2000.
F-12
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Also on June 1, 2000, the Company acquired all of the outstanding and
issued common stock of Organic Matters Limited (Organic Matters), a private
company incorporated in England and Wales, for approximately $2.1 million
in cash. The acquisition was accounted for as a purchase and the excess of
cost over the fair value of acquired net assets of $2.1 million is
recognized as intangible assets and is being amortized on a straight-line
basis over 15 years. Operating results of Organic Matters have been
included in the Company's consolidated statement of income beginning June
1, 2000.
In April 1999, the Company acquired all of the assets and liabilities of
Rachel's Dairy, Limited. (Rachel's), a private company incorporated in
England and Wales, for approximately $2.4 million in cash plus acquisition
costs of $.4 million. The acquisition was accounted for as a purchase and
the excess of cost over the fair value of acquired net assets of $2.5
million is recognized as intangible assets and is being amortized on a
straight-line basis over 15 years. The results of operations of Rachel's
have been included in the Company's consolidated statement of income
beginning April 1, 1999.
The following unaudited pro forma financial information presents the
combined results of operations of the Company, Meadow Farms and Organic
Matters as if the acquisitions had occurred at the beginning of 1999, after
giving effect to certain adjustments including amortization of intangible
assets, interest expense, reduction of milk bonus payments and income
taxes. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company, Meadow
Farms and Organic Matters constituted a single entity during such periods.
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
----------- ------------
(unaudited, dollars in thousands)
Net sales $ 138,966 106,093
=========== =======
Net income $ 119 1,072
=========== =======
Net income per basic share $ 0.01 0.11
=========== =======
Net income per diluted share $ 0.01 0.11
=========== =======
(4) PURCHASE OF CERTAIN ASSETS
ACQUISITION OF THE ORGANIC COW OF VERMONT BRAND NAME
In April 1999, the Company acquired certain intangible assets including The
Organic Cow of Vermont brand name for $10.9 million. The acquisition was
financed with an $8.5 million promissory note payable to the seller,
bearing interest at 5.3%, and payable in annual installments over 4 years.
The intangible asset of $10.9 million plus acquisition costs of $0.3
million are being amortized on a straight-line basis over 15 years.
F-13
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(5) INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Grain and feed $ 5,760 5,223
Crops growing, fertilizer and other 394 320
Finished goods 9,940 1,726
Raw materials 6,316 1,666
------- -----
$22,410 8,935
======= =====
(6) ASSET HELD FOR SALE
During 2000, the Company concluded that, due to the increased interest in
the production of organic milk by conventional dairy farmers, it no longer
needs to commit capital to the expansion of its own farms or to build new
ones. Accordingly, the Company is determined to sell its 607 acre farm
property near Wilton, California (the California Farm). The asset held for
sale is not used in operations and is recorded at the lower of cost or net
realizable value (fair value less costs to sell). The Company does not
expect a loss on the sale.
(7) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Dairy processing equipment $ 2,202 775
Land and water rights 3,046 2,799
Dairy and feedlot facilities 10,948 10,632
Rolling stock, vehicles and farm equipment 3,134 2,503
Cream separator 626 622
Employee housing 1,036 942
Leasehold improvements 3,164 483
Office equipment and other 3,334 2,058
-------- ------
27,490 20,814
Less accumulated depreciation and amortization (4,304) (2,738)
-------- ------
Total property and equipment $ 23,186 18,076
======== ======
F-14
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(8) CATTLE
Cattle consists of the following (dollars in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
-------- -------
Number of head-milking cows and breeding bulls 7,513 6,856
Number of head-replacement heifers 2,752 3,753
-------- -------
Total cattle 10,265 10,609
======== =======
Cost-milking cows and breeding bulls $ 12,942 11,084
Cost-replacement heifers 3,738 3,634
-------- -------
16,680 14,718
Less accumulated depreciation (2,715) (1,981)
-------- -------
$ 13,965 12,737
======== =======
The Company has reflected its investment in cattle at cost. Cattle are
depreciated using the straight-line method over 5 years to an estimated
salvage value of $325 per head.
