<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1998
REGISTRATION NO. 333-51465
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HORIZON ORGANIC HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2020 84-1405007
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
6311 HORIZON LANE
LONGMONT, COLORADO 80503
(303) 530-2711
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
BARNET M. FEINBLUM
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HORIZON ORGANIC HOLDING CORPORATION
6311 HORIZON LANE
LONGMONT, COLORADO 80503
(303) 530-2711
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
JAMES C. T. LINFIELD, ESQ. THOMAS A. BEVILACQUA, ESQ.
CARRIE L. SCHIFF, ESQ. DAVID A. MAKARECHIAN, ESQ.
COOLEY GODWARD LLP 2595 BROBECK, PHLEGER & HARRISON LLP
CANYON BOULEVARD, SUITE 250 TWO EMBARCADERO PLACE, 2200 GENG ROAD
BOULDER, COLORADO 80302-6737 PALO ALTO, CALIFORNIA 94303
(303) 546-4000 (650) 424-0160
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 9, 1998
3,000,000 SHARES
[LOGO OF HORIZON ORGANIC HOLDING CORPORATION APPEARS HERE]
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being sold by
Horizon Organic Holding Corporation ("Horizon" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be
between $9.00 and $11.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. Of
the 3,000,000 shares to be sold in this offering, the Company has reserved up
to 210,000 shares to offer directly to persons having a relationship with the
Company. All such sales shall be made on the same terms and conditions
available to the public. See "Underwriting." The Company has applied to have
the Common Stock approved for quotation on the Nasdaq National Market under the
symbol HCOW.
Immediately following, and dependent upon, the sale of the shares offered
hereby, the Company will sell to Suiza Foods Corporation ("Suiza") up to an
additional 1,100,000 shares of Common Stock in a private placement (the
"Concurrent Placement"). Suiza will purchase shares in the Concurrent Placement
at the Price to Public set forth below, less 3 1/2% (one-half of the
Underwriting Discount set forth below); provided that the price to Suiza in the
Concurrent Placement will not be less than $11.00 nor more than $15.00 per
share, and further provided that to the extent the net price to Suiza is in
excess of $13.54, the number of shares sold in the Concurrent Placement will be
reduced so that the aggregate Suiza investment in the Concurrent Placement will
not exceed $14,900,000. The Concurrent Placement is subject to the closing of
this offering at a minimum Price to Public of $9.00 per share.
-------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 7.
-------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share.................................... $ $ $
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Total (3).................................... $ $ $
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ respectively. See "Underwriting."
-------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
HANIFEN, IMHOFF INC.
, 1998
<PAGE>
[PHOTOGRAPH OF A REFRIGERATED DAIRY CASE CONTAINING ALL 43 SKUS OF THE HORIZON
FAMILY OF PRODUCTS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
THE HORIZON LOGO AND "JOIN THE MOOOOVEMENT" ARE REGISTERED TRADEMARKS OF THE
COMPANY. THIS PROSPECTUS ALSO CONTAINS THE TRADEMARKS OF OTHER COMPANIES.
2
<PAGE>
[Gatefold containing the following copy and photographs: Caption across
entire gatefold "Horizon(R) Organic, Providing delicious organic milk and
dairy products made with no pesticides, hormones or antibiotics." The caption
"Organic Dairy Farms" over the caption "Horizon Organic Idaho Dairy Farm"
(aerial photograph of the Horizon Idaho Dairy Farm) over the caption
"Horizon's Idaho and Maryland dairy farms together span over 4,200 acres. The
dairies practice sustainable agriculture by recycling manure into compost and
fertilizing approximately 2,000 acres on which Horizon grows organic crops
used to feed the cows." Over the caption "Horizon Organic Maryland Dairy Farm"
(photograph depicting several cows and farm hands at the Maryland dairy farm).
Under the caption "Organic Cows" (photograph of hay) over the caption "Horizon
supplements its feed supply from purchases from family-owned farms across the
nation." (photograph of farm hand feeding cows) over the caption "Horizon
strives to maintain a healthy herd using organic farm practices as well as
through milk parlor and farm cleanliness, close animal observation, preventive
care and the use of natural and homeopathic medications. Horizon's practices
emphasize access to fresh air and exercise and prohibit injecting cows with
growth hormones." Under the caption "Organic Processing" (photograph of a
tanker truck with the Horizon logo) over the caption "Horizon uses a number of
milk transporters, such as Idaho Milk Transport, to move milk from the farm to
processing plants. Idaho Milk Transport tankers display the Horizon Happy
Cow(TM) logo. Horizon has become the only dairy to offer nationwide
distribution of organic fluid milk." (photograph depicting a milk processing
line) over the caption "Horizon's network of third-party certified organic
processors manufacture and package the organic fluid milk and organic dairy
products, including yogurt, sour cream, cottage cheese, butter and cheese."]
<PAGE>
[Continuation of the gatefold. Under the caption "Distribution" (photograph
of processor testing laboratory) with the caption in a smaller font "Reprinted
with the permission of Dairy Field Magazine." over the caption "Quality
assurance professionals at each processing plant conduct a variety of
laboratory tests after production runs, to test that all products meet
Horizon's strict organic standards." (photograph of panel truck with the
Horizon logo) Over the caption "Third party distributors, such as Stonecrest,
transport Horizon products and other goods to Horizon's customers.
Stonecrest's trucks carry the Happy Cow(TM) logo." Under the caption "Juniper
Valley Joins The Horizon Family" (photograph of 10 SKUs of Juniper Valley
products) over the caption "In April 1998, Horizon acquired the New York-based
Juniper Valley Farms brand of organic milk and other organic products. Juniper
Valley Farms is the leading brand of organic dairy products in the metro New
York market, the largest mass market for organic fluid milk sales in the
United States." Under the caption "Our Customers" (photograph of a supermarket
store clerk holding products) over the caption "An increasing number of
supermarkets have begun to offer their customers a choice of organic foods.
The Company estimates that it is currently selling its products in
approximately 5,000 conventional supermarkets and natural food stores
nationwide." Under the caption "Our Consumers" (photograph of a mother and
child with Horizon product) over the caption "The Company believes that its
consumers, particularly mothers with children, are concerned about food
safety, the environment, animal welfare and health and nutrition for
themselves and for their families. Horizon seeks to meet the needs of its
consumers by providing organic milk and other dairy products without the use
of antibiotics, hormones or pesticides." (Horizon logo)]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE COMPANY
Horizon Organic Holding Corporation ("Horizon" or the "Company") produces,
processes and markets the leading brand of certified organic dairy products in
the United States, including the leading brand of certified organic fluid milk.
Horizon has become the only dairy to offer 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 has leveraged its brand
to create a full line of refrigerated organic dairy products. Horizon currently
offers 43 stock keeping units ("SKUs") of premium-priced organic products under
the Horizon brand. Horizon estimates that it is currently selling its organic
products in over 5,000 retail locations, including conventional and natural
foods supermarkets, specialty retailers and natural foods stores.
The Company believes that consumers are attracted to Horizon's premium-
priced, organic products because of their high quality and their image as
healthy, environmentally-responsible and animal-friendly products. The Company
believes that its distinctive, brightly-colored flying cow and earth logo
appeals to a broad audience of consumers, particularly mothers and children,
and is extendible to additional organic product categories. Horizon intends to
leverage its strong national brand, its vertically-integrated production,
processing and distribution system and its commitment to the highest organic
standards to continue to capitalize on the growing demand for organic products.
Horizon believes that the trends driving the growth of the organic dairy
category are consistent with the trends driving the growth of all organic
foods. The Natural Foods Merchandiser reported that sales of organic foods
increased to approximately $3.5 billion in 1996 from $2.9 billion in 1995,
reflecting a continuation of the double-digit compound annual growth rates
which the organic foods industry has experienced since the mid 1980's. Horizon
is committed to driving the continued growth of the organic dairy category by
producing and selling high-quality organic products that address consumer
concerns regarding food safety, environmental responsibility and animal
welfare. The Company believes that its organic standards meet or exceed all
currently existing and proposed governmental certification standards, as well
as all significant private organic certification standards.
Horizon has built its national presence by establishing an extensive,
vertically-integrated production, processing and distribution system. This
system includes two Company-owned organic dairy farms, strategically-located
organic farm milk producers, a Company-owned farm milk separator and a network
of geographically-dispersed dairy processors. The majority of Horizon's organic
farm milk is produced on the Company's organic dairy farm in Southern Idaho
(the "Idaho Dairy"), the largest organic dairy in the country, with over 4,000
certified organic cows. Horizon recently completed construction of its second
organic dairy farm in Maryland (the "Maryland Dairy"), which has over 500
certified organic cows, from which Horizon supplies farm milk for products sold
in the Eastern United States. Horizon sources the remainder of its organic farm
milk supply through supply arrangements with independent dairy cooperatives and
farmers located throughout the United States.
Horizon's goal is to strengthen its position as the leading brand of organic
dairy products and to continue to drive the growth of the organic dairy market.
The key elements of Horizon's growth strategy include: building awareness of
the Horizon brand; expanding the distribution of Horizon's organic fluid milk
in the mass market; extending Horizon's brand identity; optimizing the
logistics of its supply chain; increasing its organic farm milk supply;
optimizing its use of organic farm milk components; and entering new
distribution channels.
3
<PAGE>
Horizon recently completed the acquisition of the Juniper Valley Farms brand,
the leading brand of organic dairy products in the metro New York market, the
largest mass market for organic fluid milk sales in the United States. The
Company believes that the acquisition will enable the Company to increase its
market penetration in the Northeastern United States and lower the cost of its
organic dairy products through access to a complementary production and
distribution system. The Company intends to transition the Juniper Valley Farms
branded products to the Horizon brand over the next 12 months.
In June 1998, Horizon entered into agreements with Suiza Foods Corporation
("Suiza"), a leading manufacturer and distributor of fresh milk and related
dairy products, shelf-stable and refrigerated food and beverage products,
frozen food products, coffee and plastic containers. The Company believes that
its relationship with Suiza will provide it with opportunities to enhance the
Company's market penetration in a number of key markets nationally. Suiza
processes and distributes fluid milk and related dairy products from 46 dairy
processing facilities located across the United States and Puerto Rico. The
Company's relationship with Suiza will consist of an investment by Suiza in the
Company pursuant to a stock purchase agreement and processing and distribution
agreements with certain of Suiza's subsidiaries pursuant to which such
subsidiaries will process and distribute organic fluid milk for Horizon.
The Company is incorporated in Delaware and its principal offices are located
at 6311 Horizon Lane, Longmont, Colorado 80503. The Company's telephone number
is (303) 530-2711.
THE OFFERING
Common Stock offered by the Company....... 3,000,000 shares
Common Stock offered in Concurrent 1,100,000 shares(1)
Placement............................
Common Stock to be outstanding after the
offering and the Concurrent Placement....
9,156,341 shares(2)
Use of proceeds........................... To repay certain promissory notes
and bank debt, finance possible
expansion of the Company's dairy
facilities, acquisitions and for
working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol............. HCOW
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------- --------------------
DEC. 31, DEC. 28, DEC. 31, MAR. 31, MAR. 31,
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales................................ $7,246 $15,986 $29,565 $ 6,134 $ 10,102
Gross profit(3)(4)....................... 1,729 4,561 6,926 1,021 3,047
Operating income (loss).................. (524) 225 (1,114) (525) 334
Net income (loss)........................ $ (509) $ 27 $(1,022) $ (43) $ (115)
Basic and diluted net income (loss) per
share(5)................................ $ (.18) $ .01 $ (.23) $ (.01) $ (.02)
Weighted average shares outstanding:
Basic.................................. 2,791 3,264 4,488 3,659 5,056
Diluted................................ 2,791 3,283 4,488 3,659 5,056
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
DEC. 31, ----------------------
1997 ACTUAL AS ADJUSTED(6)
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(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 404 $ 811 $25,322
Working capital............................... 2,935 2,520 27,031
Total assets.................................. 32,737 34,501 59,013
Long-term debt................................ 17,960 18,970 4,969
Total stockholders' equity.................... 8,886 8,796 47,512
</TABLE>
4
<PAGE>
- --------------------
(1) Immediately following, and dependent upon, the sale of the shares offered
hereby, the Company will sell to Suiza up to an additional 1,100,000 shares
of Common Stock pursuant to the Concurrent Placement. Suiza will purchase
shares in the Concurrent Placement at the Price to Public less 3 1/2% (one-
half of the Underwriting Discount); provided that the price in the
Concurrent Placement will not be less than $11.00 nor more than $15.00, and
further provided that to the extent the net price to Suiza is in excess of
$13.54, the number of shares sold in the Concurrent Placement will be
reduced so that the aggregate Suiza investment in the Concurrent Placement
will not exceed $14,900,000. The Concurrent Placement is subject to the
closing of this offering at a minimum Price to Public of $9.00 per share.
See "--Recent Events".
(2) Based on the number of shares outstanding as of March 31, 1998. Assumes
issuance of 1,100,000 shares in the Concurrent Placement. Excludes, as of
March 31, 1998, 567,768 shares of Common Stock issuable upon exercise of
options outstanding under the Company's stock option plans and 69,118
shares of Common Stock reserved for issuance upon exercise of certain
warrants. As of March 31, 1998, the weighted average exercise prices of the
Company's stock options and warrants were $3.44 and $5.34 per share,
respectively. See "Capitalization," "Management--Stock Option Plans" and
Notes to the Company's Consolidated Financial Statements.
(3) Includes losses of organic premiums in connection with milk supply
contracts of approximately $198,000 and $73,000 in fiscal 1995 and 1996.
Losses of organic premiums relate to the Company's commitment to purchase
minimum amounts of organic farm milk. When organic farm milk is sold as
conventional milk, the difference between the organic and conventional
prices is recorded as a loss of organic premium.
(4) Prior to fiscal 1997, the Company recorded its share of 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, losses of $1.3
million and $627,000 are included in cost of sales for fiscal 1997 and the
three months ended March 31, 1997, respectively.
(5) 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.
(6) As adjusted to reflect the sale of 3,000,000 shares of Common Stock at an
assumed initial public offering price of $10.00 per share, the sale of
1,100,000 shares in the Concurrent Placement at an assumed price of $11.00
per share and the application of the net proceeds therefrom. See "Use of
Proceeds", "Capitalization" and Note 2 to the Company's Consolidated
Financial Statements.
--------------------
Except as otherwise noted, all information in this Prospectus assumes (i) the
issuance of 1,100,000 shares of Common Stock to Suiza in the Concurrent
Placement and (ii) no exercise of the Underwriters' over-allotment option. See
"Description of Capital Stock" and "Underwriting." References to "Horizon" and
the "Company" include Horizon Organic Holding Corporation and each of its
consolidated subsidiaries, Horizon Organic Dairy, Inc.; Horizon Organic Dairy,
Idaho Farm, Inc. and Horizon Organic Dairy, Maryland Farm, Inc., and
predecessor companies, unless the context indicates otherwise.
RECENT EVENTS
In June 1998, Horizon entered into agreements with Suiza, a leading
manufacturer and distributor of fresh milk and related dairy products, shelf-
stable and refrigerated food and beverage products, frozen food products,
coffee and plastic containers. The Company believes that its relationship with
Suiza will provide it with opportunities to enhance the Company's market
penetration in a number of key markets nationally. Suiza processes and
distributes fluid milk and related dairy products from 46 dairy processing
facilities located across the United States and Puerto Rico. The Company's
arrangement with Suiza consists of an investment by Suiza in the Company
pursuant to a stock purchase agreement, and processing and distribution
agreements with certain of Suiza's subsidiaries. In addition, Suiza has agreed
that it will not introduce any organic white fluid
5
<PAGE>
milk products for sale under Suiza's brands for a minimum period of five years.
The Company's agreements with Suiza are subject to the satisfaction of certain
closing conditions, including the closing of the offering at a minimum Price to
Public of $9.00 per share.
Processing and Distribution Agreements. Horizon's relationship with Suiza
will initially include five-year processing and distribution agreements with
two of Suiza's subsidiaries: Model Dairy, a fluid milk processor located in
Reno, Nevada which currently processes organic fluid milk for Horizon; and
Garelick Farms, a fluid milk processor and distributor with several locations
in the Northeastern United States. The processing and distribution agreements
will generally provide that Model Dairy will process organic fluid milk for
Horizon's distribution or sale in the Western United States and that Garelick
Farms will have an option to become Horizon's processor of organic fluid milk
in certain states in New England. Both Model Dairy and Garelick Farms will
distribute all SKUs of Horizon's organic fluid milk products which are
available for sale in their respective territories. Horizon and Suiza intend to
enter into other agreements pursuant to which Suiza and its affiliates will
process and/or distribute Horizon organic fluid milk and other Horizon organic
dairy products. In particular, Horizon and Suiza intend to enter into an
agreement for a Suiza subsidiary to process and distribute certain organic
dairy products for Horizon on a national basis.
Concurrent Placement. Pursuant to a stock purchase agreement (the "Stock
Purchase Agreement"), Horizon has agreed to sell Suiza up to 1,100,000 shares
of Common Stock upon the closing of the Concurrent Placement, which is
scheduled to close immediately after the closing of the offering. Suiza will
purchase shares in the Concurrent Placement at the Price to Public, less 3 1/2%
(one-half of the Underwriting Discount); provided that the price will not be
less than $11.00 nor more than $15.00, and further provided that to the extent
the net price to Suiza is in excess of $13.54, the number of shares in the
Concurrent Placement will be reduced so that the aggregate Suiza investment in
the Concurrent Placement will not exceed $14,900,000. The Concurrent Placement
is subject to the closing of the offering at a minimum Price to Public of $9.00
per share.
Stockholder Rights. In connection with the Concurrent Placement, the Company
also entered into a stockholder agreement with Suiza (the "Stockholder
Agreement") and certain of the Company's principal stockholders entered into an
agreement with Suiza (the "Major Stockholder Agreement") providing for, (i) an
exclusive period during which Suiza will not introduce its own brand of organic
white fluid milk, (ii) preemptive rights, (iii) the right to designate one
member of the Company's board of directors, (iv) standstill and stock transfer
restrictions, (v) "drag-along" obligations, (vi) right of first refusal on
sales of stock to certain competitors of Suiza, (vii) rights of first
negotiation for a sale of the Company and (viii) registration rights for shares
purchased in the Concurrent Placement. See "Management--Executive Officers and
Directors" and "Description of Capital Stock--Concurrent Placement".
6
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following principal risk
factors should be considered carefully in addition to the other information
contained in this Prospectus before purchasing the Common Stock offered
hereby.