F-15
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(9) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
2000 1999
-------- -------
Senior Secured Term Loan note payable to U.S. Bank National Association
(U.S. Bank) with interest at LIBOR plus a varying margin spread of 1.65% to
2.5% (9.13% at December 31, 2000) with quarterly principal payments with
the unpaid balance due May 31, 2005. Interest is payable in conjunction
with LIBOR pricing maturity dates and is secured by substantially all
assets of the Company $ 24,600 --
Revolving line of credit with U.S. Bank with maximum borrowing of
$25,000,000 with interest at LIBOR plus a varying margin spread of 1.65% to
2.5% (9.13% at December 31, 2000), secured by substantially all assets of
the Company, available through May 31, 2003. Interest is payable in
conjunction with LIBOR pricing period maturity dates 16,028 --
Note payable to H.P. Hood Inc. with interest at 5.3%, payable in annual
installments over four years 6,499 8,451
Note payable to Peoples Bank of Kent County, Maryland with interest at
prime (9.5% at December 31, 2000), payable in monthly installments with the
unpaid balance due April 15, 2018, secured by certain property. The note
holder has the right to demand repayment of principal and interest in full
at any time on or after April 15, 2001 471 479
Note payable to Peoples Bank of Kent County, Maryland with interest at
prime (9.5% at December 31, 2000), payable in monthly installments with the
unpaid balance due October 27, 2002, secured by certain property 643 660
Note payable to Farm Credit Services with 5 year adjustable rate interest
at 6.5%, payable in monthly installments with the unpaid balance due July
1, 2010 3,197 3,453
Obligations under capital leases with maturities from one to three years
with imputed interest rates ranging from 7.93% to 10.89%, secured by
related equipment 824 287
Other debt 175 248
-------- -------
Total long-term debt 52,437 13,578
Less current portion (6,752) (2,323)
-------- -------
Long-term debt, excluding current portion $ 45,685 11,255
======== =======
F-16
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The availability of the $25 million revolving line of credit is reduced by
outstanding letters of credit of $7.5 million. Total availability under the
line of credit is $1.5 million at December 31, 2000.
Both U.S. Bank loans contain certain covenants that among other things,
limit the Company's ability to incur additional debt, create liens, pay
dividends or enter into certain other transactions.
Aggregate maturities of long-term debt are as follows (in thousands):
December 31:
2001 $ 6,752
2002 5,998
2003 23,508
2004 5,313
2005 9,135
Thereafter 1,731
-------
Total $52,437
=======
(10) INCOME TAXES
Income tax (expense) benefit attributable to income before income taxes
consists of (in thousands):
CURRENT DEFERRED TOTAL
------- -------- -----
Year ended December 31, 2000:
U.S. federal $ (47) (230) (277)
State (11) (27) (38)
Foreign (57) (21) (78)
-------- ----- ------
$ (115) (278) (393)
======= ===== ======
Year ended December 31, 1999:
U.S. federal $(1,006) 135 (871)
State (192) 26 (166)
-------- ----- ------
$(1,198) 161 (1,037)
======= ===== ======
Year ended December 31, 1998:
U.S. federal $ (372) (196) (568)
State (70) (37) (107)
-------- ----- ------
$ (442) (233) (675)
======= ===== ======
F-17
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Income tax (expense) benefit attributable to income before income taxes
differed from the amounts computed by applying the U.S. federal income tax
rate of 34% to pretax income as a result of the following (in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Computed "expected" tax (expense) benefit $ (310) (829) (536)
(Increase) reduction in income taxes
resulting from:
State and local income taxes, net of
federal benefit (25) (110) (70)
Permanent differences (64) (115) (69)
Other, net 6 17 --
------- ------ ----
$ (393) (1,037) (675)
======= ====== ====
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below (in
thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Deferred tax assets:
Artwork and plates and cattle depreciation $ 20 151
Net operating loss carryforwards 472 717
Write off of intangibles in purchase accounting 49 71
Start-up costs capitalized for tax 68 102
Accrued compensation and vacation 222 106
Other, net 198 204
------- ------
Net deferred tax assets 1,029 1,351
Deferred tax liability -
step-up of property, equipment and cattle in acquisition (3,180) (2,179)
------- ------
Net deferred tax liabilities (2,151) (828)
Less current net deferred tax assets (439) (334)
------- ------
Long term deferred income tax liability $(2,590) (1,162)
======= ======
F-18
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in
making this assessment. Based upon management's projections of future
taxable income and future taxable income generated from the reversal of
deferred tax liabilities over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences,
accordingly, there is no valuation allowance in 2000 or 1999.