History of Operating Losses; No Assurances as to Future Profitability. The
Company commenced operations in 1991, and has incurred cumulative operating
losses since inception of approximately $1.4 million as of March 31, 1998. The
Company's net sales have increased from approximately $7.2 million in fiscal
1995 to $16.0 million in fiscal 1996 and to $29.6 million in fiscal 1997, but
the Company incurred operating losses of $524,000 in fiscal 1995 and $1.1
million in fiscal 1997. Although the Company achieved operating income of
$334,000 for the three months ended March 31, 1998, there can be no assurance
that the Company will be able to sustain its revenue growth or to operate
profitably in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Risks Related to Organic Farm Milk Cost and Supply. More than half of the
Company's current milk supply originates at its Idaho Dairy and Maryland
Dairy. The balance of the Company's 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 highly perishable and have a very
short shelf life. In the event that production at or transportation from the
Idaho Dairy or the Maryland Dairy 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 and the Maryland
Dairy, which together produce more than half of the Company's organic farm
milk requirements. The cost of organic feed accounts for 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 Related to the Implementation of the Proposed 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 1997, the federal government
published proposed national
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regulations 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. Horizon
believes that these regulations, if adopted in their initially proposed form,
would permit competitors to sell fluid milk and other dairy products labeled
"organic" which would not satisfy Horizon's own organic standards. Horizon
incurs significant costs to produce organic products that adhere to its
rigorous standards, and competitors whose "organic" practices are not as
rigorous may be able to compete with Horizon on the basis of price by
producing lower cost "organic" milk. Horizon does not intend to lower its
organic standards and intends to continue to compete on the basis of the
quality and consistency of its products. There can be no assurance that
Horizon will be able to compete successfully against lower cost competitors in
any of its markets, and the failure to compete successfully could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "--Competition" and "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. The Company's growth also may place a
significant strain on the Company's management, working capital, financial and
management control systems and its supply, production and distribution
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, including the need to identify, recruit
and integrate new members of management. There can be no assurance that such
additional qualified management will be identified and retained by the
Company. To the extent that the Company is unable to manage its growth
effectively, or is unable to attract and retain additional 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," "--Production and
Processing" and "--Acquisitions".
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. See "Business--The Organic Dairy Opportunity".
Risks Associated with Trade and Consumer Acceptance in Distribution
Channels. The Company's growth will depend on its ability to continue to
expand its distribution in conventional supermarkets without significant
impact on other current channels. The conventional supermarket channel of
distribution has presented, and will continue to present, competitive and
marketing challenges, risks and marketing and distribution costs that are
different from those faced by the Company in the natural foods market. In
addition, the Company's expansion in the conventional supermarket channel of
distribution will require it to attract consumers in broader demographic and
geographic markets. There can be no assurance that the Company will be
successful in attracting consumers in new distribution channels or in other
demographic and geographic markets. The inability to achieve trade and
consumer acceptance in new markets could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition,
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premium-priced products, such as the Company's, are sensitive to national and
regional economic conditions, and demand for products supplied by the Company
may be adversely affected from time to time by economic downturns. See
"Business--The Organic Dairy Opportunity".
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 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
organic dairies, 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 special 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'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".
Potential Difficulties of Integrating Juniper Valley Farms Operations. In
April 1998, the Company acquired the Juniper Valley Farms brand of organic fluid
milk and dairy products from Worcester Creameries Corp. ("Worcester"), an
affiliate of Elmhurst Dairy (a large regional conventional dairy). The Company
believes that the acquisition of Juniper Valley Farms will enable the Company to
increase the Company's market penetration in the Northeastern United States
through access to a complementary production, processing and distribution
system, and to lower the processing cost of its organic dairy products by
directing an increased volume of organic farm milk to the Juniper Valley Farms
processors. However, there can be no assurance that the acquisition of Juniper
Valley Farms will increase the Company's market penetration in the Northeast, or
in any other market, or that the Company will be successful in achieving
anticipated improvements in its production, processing and distribution systems.
In connection with the acquisition, Horizon acquired supply agreements with a
network of organic dairy farmers in New York, acquired the Juniper Valley Farms
brand and entered into a processing agreement with Worcester. There can be no
assurance that any of these agreements will be honored, or if honored, that they
will materially improve the Company's supply of organic dairy products or
processing capabilities. In addition, Worcester's customers are not obligated to
continue purchasing the Company's products under any agreement entered into with
Worcester. There can be no assurance that the Company will be successful in
converting any of Worcester's
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accounts to accounts of the Company. The failure to convert a significant
number of Worcester's accounts to the Company could have a material adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to
complete effectively the integration of the Juniper Valley Farms operations
with the Company's operations, to achieve the Company's operating and growth
strategies with respect to this acquisition, or to obtain increased revenue
opportunities as a result of the anticipated synergies created by additional
distribution channels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Juniper Valley Acquisition" and
"Business--Acquisitions".
Risks Related to the Company's Relationship with Suiza Foods
Corporation. Horizon's relationship with Suiza will include five-year
processing and distribution agreements with Model Dairy and Garelick Farms to
be executed at the closing of the Concurrent Placement. Horizon and Suiza
intend to enter into additional agreements after the closing of the Concurrent
Placement pursuant to which Suiza and its affiliates will process and/or
distribute Horizon organic fluid milk and other Horizon organic dairy products
from some of Suiza's 46 dairy processing facilities located across the United
States and Puerto Rico. There can be no assurance that Horizon will be able to
enter into such additional processing and distribution agreements with Suiza
and its subsidiaries on favorable terms, if at all. The processing and
distribution agreements also will require that the organic fluid milk
processors distribute all SKUs of the Company's organic fluid milk which are
available in their respective territories. However, there can be no assurance
that Suiza or its subsidiaries who undertake the distribution of Horizon
products will be successful in increasing market penetration and sales of
Horizon products in their territories. In addition, the Company is unable to
predict what effect, if any, its relationship with Suiza will have on its
existing relationships with processors and distributors, some of whom may be
affiliated with Suiza's competitors. See "Prospectus Summary--Recent Events".
Pursuant to the Stockholder Agreement with the Company and the Major
Stockholder Agreement with certain of the Company's principal stockholders,
Suiza will have 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. See "Management--
Executive Officers and Directors" and "Description of Capital Stock--
Concurrent Placement". 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. See "Prospectus
Summary--Recent Events" and "Description of Capital Stock--Concurrent
Placement".
Possibility of Adverse Effects Resulting from United States Dairy Support
Program and Federal Milk Marketing Orders. 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 farm milk. In addition, several states in New England have
established, and certain other states are in the process of attempting to
form, regional milk price compacts designed to ensure that cheaper milk from
other regions does not undercut local producers' prices. 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 1997, the Company
paid over $500,000 for pooling, compact and administrative assessment charges.
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In November 1997, a federal district judge issued a ruling enjoining the
United States Department of Agriculture (USDA) from collecting any pooling
charges. The order was stayed pending review by the U.S. Court of Appeals. In
addition, the USDA is currently considering several proposed regulations in an
attempt to reform the federal milk marketing order system. Neither the outcome
of the court proceedings, the final form of any new federal regulations or
existence or location of state compacts nor the effect of such matters on the
Company can be predicted with any certainty. The implementation of new federal
or state regulations, or the creation of new regional milk price compacts,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Government
Regulation".
Possibility of Adverse Effects Due to Public Health, Safety and
Environmental Regulations. Horizon 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 System 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 Marcus
Peperzak, its Chairman, Barnet Feinblum, its Chief Executive Officer, Mark
Retzloff, its Vice President of Sales, and, until his currently scheduled
retirement, Paul Repetto, its Vice President of Marketing. The loss of any of
such key executives (in Mr. Repetto's case, prior to his currently scheduled
retirement) 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. See "Management".
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's target retail
markets. Most of these competitors have greater financial, operational and
marketing resources than Horizon. Horizon believes that the proposed
regulations under the Organic Foods Production Act, if adopted in the form
initially proposed, would permit competitors to sell fluid milk and other
dairy products labeled as "organic," which would not satisfy Horizon's own
organic standards. Competitors that produce "organic" products to less
rigorous standards may have lower production costs than Horizon and thus be
able to undercut Horizon's prices.
The Company's principal competitors in the market for organic fluid milk
vary by region and include Organic Valley/CROPP Cooperatives (which is
marketed by Coulee Region Organic Produce Pool, a Wisconsin agricultural
cooperative ("CROPP")), a dairy cooperative located in Wisconsin which
supplies the Company with organic fluid milk), Organic Cow of Vermont, Inc. (a
regional organic dairy affiliated with H.P. Hood and located in New England),
Alta Dena Certified Dairy (a regional dairy located in Southern
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California) and Straus Family Creamery (a regional organic dairy located in
Northern California). Many of these competitors also sell other organic dairy
products in competition with Horizon on a national basis.
The Company's principal competitors in the market 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 which sells yogurt and frozen desserts), Springfield Creamery
(a regional organic and conventional dairy located in Oregon which sells
yogurt) and Brown Cow West, Inc. (a regional organic and conventional dairy
located in Northern California which sells yogurt). In addition, Horizon
expects increased competition from both new and existing competitors in its
markets and there can be no assurance that the Company will be able to compete
effectively in the future. See "--Risks Related to the Implementation of the
Proposed Federal Organic Certification Regulations" and "Business--
Competition".
Risks Related to Establishing New Organic Dairy Farms. In fiscal 1997, the
Company undertook 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 the organic Maryland Dairy. The Company has spent a
significant amount of money converting the Idaho Dairy and the Maryland Dairy
to organic. There can be no assurance that the Company will realize an
increase in production capacity as a result of this expansion, or that future
revenues from products produced at either the Idaho Dairy or the Maryland
Dairy will be sufficient to recover the Company's investment in the expansion.
In addition, the Company may in the future incur significant environmental
clean-up costs in converting conventional dairies to organic operations. There
can be no assurance that the Company will be able to adjust its production
capacity to reflect future changes in demand for its products or that any
future additions to, expansions of, or new organic facilities will be
completed on schedule and within budget. Any significant delay or cost overrun
in the construction or acquisition of new or expanded organic dairy facilities
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Expansion of dairy operations may be limited or slowed by state and local
regulations. For example, the Company's Maryland Dairy is currently milking its
permitted capacity of 556 cows per day although its milking capacity is 1,000
cows per day. The Company's ability to operate the Maryland Dairy profitably
depends, in part, on its ability to secure operating permits for additional
cows. The Company plans to apply for additional permits over the next 24 months.
The permitting process will require that the Company make additional capital
expenditures at the Maryland Dairy to accommodate the addition of such cows.
There can be no assurance that the Company will be able to obtain the requisite
permits to increase the number of cows at the Maryland Dairy in a timely manner,
if at all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Horizon Organic Dairy Standards" and
"--Production and Processing".
Risks Associated with Perishable Products. Although the Company's products
are pasteurized, they are highly 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
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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 affect the
Company's business, financial 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 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 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.
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 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 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 "Business--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'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
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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 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".
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 1997, the Company's
largest account was United Natural Foods, which accounted for approximately
25% of the Company's sales. United Natural Foods is a national distributor
comprised of four 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 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 affect
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 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 registered
trademarks and three trademark applications pending. 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 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
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be no assurance that some or all of the trade secrets and other know-how that
Horizon 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 Absence of Prior Trading Market; Potential Volatility
of Stock Price; No Dividends. Prior to this offering, there has been no public
market for the Common Stock. There can be no assurance that an active trading
market will develop or, if one develops subsequent to this offering, that it
will be maintained. The initial public offering price of the Common Stock will
be established by negotiation among the Company and the representatives of the
Underwriters. See "Underwriting" for factors considered in determining the
initial public offering price. The market price of the shares of Common Stock
could be subject to significant fluctuations in response to the Company's
operating results and other factors, including announcements by its
competitors. In addition, the stock market in recent years has experienced
extreme price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies. These
fluctuations, as well as a shortfall in sales or earnings compared to public
market analysts' expectations, changes in analysts' recommendations or
projections and general economic and market conditions, may adversely affect
the market price of the Common Stock. The Company has never paid any cash
dividends and does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy".
Possibility of Adverse Effect on the Market Price of the Common Stock by
Virtue of Public Sales of Common Stock Following This Offering. Sales of
substantial amounts of Common Stock in the public market following this
offering (including shares issued upon the exercise of stock options and
warrants) by current holders of the Common Stock, stock options and warrants,
or the perception that such sales might occur, could adversely affect the
market price of the Common Stock and the Company's ability to raise additional
equity capital. Upon the completion of this offering and the Concurrent
Placement, 9,156,341 shares of Common Stock will be outstanding. The shares of
Common Stock sold in this offering will be freely tradable by persons other
than "affiliates" of the Company without restriction under the Securities Act
of 1933, as amended (the "Securities Act"). All other outstanding shares of
Common Stock are subject to lock-up agreements, pursuant to which such shares
may not be sold or otherwise disposed of for a period of 180 days after the
date of this prospectus (the "Lock-Up Period") without the prior written
consent of Hambrecht & Quist LLC, or are "restricted securities" within the
meaning of Rule 144 under the Securities Act. Such shares consist of an
aggregate of 5,800,124 shares that are subject to lock-up agreements (the
"Lock-Up Agreements") (including the Concurrent Placement shares) with
Hambrecht & Quist LLC, and an aggregate of 356,217 shares which are
"restricted securities" under Rule 144. Hambrecht & Quist LLC may release all
or any portion of the shares subject to the Lock-Up Agreements. After
termination of the Lock-Up Period, all such shares will become eligible for
sale in the public market only in compliance with the registration
requirements of the Securities Act or pursuant to a valid exemption from
registration. See "Principal Stockholders" and "Shares Eligible for Future
Sale".
Possibility of Adverse Effect on the Market Price of the Common Stock by
Virtue of Certain Takeover Provisions. The Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") and Amended
and Restated Bylaws (the "Bylaws") contain provisions which may have the
effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of the
Common Stock and the voting and other rights of the holders of the Common
Stock. These provisions include, but are not limited to, a classified Board of
Directors and the authority of the Board of Directors to issue up to 5,000,000
shares of preferred stock and to fix the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. The
Company has no present plans to issue shares of preferred stock. In addition,
certain provisions of Delaware law applicable to the Company could have the
effect of discouraging certain attempts to acquire the Company which could
15
<PAGE>
deprive the Company's stockholders of the opportunities to sell their shares
of Common Stock at prices higher than prevailing market prices. See
"Description of Capital Stock".
Possibility of Adverse Effect on Market Price of the Common Stock Due to
Control by Officers and Directors. Following completion of this offering and
the Concurrent Placement, directors, executive officers and principal
stockholders of the Company, and certain of their affiliates, will
beneficially own approximately 41% of the outstanding shares of Common Stock.
Accordingly, these persons, individually and as a group, will be able to
effectively control the Company and direct its affairs and business, including
any determination with respect to the acquisition or disposition of assets by
the Company, future issuances of Common Stock or other securities by the
Company, declaration of dividends on the Common Stock and the election of
directors. Such concentration of ownership may also have the effect of
delaying, deferring or preventing a change in control of the Company. See
"Principal Stockholders".
Adverse Effect Due to Dilution. The initial public offering price is
substantially higher than the net tangible book value per share of Common
Stock. Investors purchasing shares of Common Stock in this offering and in the
Concurrent Placement will therefore incur immediate and substantial dilution
of $5.05 per share. See "Dilution".
Cautionary Language Regarding Forward-Looking Statements. This Prospectus
contains certain forward-looking statements, including without limitation,
statements concerning the Company's operations, economic performance and
financial condition, including in particular, statements relating to the
Company's growth strategy. The words "believe", "expect", "anticipate" and
other similar expressions generally identify forward-looking statements.
Investors are cautioned not to place undue reliance on these forward-looking
statements. These forward-looking statements are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties, including, without limitation, those identified under "Risk
Factors" and elsewhere in this Prospectus. Actual results could differ
materially from these forward-looking statements. In addition, important
factors to consider in evaluating such forward-looking statements include
changes in external market factors, changes in the Company's business or
growth strategy or an inability to execute its strategy due to changes in its
industry or the economy generally, the emergence of new or growing competitors
and various competitive factors. In light of these risks and uncertainties,
there can be no assurance that the matters referred to in the forward-looking
statements contained in this Prospectus will in fact occur.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $10.00 per share and from the Concurrent Placement of
1,100,000 shares offered by the Company at an assumed price of $11.00 per
share are estimated to be $39.2 million ($43.4 million if the Underwriters'
over-allotment option is exercised in full).
The net proceeds received by the Company will be used (i) to repay $4.0
million of a secured promissory note which has a maturity date of July 8,
1998, issued as partial consideration for the acquisition of the Juniper
Valley Farms brand, (ii) to repay the $2.0 million outstanding principal
amount of a Term Loan from U.S. Bancorp, through its affiliate U.S. Bancorp Ag
Credit, Inc. (collectively, "U.S. Bancorp"), which bears interest at a
variable rate based on U.S. Bancorp's announced reference rate plus 2% and
which has a final maturity date of July 31, 1998 (the "Term Loan"), (iii) to
repay up to $10.0 million of the outstanding principal amount of the Company's
Line of Credit with U.S. Bancorp (the "Line of Credit") which bears interest
at U.S. Bancorp's announced reference rate plus 1.25% and has a final maturity
date of June 30, 1999, (iv) to repay approximately $3.6 million of unsecured
subordinated promissory notes, a portion of which are held by certain
affiliates of the Company, which bear interest at a variable rate equal to the
current prime rate plus 1% which have a final maturity date of the earlier of
(x) March 20, 2002 or (y) the closing of this offering, issued in connection
with the acquisition by the Company of the remaining interest in Sunrise from
Aurora Dairy Corporation ("Aurora") in May 1997, (v) to repay $3.1 million of
senior subordinated promissory notes, a portion of which are held by certain
affiliates of the Company, which bear interest at an annual rate of 11% and
have a final maturity date of the earlier of (x) May 29, 2003 or (y) the
closing of this offering, at which time a premium of 3% of the principal
amount of such notes will be due and payable, and (vi) for possible expansion
of the Company's dairy facilities, acquisitions, working capital and general
corporate purposes. The Company has no present commitments or agreements with
respect to any potential acquisitions. The amounts and timing of actual
expenditures will depend upon a number of factors, many of which are beyond
the Company's control, including demand for the Company's products and the
availability of suitable acquisition candidates. Pending such uses, the net
proceeds of this offering will be invested in short-term, interest bearing
securities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Certain
Transactions".
DIVIDEND POLICY
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate
paying any 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, the future earnings, operations, capital
requirements and financial condition of the Company. In addition, the Line of
Credit and the senior subordinated promissory notes prohibit the payment of
dividends. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources".