At December 31, 2000, the Company has net operating loss carryforwards for
U.S. federal income tax purposes of $1,212,000 which are available to
offset future federal taxable income and expire in the following years (in
thousands):
2011 $ 614
2012 598
-------
Total $ 1,212
=======
(11) STOCKHOLDERS' EQUITY
During March 2000, two warrants were exercised to purchase an aggregate of
3,500 shares of the Company's common stock for $28,000. The warrants had an
exercise price of $8.00 per share.
During 1999, two warrants were exercised to purchase an aggregate of 25,769
shares of the Company's common stock for approximately $138,000. The
warrants had an exercise price of $5.335 per share.
(12) STOCK OPTION PLAN AND STOCK OPTION AGREEMENTS
The Company may grant up to 1,500,000 shares of its common stock for an
incentive stock option plan (Plan) it implemented for key employees.
Options are granted at the discretion of the Board of Directors with an
exercise price equal to the stock's fair value on date of grant.
In 2000, a total of 306,150 shares were granted by the Board. 36,000
nonqualified shares were granted to outside agents that vest 25% per year
beginning one year after grant date and expire in 2005. 71,764 nonqualified
shares were granted to employees that vest 25% per year beginning one year
after grant date and expire in 2005. 198,386 qualified shares were granted
to employees that vest 25% per year beginning one year after grant date and
expire in 2005.
F-19
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
In 1999, a total of 426,500 shares were granted by the Board. 175,436
nonqualified shares were granted to outside agents and employees that vest
25% per year beginning one year after grant date and expire in 2004.
251,064 qualified shares were granted to employees that vest 25% per year
beginning one year after grant date and expire in 2004.
In 1998, a total of 66,250 shares were granted by the Board. 1,000
nonqualified shares were granted to outside agents that vest 25% per year
beginning one year after grant date and expire in 2003. 62,250 qualified
shares were granted to employees that vest 25% per year beginning one year
after grant date and expire in 2003. 3,000 nonqualified shares were granted
to a director that vest 25% per year beginning one year after grant date
and expire in 2003.
The per share weighted-average fair value of stock options granted during
2000, 1999 and 1998 was $9.23, $6.27, and $2.82, respectively, on the date
of grant using the Black Scholes option-pricing model with the following
weighted- average assumptions: 2000 - no expected dividend yield, expected
volatility of 70%, risk free rates ranging from 5.3% to 6.7%, and expected
lives of 5 years 1999 - no expected dividend yield, expected volatility of
59%, risk-free interest rate of 5.8%, and expected lives of 5 years, 1998 -
no expected dividend yield, expected volatility of 50% for options granted
after July 2, 1998, risk-free interest rates ranging from 4.17% to 5.69%
depending on the life of the option, and expected option lives of 4.5
years.
The Company applies the principles in APB Opinion No. 25 in accounting for
its Plan and stock option agreements and, accordingly, no compensation cost
has been recognized for its stock options in the accompanying consolidated
financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below (in thousands):
2000 1999 1998
------- ------ ------
Net income, as reported $ 519 1,402 486
======= ===== ===
Net income, pro forma $ 57 1,125 463
======= ===== ===
Net income per basic share, pro forma $ .01 .12 .06
======= ===== ===
Net income per diluted share, pro forma $ .01 .11 .06
======= ===== ===
The above pro forma disclosures are not necessarily representative of the
effect on the reported net income for future periods because options vest
over several years and additional awards are made each year.