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis and (ii) as adjusted to reflect to the sale of
the 3,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $10.00 per share and 1,100,000 shares pursuant to the
Concurrent Placement at an assumed price of $11.00 per share and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt......................... $ 575 $ 575
======= =======
Long-term debt, excluding current portion(1).............. $18,970 $ 4,969
------- -------
Stockholders' equity (deficit):
Preferred stock, par value $.001, 2,000,000 shares
authorized; no shares issued and outstanding, actual;
5,000,000 shares authorized; no shares issued and
outstanding, as adjusted............................... -- --
Common stock, par value $.001, 8,000,000 shares
authorized; 5,176,341 shares issued and 5,056,341
shares outstanding, actual; 30,000,000 shares
authorized, 9,156,341 shares issued and outstanding, as
adjusted(2)............................................ 5 9
Additional paid-in capital(3)........................... 11,859 50,474
Accumulated deficit(4).................................. (2,486) (2,971)
Treasury stock(3)....................................... (582) --
------- -------
Total stockholders' equity............................ 8,796 47,512
------- -------
Total capitalization................................. $27,766 $52,481
======= =======
</TABLE>
- ---------------------
(1) Reflects repayment of Line of Credit with U.S. Bancorp, unsecured
subordinated promissory notes and senior subordinated promissory notes.
(2) Based on the number of shares outstanding as of March 31, 1998. Excludes,
as of March 31, 1998, 567,768 shares of Common Stock issuable upon
exercise of options outstanding under the Company's stock option plans and
69,118 shares of Common Stock reserved for issuance upon exercise of
certain warrants. As of March 31, 1998, the weighted average exercise
prices of the Company's stock options and warrants were $3.44 and $5.34
per share, respectively. See "Capitalization," "Management--Stock Option
Plans" and Notes to the Company's Consolidated Financial Statements.
(3) As adjusted Common Stock outstanding also reflects the retirement of
120,000 treasury shares of Common Stock retired as of April 30, 1998.
(4) Reflects an extraordinary loss of $485,000 (net of income tax effect) to
be recorded upon the extinguishment of the senior subordinated promissory
notes with a face amount of $3.1 million. See "Use of Proceeds".
18
<PAGE>
DILUTION
As of March 31, 1998, the Company had a net tangible book value of
approximately $6,630,000 or $1.31 per share. Net tangible book value
represents the amount of total tangible assets less total liabilities divided
by the number of shares of Common Stock outstanding. Without taking into
account any other changes in the net tangible book value after March 31, 1998,
other than to reflect the receipt by the Company of the net proceeds from the
sale of the 3,000,000 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $10.00 per share, and from the
sale of 1,100,000 shares in the Concurrent Placement at an assumed price of
$11.00 per share, the pro forma net tangible book value of the Company at
March 31, 1998 would have been approximately $45,345,000, or $4.95 per share.
This represents an immediate increase in such net tangible book value of $3.64
per share to existing stockholders and an immediate dilution of $5.05 per
share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of March
31, 1998................................................ $1.31
Increase per share attributable to new investors......... 3.64
-----
Pro forma net tangible book value per share after the offer-
ing and the Concurrent Placement(1)........................ 4.95
------
Dilution per share to new investors......................... $ 5.05
======
</TABLE>
The above table assumes that the sale of 1,100,000 shares in the Concurrent
Placement will be completed immediately following the offering. Should the
Concurrent Placement not be completed, the pro forma net tangible book value
of the Company after the offering would have been $4.13 per share. This would
represent an immediate increase in such net tangible book value of $2.82 per
share to existing stockholders and an immediate dilution of $5.87 per share to
new investors.
The following table summarizes, on a pro forma basis as of March 31, 1998,
the differences between existing stockholders, Suiza's investment in the
Concurrent Placement and the new investors with respect to the number of
shares of Common Stock purchased from the Company, the total consideration
paid to the Company and the average consideration paid per share by the
existing investors, Suiza in the Concurrent Placement (based upon an assumed
price of $11.00 per share) and by the investors purchasing shares of Common
Stock in this offering (based upon an assumed initial public offering price of
$10.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2).. 5,056,341 55.2% $11,283,000 21.1% $ 2.23
Suiza in Concurrent Place-
ment(3).................. 1,100,000 12.0% 12,100,000 22.7% 11.00
New investors in the
offering................. 3,000,000 32.8 30,000,000 56.2 10.00
--------- ----- ----------- -----
Total................... 9,156,341 100.0% $53,383,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------------
(1) Reflects an extraordinary loss of $485,000 (net of income tax effect) to
be recorded upon the extinguishment of senior subordinated promissory
notes with a face amount of $3.1 million.
(2) Based on the number of shares outstanding as of March 31, 1998. Excludes,
as of March 31, 1998, 567,768 shares of Common Stock issuable upon
exercise of options outstanding under the Company's stock option plans and
69,118 shares of Common Stock reserved for issuance upon exercise of
warrants. As of March 31, 1998, the weighted average exercise prices of
the Company's stock options and warrants were $3.44 and $5.34 per share,
respectively. See "Capitalization," "Management--Stock Option Plans" and
Notes to the Company's Consolidated Financial Statements.
19
<PAGE>
(3) Includes the sale of 1,100,000 shares of Common Stock to Suiza in the
Concurrent Placement. Suiza will purchase shares in the Concurrent
Placement at the Price to Public less 3 1/2% (one-half of the Underwriting
Discount); provided that the price will not be less than $11.00 nor more
than $15.00, and further provided that to the extent the net price to
Suiza is in excess of $13.54, the number of shares sold in the Concurrent
Placement will be reduced so that the aggregate Suiza investment in the
Concurrent Placement will not exceed $14,900,000. The Concurrent Placement
is subject to the closing of this offering at a minimum Price to Public of
$9.00 per share.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statements of operations data for the
fiscal years ended December 31, 1995, December 28, 1996 and December 31, 1997
and the selected balance sheet data as of December 28, 1996 and December 31,
1997 have been derived from the Consolidated Financial Statements of the
Company, which have been audited by KPMG Peat Marwick LLP, independent
accountants, whose report thereon also is included herein. The selected
consolidated statement of operations data for the fiscal years ended December
31, 1993 and 1994, and the balance sheet data as of December 31, 1993, 1994
and 1995 have been derived from the audited consolidated financial statements
of the Company that are not included in this Prospectus. The selected
consolidated statements of operations data for the three months ended March
31, 1997 and 1998 are unaudited but have been prepared on the same basis as
the audited consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting only of normally recurring
adjustments, necessary for a fair presentation of the financial information
presented. The selected consolidated financial data set forth below is not
necessarily indicative of results to be expected for any future period. The
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in the Prospectus. The financial statements and
notes thereto of Sunrise Organic Farms, Inc. (f/k/a Aurora Dairy Corporation
of Idaho, Inc.) as of and for the year ended December 31, 1996 are included
elsewhere in this Prospectus as a significant acquisition purchased by the
Company in fiscal 1997.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
--------------------------------------------- --------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 28, DEC. 31, MAR. 31, MAR. 31,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales...................... $ 973 $3,436 $7,246 $15,986 $29,565 $6,134 $10,102
Cost of sales(1)(2)............ 659 2,564 5,517 11,425 22,639 5,113 7,055
----- ------ ------ ------- ------- ------ -------
Gross profit................... 314 872 1,729 4,561 6,926 1,021 3,047
Selling expenses............... 210 478 1,620 3,270 5,656 1,147 2,132
General and administrative
expenses(3)................... 267 298 633 1,066 2,384 399 581
----- ------ ------ ------- ------- ------ -------
Operating income (loss)........ (163) 96 (524) 225 (1,114) (525) 334
Other income (expense),
net(4)........................ -- 3 (122) (184) (1,108) (153) (492)
----- ------ ------ ------- ------- ------ -------
Income (loss) from continuing
operations before income taxes
and minority interest......... (163) 99 (646) 41 (2,222) (678) (158)
Income tax benefit (expense)... -- -- 30 (14) 513 64 43
Minority interest in loss of
subsidiary(5)................. -- -- -- -- 687 571 --
----- ------ ------ ------- ------- ------ -------
Income (loss) from continuing
operations.................... (163) 99 (616) 27 (1,022) (43) (115)
Income (loss) from discontinued
dairy operations, net(6)...... -- (533) 107 -- -- -- --
----- ------ ------ ------- ------- ------ -------
Net income (loss).............. $(163) $ (434) $ (509) $ 27 $(1,022) $ (43) $ (115)
===== ====== ====== ======= ======= ====== =======
Basic and diluted net income
(loss) per share(7)........... $(.14) $ (.20) $ (.18) $ .01 $ (.23) $ (.01) $ (.02)
===== ====== ====== ======= ======= ====== =======
Weighted average shares
outstanding:
Basic.......................... 1,126 2,120 2,791 3,264 4,488 3,659 5,056
Diluted........................ 1,126 2,120 2,791 3,283 4,488 3,659 5,056
<CAPTION>
DEC. 31, DEC. 31, DEC. 31, DEC. 28, DEC. 31, MAR. 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...... $ 2 $ 41 $ 5 $ 600 $ 404 $ 811
Working capital (deficit)...... (80) (1,109) (1,016) 414 2,935 2,520
Total assets................... 179 4,259 2,414 5,232 32,737 34,501
Long-term debt................. -- 500 -- -- 17,960 18,970
Total stockholders' equity
(deficit)..................... (95) 1,057 798 3,264 8,886 8,796
</TABLE>
21
<PAGE>
- ---------------------
(1) Includes losses of organic premiums in connection with milk supply
contracts of approximately $198,000 and $73,000 in fiscal 1995 and 1996,
respectively. Losses of organic premiums relate to the Company's
commitment to purchase minimum amounts of organic farm milk. When organic
milk is sold as conventional milk, the difference between the organic and
conventional prices is recorded as a loss of organic premium.
(2) Prior to fiscal 1997, the Company recorded its share of the losses of
Sunrise in other income (expense), net. As a result of the acquisition of
the remainder of Sunrise in May 1997, losses of $1.3 million and $627,000
are included in cost of sales for fiscal 1997 and the three months ended
March 31, 1997, respectively.