F-20
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Stock option activity during the years indicated was as follows:
WEIGHTED
AVERAGE
NUMBER OF RANGE OF EXERCISE
SHARES EXERCISE PRICES PRICE
---------- --------------- --------
Balance at December 31, 1997 540,268 $1.25 - $6.50 $3.28
Granted 66,250 $6.50 - $12.75 $10.08
Canceled (7,750) $6.50 - $12.75 $12.55
----------
Balance at December 31, 1998 598,768 $1.25 - $14.88 $3.91
Granted 426,500 $7.01 - $17.25 $11.25
Exercised (48,330) $1.25 - $6.50 $3.33
Canceled (23,875) $3.22 - $17.25 $10.45
----------
Balance at December 31, 1999 953,063 $1.25 - $17.25 $7.03
Granted 306,150 $6.50 - $17.25 $9.33
Exercised (126,874) $1.25 - $6.50 $2.61
Canceled (100,811) $3.22 - $17.25 $10.41
----------
Balance at December 31, 2000 1,031,528 $1.25 - $17.25 $8.04
==========
Number of options exercisable at
December 31, 2000 442,689
==========
WEIGHTED AVERAGE NUMBER WEIGHTED
REMAINING EXERCISABLE AT AVERAGE
NUMBER CONTRACTUAL LIFE DECEMBER 31, EXERCISE
EXERCISE PRICE OUTSTANDING (YEARS) 2000 PRICE
-------------- ----------- ---------------- -------------- --------
$ 1.25 45,000 3.2 45,000 $ 1.25
2.10 85,000 .3 85,000 2.10
3.22 - 3.54 61,250 .5 61,250 3.35
4.85 - 7.88 269,877 2.7 150,813 5.97
8.25 - 11.00 439,776 4.1 60,251 8.78
12.63 - 17.25 130,625 3.2 40,375 16.25
--------- ---------
1,031,528 3.1 442,689 5.73
========= ==== ========= =======
Canceled options are a result of employee terminations and forfeitures. As
of December 31, 2000, the Company had 581,661 options available for grant
under the Plan and had 170,250 options outstanding outside of the Plan,
which were granted prior to establishing the Plan.
(13) LEASES
The Company has noncancelable operating leases, primarily for office space
and office equipment, expiring at various dates from 2000 to 2007. These
leases generally require the Company to pay all
F-21
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
executory costs such as maintenance and insurance. Rent expense totaled
$392,000 in 2000, $271,000 in 1999 and $278,000 in 1998.
Future minimum lease payments under noncancelable operating and capital
leases (with initial or remaining lease terms in excess of one year) as
of December 31, 2000 were as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
Year ended December 31:
2001 $345 878
2002 310 724
2003 260 675
2004 -- 585
2005 -- 574
Thereafter -- 958
---- -----
Total minimum lease payments 915 4,394
=====
Less amounts representing interest 91
----
Present value of minimum capital lease payments 824
Less current portion 295
----
Capital lease obligations, less current portion $529
====
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade accounts
receivable, other current assets, other assets, trade accounts payable and
other accrued expenses approximate fair value because of the short maturity
of these instruments.
The carrying amounts of long-term debt approximates fair value because the
interest rates are variable at market rates or because the rates are based
on currently offered rates by lending institutions for similar debt
instruments of comparable maturities.
The fair value of the Company's foreign currency forward delivery contract
outstanding at December 31, 2000 is estimated by reference to market
quotations received from banks. At December 31, 2000 the contract value of
the foreign currency forward delivery contract outstanding approximated
fair value.
(15) RELATED PARTY TRANSACTIONS
(a) AURORA DAIRY CORPORATION
The Company entered into a Dairy Herd Management and Supply Agreement
on March 5, 1999 (subsequently amended on June 9, 1999) with Aurora
Dairy Corporation (Aurora) whose majority owner is a former Company
board member. The agreement allows the Company to provide and maintain
an organic dairy herd at Aurora's facilities in Platteville, Colorado
approximating 1,150 head milking. The Company is to provide the feed
for the animals and
F-22
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
has paid for approximately $270,000 in 1999 in equipment and leasehold
improvements. Aurora manages the herd and pays for all operating
expenses outside of the feed, breeding, and cattle costs and the
related leasehold Company purchased equipment depreciation. The
management fees vary throughout the term of the contract but require a
minimum of $90,000 per month. The contract runs from October 1999
through September 2002. The Company has the option to renew the
agreement for up to an additional 18 months in six-month increments
provided that the Company gives Aurora notice of its extension by June
30, 2002.