(3) Includes $448,000 of expenses during fiscal 1997 relating to pre-operating
costs associated with the Maryland Dairy. No pre-operating costs were
incurred at the Maryland Dairy during the three months ended March 31,
1997.
(4) Includes the Company's share of the losses of Sunrise relating to its
minority interest in Sunrise. The Company's shares of these losses were
$85,000 and $158,000 for fiscal 1995 and 1996, respectively, of which
$44,000 and $77,000, respectively, represents the Company's proportionate
equity in losses recognized by Sunrise.
(5) 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 and $571,000 during
fiscal 1997 and during the three months ended March 31, 1997,
respectively.
(6) On May 30, 1995, the Company transferred the assets and liabilities of its
dairy operations to Sunrise in exchange for Sunrise common stock. The
Company's dairy operations as well as the gain on the disposal have been
reflected as discontinued operations in the consolidated statements of
operations in fiscal 1994 and fiscal 1995. The loss on the dairy
operations in fiscal 1994 was $533,000 and in fiscal 1995, the loss on the
dairy operations of $406,000 was offset by a gain on disposal of the dairy
operations of $513,000.
(7) 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.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
Except for the historical information contained herein, the discussion in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
OVERVIEW
Horizon produces, processes and markets the leading brand of certified
organic dairy products in the United States, including the leading brand of
certified organic fluid milk. Horizon has become the only dairy to offer
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 has leveraged its brand to create a full line of
refrigerated organic dairy products.
Formation and Structure of the Company. Horizon was founded in Boulder,
Colorado in 1991 and introduced its first products, organic fat free 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. 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 CROPP, an organic dairy cooperative which during that period was
located only in Wisconsin. 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
for a dairy farm in Idaho. These facilities became the Company's Idaho Dairy
in fiscal 1997. Aurora is controlled by Marc Peperzak, the Chairman of the
Company's Board of Directors. See "Certain Transactions".
In fiscal 1995, the Company and a subsidiary of Aurora formed a corporation,
Sunrise, to hold certain of the Company's and Aurora's assets which combined
to form the Idaho Dairy. The Company contributed its organic cattle and other
supplies for a 23.8% interest in Sunrise, Aurora contributed the land and
equipment for a majority interest in Sunrise, and certain other investors
provided capital in exchange for a minority interest in Sunrise. The Company
also entered into a contract to purchase a percentage of Sunrise's forecasted
production volume. To the extent that Sunrise produced organic farm milk in
excess of the Company's demands for organic farm milk, the Company sold the
excess as conventional farm milk with the difference being recorded as a loss
of the "organic premium" in cost of sales.
In fiscal 1996, the Company made an additional $350,000 equity investment in
Sunrise (increasing its stake to 26.8%), and made a $650,000 term loan to
Sunrise. In fiscal 1997, the Company acquired the remaining interest in
Sunrise from Aurora and the other Sunrise investors. Accordingly, the
Company's 1997 Consolidated Financial Statements include the results of
operations of Sunrise from January 1, 1997 with a corresponding minority
interest shown separately covering the period in which Sunrise was not 100%
owned by the Company. In connection with the acquisition, the Company recorded
goodwill of approximately $2.3 million which is being amortized on a straight-
line basis over 15 years. In order to develop an organic farm milk supply for
products sold in the Eastern United States, in 1997, the Company began
developing the
23
<PAGE>
Maryland Dairy. Shipments of organic farm milk from the Maryland Dairy began
in the first quarter of 1998. In April 1998, the Company acquired the Juniper
Valley Farms brand, the leading brand of organic dairy products in the metro
New York market.
Customers, Revenue Recognition and Marketing. Horizon's organic products are
sold in conventional and natural foods supermarkets, specialty retailers and
natural foods stores. Horizon's customers include natural foods distributors,
dairy distributors and supermarket chains. Once processed, products are either
delivered to, or picked up by, the customers. Revenue is recognized at the
time of shipment or pick up. Sales to new customers are generally 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
customer, the Company buys back the excess inventory. Horizon engages in a
range of consumer and trade marketing activities, and in fiscal 1998, plans to
increase its marketing spending as a percentage of sales.
Internal Production of Milk. In establishing the Idaho Dairy and the
Maryland Dairy, the Company made a substantial investment in organic dairy
herds and in converting the farm land to provide a source of organic feed.
Horizon's animal care and facility maintenance costs are significantly higher
than conventional dairies.
The Company began converting the Idaho Dairy farm land to organic in 1994,
but due to the three-year growing requirement to be certified organic the feed
grown on the farm land was not certified as organic until 1997. The Company
began converting the Maryland Dairy to organic in 1997 and expects that it
will be certified organic beginning in 2000. From 1994 through 1996, the
Company purchased all of its organic feed from third party suppliers, and the
Company continues to purchase a majority of organic feed on the open market.
The Company sells the feed which it cannot certify as organic as
conventional feed at conventional prices. Since the prices of conventional
farm milk and feed historically have been significantly lower than organic,
the Company has experienced, and expects to continue to experience, lower
gross profit during periods when its Company-owned dairy farms are being
converted to organic.
The cost of farm milk from the Idaho Dairy and the Maryland Dairy is
significantly influenced by the Company's ability to operate these dairy farms
at capacity. The Idaho Dairy achieved milking capacity in December 1997, while
the Company's Maryland Dairy is not currently operating at milking capacity.
The Company's ability to operate the Maryland Dairy at capacity will depend,
in part, on its ability to secure operating permits for additional cows. The
Company will apply for additional permits over the next 24 months. The
permitting process will require that the Company make additional capital
expenditures at the Maryland Dairy to accommodate the addition of such cows.
There can be no assurance that the Company will be able to obtain the
requisite permits to increase the number of cows at the Maryland Dairy. See
"Risk Factors--Risks Related to Establishing New Organic Dairy Farms".
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 at an inter-company transfer
price which the Company believes approximates fair market 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. Except for the
contract with CROPP which extends through December 2001, these contracts are
for twelve months or less and are renewable upon agreement by the Company and
the producer. 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
24
<PAGE>
the organic milk as conventional milk and records a loss of organic premium in
cost of sales. In fiscal 1997, the Company incurred no loss of organic
premiums.
The prices which the Company pays many of its third party producers are
based on a fixed mark-up from the price for conventional farm milk. Changes in
the price of conventional farm milk and the availability of organic farm milk
directly affect the Company's cost of organic farm milk.
Milk Processing. Horizon has a national network of 17 dairy processors which
process the Company's organic farm milk into refrigerated organic fluid milk
and other 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 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 a long-term processing agreement with
Worcester and will enter into processing and distribution agreements with
certain Suiza subsidiaries, it does not have written agreements with its other
processors.
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.
In addition, states in New England have established, and certain other
states are in the process of attempting to form, regional milk price compacts
designed to provide farmers within the compact states with a minimum price
which will result in higher milk prices than the federally mandated minimum
prices. For example, the Northeast Interstate Dairy Compact has resulted in
farm milk prices higher than federal order minimum prices. These charges are
assessed as "compact over-order charges". As with the federal milk market
orders, these charges are not known or predictable in advance and may increase
the Company's costs. For fiscal 1997, the Company paid over $500,000 for
pooling, compact and administrative assessment charges. See "Risk Factors--
Possibility of Adverse Effects Resulting from United States Dairy Support
Program and Federal Milk Marketing Orders".
Juniper Valley Acquisition. On April 8, 1998, the Company completed the
acquisition of the Juniper Valley Farms brand of organic dairy products from
Worcester. As a result of the acquisition, the Company recognized
approximately $6.3 million of goodwill and other intangibles which will be
amortized over 15 years.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain selected
statements of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------------
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------- ----------------------
DEC. 31, DEC. 28, DEC. 31, MAR. 31, MAR. 31,
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales........ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.... 76.1 71.5 76.6 83.4 69.8
----- ----- ----- --------- ---------
Gross profit..... 23.9 28.5 23.4 16.6 30.2
Selling
expenses........ 22.4 20.4 19.1 18.7 21.1
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------------
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------- ----------------------
DEC. 31, DEC. 28, DEC. 31, MAR. 31, MAR. 31,
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
General and
administrative
expenses............... 8.7 6.7 8.1 6.5 5.8
----- ---- ----- --------- ---------
Operating income
(loss)................. (7.2) 1.4 (3.8) (8.6) 3.3
Other income (expense),
net.................... (1.7) (1.2) (3.7) (2.5) (4.9)
----- ---- ----- --------- ---------
Income (loss) from
continuing operations
before income taxes and
minority interest...... (8.9) 0.2 (7.5) (11.1) (1.6)
Income tax benefit
(expense).............. 0.4 -- 1.7 1.0 0.5
Minority interest in
loss of subsidiary..... -- -- 2.3 9.4 --
----- ---- ----- --------- ---------
Income (loss) from
continuing operations.. (8.5) 0.2 (3.5) (0.7) (1.1)
Income from discontinued
dairy operations....... 1.5 -- -- -- --
----- ---- ----- --------- ---------
Net income (loss)....... (7.0)% 0.2% (3.5)% (0.7)% (1.1)%
===== ==== ===== ========= =========
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net Sales. Net sales includes product sales, royalties and consulting
revenue, less returns and allowances. Net sales increased 65% to $10.1 million
in the first quarter of fiscal 1998 from $6.1 million in the first quarter of
fiscal 1997. This increase is primarily due to: the development of new retail
accounts, including a major conventional supermarket chain; increased sales
with existing accounts; the introduction of several new products, including
organic chocolate milk and cottage cheese; and a price increase.