The payments made during 2000 to Aurora for management fees were
$1,460,723. The Company paid Aurora $83,607 for feed and cattle during
2000. On April 26, 2000, the Company entered into a Dairy Cattle
Exchange Contract with Aurora, in which the Company agreed to deliver
to Aurora, 600 head of cattle between April and June 2000. In
exchange, Aurora would deliver 600 head of cattle to the Company
between December 2000 and March 2001. Aurora agreed to pay the Company
interest during 2000 relating to this exchange of $6,918. As of
December 31, 2000, Aurora had delivered 131 head of cattle back to the
Company. During 2000, Aurora purchased from the Company 889 head of
cattle of varying ages for $395,637.
(b) ROBINSON DAIRY, INC.
On January 1, 1999, the Company entered into a Processing and
Distribution Agreement (Agreement) with Robinson Dairy, Inc.,
(Robinson) whereby the Company will not engage another processor
located within the state of Colorado. A director of the Company
controlled Robinson. Per the agreement, the Company will pay minimum
co-packing fees for processing product through December 31, 2003. The
Company incurred expenses of approximately $2,373,000, $779,000 and
$1,049,000 during 2000, 1999 and 1998, respectively. Robinson has
since been acquired by Suiza which is a related party to the Company.
(c) SUIZA
In 1998, Horizon entered into agreements with Suiza, a manufacturer
and distributor of fresh milk and related dairy products. Horizon's
relationship with Suiza includes five-year processing and distribution
agreements with three of Suiza's subsidiaries: Model Dairy, a fluid
milk processor located in Reno, Nevada, which currently processes
organic fluid milk for Horizon; Robinson Dairy, a fluid milk processor
located in Colorado, which currently processes organic milk for
Horizon; and Garelick Farms, a fluid milk processor and distributor
with several locations in the northeastern United States, which does
not currently process any products for Horizon. The processing and
distribution agreement with Model Dairy provides that it will
distribute all SKUs of Horizon's organic fluid milk products which are
available for sale in its territory. The Company also moved the
processing of its organic chocolate milk, its organic yogurt and sour
cream and its organic cottage cheese to three Suiza owned facilities
in California. Amounts paid to Suiza and its subsidiaries under these
agreements totaled $8,814,000, $4,487,000 and $1,677,000 in 2000, 1999
and 1998, respectively.
F-23
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(d) DEBT GUARANTEE
During 1998, the Company paid fees to one of its directors for the
guarantee of certain debt at one percent of the amount guaranteed. The
Company paid approximately $29,000 to this director in connection with
guarantee fees in 1998. The guarantees were released in 1998.
(16) PURCHASE COMMITMENTS
The Company contracts with various organic farmers and cooperatives
throughout the United States and the United Kingdom for organic farm milk.
In the United States, these contracts are generally for twelve to
twenty-four months and are renewable upon agreement by the Company and the
producer. In the United Kingdom, these contracts are three months to four
years and are renewable upon agreement by the Company and the producer. All
United States and United Kingdom production contracts require that the
Company purchase minimum quantities of organic farm milk and are priced
using butterfat differentials and quality testing. The Company believes
that these contracts approximate organic farm milk prices at December 31,
2000. If the Company cannot use the minimum amount as organic fluid milk or
other organic products, the Company sells the organic milk as conventional
milk and records the difference in the Company's purchase price and the
conventional price in cost of sales.
(17) EMPLOYEE STOCK PURCHASE PLAN
In April 1998, the Board adopted the 1998 Employee Stock Purchase Plan (the
Purchase Plan), to provide employees of the Company with an opportunity to
purchase common stock through payroll deductions. Under the Purchase Plan,
250,000 shares of common stock have been reserved for issuance. The
Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code. The Board
may authorize participation by eligible employees, including officers, in
periodic offerings following the adoption of the Purchase Plan. A new
offering period begins every January and July.
All employees are eligible to participate in the Purchase Plan if they are
employed by and their Purchase Plan participation application is completed
by the biannual offering dates. Employees can have up to 10% of their
earnings withheld pursuant to the Purchase Plan and applied on specific
purchase dates (currently the last day of each authorized offering) to the
purchase of shares of common stock. The price of common stock purchased
under the Purchase Plan is equal to 85% of the lower of the fair value of
the common stock on the commencement date of each offering or the purchase
date. Employees may end their participation in the offering at any time
during the offering, and participation ends automatically on termination of
employment. Holders of five percent or more of the Company's outstanding
common stock are not eligible to participate in the Purchase Plan.
In the event of certain changes in control, the Company and the Board have
discretion to provide that each right to purchase common stock will be
assumed or an equivalent right substituted by the successor corporation, or
the Board may shorten an offering and provide for all sums collected by
payroll deductions to be applied to purchase stock immediately prior to the
change in control. The Purchase Plan may be terminated at the Board's
discretion.
F-24
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(18) QUARTERLY RESULTS (UNAUDITED)
The following table sets forth selected quarterly unaudited financial
information for the years ended December 31, 2000 and 1999 (in thousands,
except per share amounts):
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- -------
Net sales 26,336 29,692 33,392 37,786
Gross profit 8,401 10,229 10,299 11,374
Total operating expenses 7,765 8,970 8,840 11,321
Operating income (loss) 636 1,259 1,459 53
Other income (expense) (116) (400) (1,005) (974)
Income (loss) before income taxes 520 859 454 (921)
Income tax benefit (expense) (213) (345) (177) 342
Net income (loss) 307 514 277 (579)
Net income (loss) per share, basic .03 .05 .03 (.06)
Net income (loss) per share, diluted .03 .05 .03 (.06)
Weighted average shares outstanding - basic 9,753 9,777 9,814 9,839
Weighted average shares outstanding - diluted 10,025 10,048 10,078 9,969
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- -------
Net sales 16,423 20,590 22,798 24,960
Gross profit 5,522 7,232 8,143 7,283
Total operating expenses 4,868 6,106 6,806 8,019
Operating income (loss) 654 1,126 1,337 (736)
Other income (expense) 182 (16) (69) (39)
Income (loss) before income taxes 836 1,110 1,268 (775)
Income tax benefit (expense) (334) (444) (507) 248
Net income (loss) 502 666 761 (527)
Net income (loss) per share, basic .05 .07 .08 (.06)
Net income (loss) per share, diluted .05 .07 .08 (.05)
Weighted average shares outstanding - basic 9,666 9,692 9,719 9,544
Weighted average shares outstanding - diluted 10,099 10,129 10,093 9,868
F-25
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(19) REPORTABLE SEGMENTS
The Company has three segments of business, the marketing company, the
dairy farm operations and international. The marketing company is
responsible for acquiring, processing and marketing organic fluid milk,
organic dairy products and organic non-dairy products. The dairy farm
operations are responsible for producing farm milk for use by the marketing
company in the production of its products. International is the United
Kingdom entities responsible for acquiring, processing and marketing
organic in fluid milk and organic dairy products. The following table sets
forth selected segment data for the fiscal years ended December 31, 2000
and 1999 (in thousands):
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------------------------------------------------
U.S. AND INTERNATIONAL
DAIRY FARM U.S. U.S. U.S. INTERNATIONAL ELIMINATIONS
MARKETING OPERATIONS ELIMINATIONS ADJUSTMENTS SUBTOTAL INTERNATIONAL SUBTOTAL WITH U.S. TOTAL