Gross Profit. Gross profit consists of net sales, less cost of sales (which
includes the cost of raw materials, processing fees, inbound freight, pooling
charges and losses of organic premiums). Gross profit increased 198% to $3.0
million in the first quarter of fiscal 1998 from $1.0 million in the first
quarter of fiscal 1997. As a percentage of sales, gross profit increased to
30.2% in the first quarter of fiscal 1998 from 16.6% in the first quarter of
fiscal 1997. This increase is primarily due to significantly lower losses
resulting from the Company reaching capacity at the Idaho Dairy. Prior to
fiscal 1997, the Company recorded its share of the losses of Sunrise as other
income (expense), net. Due to the acquisition of the remainder of Sunrise
during fiscal 1997, the three months ended March 31, 1997 includes losses of
$627,000 in cost of sales.
Selling Expenses. Selling expenses include direct selling, marketing and
distribution costs. Selling expenses increased 86% to $2.1 million in the
first quarter of fiscal 1998 from $1.1 million in the first quarter of fiscal
1997. As a percentage of sales, selling expenses increased to 21.1% in the
first quarter of fiscal 1998 from 18.7% in the first quarter of fiscal 1997,
primarily due to increased levels of marketing expenses, including hiring
marketing executives and staff.
General and Administrative Expenses. General and administrative expenses
include operations and corporate support, and increased 46% to $581,000 in the
first quarter of fiscal 1998 from $399,000 in the first quarter of fiscal
1997. As a percentage of sales, general and administrative expenses decreased
to 5.8% in the first quarter of fiscal 1998 from 6.5% in the first quarter of
fiscal 1997 due to increased leverage of general and administrative expenses
over a larger sales base.
Other Income (Expense), Net. Other income (expense), net increased to
$492,000 in the first quarter of fiscal 1998 from $153,000 in the first
quarter of fiscal 1997, primarily as a result of higher levels of indebtedness
incurred to acquire the remaining interest in the Idaho Dairy, and to finance
the acquisition and development of the Maryland Dairy.
Minority Interest in Loss of Subsidiary. Minority interest in loss of
subsidiary includes the minority stockholders' share of the losses from
operations of the Idaho Dairy for the period prior to the Company's
acquisition of the remainder of Sunrise in the second quarter of fiscal 1997.
Minority interest in loss of
26
<PAGE>
subsidiary was $571,000 in the first quarter of fiscal 1997. In the first
quarter of fiscal 1998, the operations of the Idaho Dairy are reflected in the
Company's cost of sales.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 28, 1996
Net Sales. Net sales increased 85% to $29.6 million in fiscal 1997 from
$16.0 million in fiscal 1996. This increase was primarily due to: development
of new retail accounts, particularly as a result of the Company's expansion
into conventional supermarkets; increased sales to existing accounts; and the
introduction of several new products including hard cheeses, cottage cheese,
eggs and new SKUs of yogurt and fluid milk. Also included in the increase was
$879,000 from the sale of conventional milk from the Idaho Dairy prior to the
conversion to 100% organic.
Gross Profit. Gross profit increased 52% to $6.9 million in fiscal 1997 from
$4.6 million in fiscal 1996. As a percentage of sales, gross profit decreased
to 23.4% in fiscal 1997 from 28.5% in fiscal 1996. Gross profit on organic
fluid milk and other organic dairy products remained relatively flat as a
percentage of sales but was offset by the consolidation of the Idaho Dairy
operations. The operations of the Idaho Dairy in fiscal 1997 reflect the costs
associated with expanding the Idaho Dairy to capacity and completing its
conversion to organic (including costs associated with culling conventional
cows and sourcing organic feed). In addition, the Company recognized losses of
organic premiums of $73,000 in fiscal 1996. In fiscal 1997, the Company also
completed the transition of the Idaho Dairy to 100% organic, which included
the disposition of the balance of the conventional cows. The loss associated
with the disposition of conventional cows was $310,000 and was booked as an
expense in fiscal 1997.
Selling Expenses. Selling expenses increased 73% to $5.7 million in fiscal
1997 from $3.3 million in fiscal 1996. As a percentage of sales, selling
expenses decreased to 19.1% in fiscal 1997 from 20.4% in fiscal 1996 primarily
due to increased leverage of selling expenses over a larger sales base,
partially offset by the increased costs associated with expanding into
conventional supermarkets.
General and Administrative Expenses. General and administrative expenses
increased 124% to $2.4 million in fiscal 1997 from $1.1 million in fiscal
1996. As a percentage of sales, general and administrative expenses increased
to 8.1% in fiscal 1997 from 6.7% in fiscal 1996 primarily due to $448,000 in
pre-operating costs associated with the Maryland Dairy.
Other Income (Expense), Net. Other income (expense), net increased to $1.1
million in fiscal 1997 from $184,000 in fiscal 1996 primarily as a result of
increased indebtedness related to both the purchase of Sunrise and a debt
financing. Other expense included $158,000 loss in fiscal 1996 as a result of
the Company's ownership of a minority interest in Sunrise. A similar expense
did not occur in fiscal 1997 because the Company's acquisition of the
remainder of Sunrise resulted in the consolidation of those operations with
the Company's beginning January 1, 1997.
Minority Interest in Loss of Subsidiary. The Company recognized Sunrise as
an investment during fiscal 1996 due to its less than 50% ownership during
that year. The minority interest in loss of subsidiary was $687,000 in fiscal
1997 to recognize minority stockholders' proportionate share of losses prior
to 100% ownership by the Company in May 1997.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 28, 1996 AND DECEMBER 31, 1995
Net Sales. Net sales increased 121% to $16.0 million in fiscal 1996 from
$7.2 million in fiscal 1995. This increase was primarily due to: development
of new accounts; increased sales to existing accounts; and the introduction of
several new products, including butter, non-fat dry milk powder, cheese, half
and half and additional SKUs of fluid milk. The Company also attributes the
increase in net sales in fiscal 1996 in part to the development of the
Company's regional sales force and the appointment of mass market brokers.
27
<PAGE>
Gross Profit. Gross profit increased 164% to $4.6 million in fiscal 1996
from $1.7 million in fiscal 1995. As a percentage of sales, gross profit
increased to 28.5% in fiscal 1996 from 23.9% in fiscal 1995. This increase is
primarily due to the introduction of several new organic dairy products with
higher profit margins than organic fluid milk, the implementation of the
Company's national pricing policy along with a price increase in the third
quarter of fiscal 1995, as well as a slightly improved profit margin on fluid
milk due to a full year of milk production at the Idaho Dairy and the
appointment of fluid milk processors in the western region of the United
States to process farm milk from the Idaho Dairy. In addition, in fiscal 1995,
the Company recognized losses of organic premiums of $198,000.
Selling Expenses. Selling expenses increased 102% to $3.3 million in fiscal
1996 from $1.6 million in fiscal 1995. As a percentage of sales, selling
expenses decreased to 20.4% in fiscal 1996 from 22.4% in fiscal 1995 primarily
due to increased leverage of selling expenses over a larger sales base,
partially offset by increased expenses associated with the development of the
Company's sales force infrastructure, including hiring regional sales
managers.
General and Administrative Expenses. General and administrative expenses
increased 68% to $1.1 million in fiscal 1996 from $633,000 in fiscal 1995. As
a percentage of sales, general and administrative expenses decreased to 6.7%
in fiscal 1996 from 8.7% in fiscal 1995 due to increased leverage of general
and administrative expenses over a larger sales base.
Other Income (Expense), Net. Other income (expense), net increased to
$184,000 in fiscal 1996 from $122,000 in fiscal 1995, primarily as a result of
increased other expense in fiscal 1996 partially offset by interest income on
excess cash in fiscal 1996. Other expense includes $158,000 in fiscal 1996 and
$85,000 in fiscal 1995 as a result of the Company's ownership of a minority
interest in Sunrise. This increase was primarily due to increased costs at the
farm related to the continued conversion of the Idaho Dairy to organic as well
as the Company's purchase of an additional 3% of Sunrise in fiscal 1996.
Income from Discontinued Dairy Operations. Income from discontinued dairy
operations in fiscal 1995 reflects the gain on the sale of the Company's
assets to Sunrise of $513,000 in connection with the formation of Sunrise,
which more than offset the Company's losses on the operations of those assets
of $406,000 during the five months prior to the sale.