--------- ---------- ------------ ----------- -------- ------------- ------------ ------------- --------
Total net sales $ 104,966 25,759 (25,759) -- 104,966 22,240 127,206 127,206
Cost of goods
sold 73,679 14,765 (14,765) (3,548) 70,131 16,772 86,903 86,903
--------- ------ ------- ------ -------- ------- -------- -------- --------
Gross margin 31,287 10,994 (10,994) 3,548 34,835 5,468 40,303 -- 40,303
Operating expenses 30,882 7,575 (7,575) 129 31,010 5,885 36,896 36,896
--------- ------ ------- ------ -------- ------- -------- -------- --------
Operating income 405 3,419 (3,419) 3,419 3,824 (417) 3,407 -- 3,407
Interest income 1,163 33 (933) -- 262 37 299 299
Interest expense (637) (1,300) 933 -- (1,004) (1,643) (2,647) (2,647)
Other (139) -- -- -- (139) (8) (147) (147)
--------- ------ ------- ------ -------- ------- -------- -------- --------
Income (loss)
before income
taxes 792 2,151 (3,419) 3,419 2,944 (2,031) 912 -- 912
Income tax benefit
(expense) (315) (856) -- -- (1,171) 777 (393) (393)
--------- ------ ------- ------ -------- ------- -------- -------- --------
Net income (loss) $ 477 1,296 (3,419) 3,419 1,773 (1,254) 519 -- 519
========= ====== ======= ====== ======== ======= ======== ======== ========
Segment assets $ 121,734 45,231 (39,189) -- 127,776 37,683 165,459 (33,295) 132,164
========= ====== ======= ====== ======== ======= ======== ======== ========
The following additional supplemental information is already included in
cost of goods sold or in operating expenses above:
Depreciation and
amortization $ 1,742 3,061 -- -- 4,802 1,632 6,435 -- 6,435
Loss on sale of
cattle and
equipment 0 2,311 -- -- 2,311 -- 2,311 -- 2,311
(Continued)
F-26
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------------------------------------------
U.S. AND INTERNATIONAL
DAIRY FARM U.S. U.S. U.S. INTERNATIONAL ELIMINATIONS
MARKETING OPERATIONS ELIMINATIONS ADJUSTMENTS SUBTOTAL INTERNATIONAL SUBTOTAL WITH U.S. TOTAL
--------- ---------- ------------ ----------- -------- ------------- ------------ ------------- --------
Total net sales $ 80,417 20,597 (20,597) -- 80,417 4,354 84,771 84,771
Cost of goods
sold 56,220 12,397 (12,397) (2,472) 53,748 2,843 56,591 56,591
-------- ------- ------- ------ ------- ------ ------- ------- --------
Gross margin 24,197 8,200 (8,200) 2,472 26,669 1,511 28,180 -- 28,180
Operating expenses 24,349 5,857 (5,857) 129 24,478 1,321 25,799 25,799
-------- ------- ------- ------ ------- ------ ------- ------- --------
Operating income (152) 2,343 (2,343) 2,343 2,191 190 2,381 -- 2,381
Interest income 1,681 17 (719) -- 979 -- 979 (124) 855
Interest expense (447) (976) 719 -- (704) (124) (828) 124 (704)
Other (93) -- -- -- (93) -- (93) (93)
-------- ------- ------- ------ ------- ------ ------- ------- --------
Income (loss)
before income
taxes 989 1,384 (2,343) 2,343 2,373 67 2,439 -- 2,439
Income tax benefit
(expense) (420) (589) -- -- (1,009) (28) (1,037) (1,037)
-------- ------- ------- ------ ------- ------ ------- ------- --------
Net income (loss) $ 569 795 (2,343) 2,343 1,364 39 1,402 -- 1,402
======== ======= ======= ====== ======= ====== ======= ======= ========
Segment assets $ 79,623 38,471 (34,713) -- 83,381 4,764 88,145 (3,533) 84,612
======== ======= ======= ====== ======= ====== ======= ======= ========
The following additional supplemental information is already included in
cost of goods sold or in operating expenses above:
Depreciation and
amortization $ 1,287 2,500 -- -- 3,787 152 3,939 -- 3,939
Loss on sale of
cattle and
equipment 0 1,738 -- -- 1,738 -- 1,738 -- 1,738
F-27
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(20) CONTINGENCY
The Company is a party to certain legal and regulatory proceedings and
claims in the ordinary course of its business. The Company believes that
the outcome of these matters will not have a material adverse effect on its
consolidated financial position, results of operations or liquidity.
F-28