28
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statements of
operations data for the five quarters ended March 31, 1998, as well as such
data expressed as a percentage of the Company's net sales for the periods
indicated. This data has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for fair
presentation of such information when read in conjunction with the Company's
annual consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
FISCAL 1997 FISCAL 1998
--------------------------------------- -----------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
-------- -------- --------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................. $6,134 $6,740 $7,648 $9,043 $10,102
Cost of sales(1)(2)....... 5,113 5,286 5,693 6,547 7,055
------ ------ ------ ------ -------
Gross profit.............. 1,021 1,454 1,955 2,496 3,047
Selling expenses.......... 1,147 1,333 1,527 1,649 2,132
General and administrative
expenses(3).............. 399 442 652 891 581
------ ------ ------ ------ -------
Operating income (loss)... (525) (321) (224) (44) 334
Other income (expense),
net...................... (153) (226) (345) (384) (492)
------ ------ ------ ------ -------
Loss before income taxes
and minority interest.... (678) (547) (569) (428) (158)
Income tax benefit........ 64 155 147 147 43
Minority interest in loss
of subsidiary(4)......... 571 116 -- -- --
------ ------ ------ ------ -------
Net loss.................. $ (43) $ (276) $ (422) $ (281) $ (115)
====== ====== ====== ====== =======
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............. 83.4 78.4 74.4 72.4 69.8
------ ------ ------ ------ -------
Gross profit.............. 16.6 21.6 25.6 27.6 30.2
Selling expenses.......... 18.7 19.8 20.0 18.2 21.1
General and administrative
expenses................. 6.5 6.6 8.5 9.9 5.8
------ ------ ------ ------ -------
Operating income (loss)... (8.6) (4.8) (2.9) (0.5) 3.3
Other income (expense),
net...................... (2.5) (3.3) (4.5) (4.2) (4.9)
------ ------ ------ ------ -------
Loss before income taxes
and minority interest.... (11.1) (8.1) (7.4) (4.7) (1.6)
Income tax benefit........ 1.0 2.3 1.9 1.6 0.5
Minority interest in loss
of subsidiary............ 9.4 1.7 -- -- --
------ ------ ------ ------ -------
Net loss.................. (0.7)% (4.1)% (5.5)% (3.1)% (1.1)%
====== ====== ====== ====== =======
</TABLE>
- ---------------------
(1) As a result of the acquisition of the remainder of Sunrise in May 1997,
operating losses of $627,000, $341,000, $202,000 and $165,000 and
operating income of $184,000 are included in cost of sales for the
quarters ended March 31, 1997, June 30, 1997, September 30, 1997, December
31, 1997 and March 31, 1998, respectively.
(2) Includes $271,000 in start-up costs associated with the Maryland Dairy in
the quarter ended March 31, 1998.
(3) Includes pre-operating costs associated with the Maryland Dairy of
$13,000, $174,000 and $262,000 for the quarters ended June 30, 1997,
September 30, 1997 and December 31, 1997, respectively.
(4) The results of operations of Sunrise have been included in the Company's
consolidated statement 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 $571,000 and $116,000 during
the quarters ended March 31, 1997 and June 30, 1997, respectively.
The Company's results of operations may fluctuate significantly from period
to period. The Company's quarterly results may fluctuate as a result of a
variety of factors, including: the number, timing and mix of
29
<PAGE>
trade promotions; the mix of product sales; factors affecting farm
profitability, including natural disasters and economic downturns; additional
sales and expenses as a result of acquisitions, hiring and training of
additional personnel; the timing of inventory writedowns; competition; the
incurrence of unexpected operating costs; and other factors beyond the
Company's control. Accordingly, the results of operations in any quarter will
not necessarily be indicative of the results that may be achieved for a full
fiscal year or any future quarter.
In part as a result of the Company's limited operating history, the Company
may be unable to accurately forecast its revenues. The Company's current and
future expense levels are based predominantly on its operating plans and
estimates of future revenues. The Company may be unable to adjust spending in
a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in revenues would likely have an
immediate material adverse effect on the Company's business, financial
condition and results of operations. Further, the Company currently intends to
substantially increase its operating expenses in a number of areas, including
increased marketing efforts. To the extent such expenses precede or are not
subsequently followed by increased revenues, the Company's operating results
may fluctuate significantly.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as an indication of future performance. It is likely
that the Company's future quarterly operating results from time to time will
not meet the expectations of security analysts or investors. In such event,
the price of the Company's Common Stock would likely be materially and
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Horizon'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. The following table presents a summary of
the Company's cash flows for fiscal 1995, 1996 and 1997 and the first quarter
of fiscal 1998:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------ MARCH 31,
1995 1996 1997 1998
----- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities............................... $ 38 $ (477) $ (257) $ 1,642
Net cash used in investing activities..... (335) (1,191) (10,003) (2,197)
Net cash provided by financing activi-
ties..................................... 261 2,263 10,064 962
----- ------- -------- -------
Net increase (decrease) in cash and cash
equivalents.............................. $ (36) $ 595 $ (196) $ 407
===== ======= ======== =======
</TABLE>
Although net income decreased in fiscal 1997, net cash used in operations
decreased by $220,000 primarily due to non-cash charges associated with
depreciation and amortization and the disposal of cattle combined with an
increase in trade accounts payable and collection of trade accounts
receivable, offset by purchases of inventories. Cash flows provided by
operations increased in the first quarter of fiscal 1998 as a result of non-
cash charges associated with depreciation and amortization and the disposal of
cattle combined with cash provided by inventories and an increase in trade
accounts payable and other accrued expenses, partially offset by an increase
in trade accounts receivable.
Net cash used in investing activities was $335,000, $1.2 million and $10.0
million in fiscal 1995, 1996 and 1997, respectively, and $2.2 million in the
first quarter of fiscal 1998. The expenditures in fiscal 1996 and 1997 related
primarily to the investment in and acquisition of Sunrise and purchases of
equipment. The expenditures in the first quarter of fiscal 1998 relate
primarily 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 financing activities was $261,000, $2.3 million and
$10.1 million in fiscal 1995, 1996 and 1997, respectively, and $962,000 in the
first quarter of fiscal 1998. In fiscal 1995, the Company received net
proceeds of $125,000 from the sale of Common Stock and $136,000 from increased
borrowings net of
30
<PAGE>
repayment of debt. In fiscal 1996, the Company received net proceeds of $2.3
million from the sale of Common Stock, and $775,000 from the issuance of
bridge notes resulting in a net increase in borrowings, net of repayment of
debt, of $22,000. In fiscal 1997, the Company received net proceeds of $4.3
million (net of treasury stock acquired) from the sale of common stock and
$6.0 million (net of repayments) from the proceeds of the issuance of long-
term debt and the restructuring of the Company's credit lines, most of which
relate to the acquisition of Sunrise.
In fiscal 1997, the Company entered into the Line of Credit which provides a
revolving line of credit with an aggregate principal amount of up to $10.0
million, as determined pursuant to a borrowing base formula. The Line of
Credit bears interest at U.S. Bancorp's announced reference rate plus 1.25%
and has a final maturity of June 30, 1999. At March 31, 1998, the Company had
borrowings outstanding under the Line of Credit of approximately $8.0 million.
The Company intends to use a portion of the net proceeds from this offering to
repay amounts outstanding on the Line of Credit. Following this offering the
Company will have approximately $10.0 million of available borrowing capacity,
subject to certain covenants and other restrictions applicable to the Line of
Credit. Further, in April 1998, the Company received a commitment from U.S.
Bancorp for an additional Term Loan of $2.0 million at the lender's announced
reference rate plus 2%. This $2.0 million Term Loan (which proceeds were used
as a partial payment for the Juniper Valley Farms brand acquisition on April
8, 1998) is to be paid back to U.S. Bancorp out of the proceeds of this
offering. The Company's ability to borrow under the Line of Credit is
contingent upon its compliance with certain material covenants, including
covenants related to the Company's tangible net worth, working capital ratio,
total liabilities to tangible net worth ratio, minimum working capital
interest coverage ratio, as well as other borrowing base requirements.
The Company anticipates that it will spend approximately $800,000 in the
last three quarters of fiscal 1998 for fixed asset additions at both the Idaho
Dairy and the Maryland Dairy as well as $1.7 million for replacement cows.
The Company believes that the net proceeds of this offering and the
Concurrent Placement, together with cash generated from operations and funds
available under the Line of Credit, will be sufficient to satisfy its cash
requirements through fiscal 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per
share (EPS) and applies to all entities with publicly held common stock or
potential common stock. This statement replaces the presentation of primary
EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Similar to fully diluted EPS, diluted EPS
reflects the potential dilution of securities that could share in the
earnings. This statement is effective for the Company's consolidated financial
statements for the year ended December 31, 1997 and has been adopted,
resulting in the restatement of earnings per share for all prior periods.
Details regarding earnings per share are disclosed in Note 2 to the Company's
Consolidated Financial Statements.
In June 1997, FASB issued Statement of Financial Accounting Standards, No.
130, Reporting Comprehensive Income (Statement No. 130), effective for years
beginning after December 15, 1997. Statement No. 130 establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. The Company has not yet adopted
Statement No. 130. The Company will comply with the reporting and display
requirements under this statement when required.
In June 1997, FASB issued Statement of Financial Accounting Standards, No.
131, Disclosures About Segments of an Enterprise and Related Information
(Statement No. 131), effective for years beginning
31
<PAGE>
after December 15, 1997. Statement No. 131 establishes standards for reporting
information about operating segments and the methods by which such segments
were determined. The Company has not yet adopted Statement No. 131. The
Company will comply with the reporting requirements under this statement when
required.
In February 1998, FASB issued Statement of Financial Accounting Standards
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits (Statement No. 132), effective for fiscal years beginning after
December 15, 1997. Statement No. 132 revises disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. Statement No. 132 standardizes the disclosure
requirements and suggests combined formats for presentations of such
disclosures. The Company has not yet adopted Statement No. 132. The Company
will comply with the reporting requirements under this statement when
required.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP) Reporting on the Costs of Start-Up
Activities, effective for fiscal years beginning after December 15, 1998 and
encouraging earlier adoption. The SOP broadly defines start-up activities as
those one time activities related to, among other things, opening a new
facility. In general, the SOP requires the Company to expense as incurred
those costs. Currently, the Company expenses such costs.
YEAR 2000 COMPLIANCE
Certain management information systems use two digit data fields which
recognize dates using the assumption that the first two digits are "19" (i.e.,
the number 98 is recognized as the year 1998). Although the Company has not
conducted any testing, the Company believes that all of its major software and
hardware systems are year 2000 compliant and will recognize data fields beyond
1999. The Company also is in the process of verifying whether its major
suppliers, service providers, and financial institutions are year 2000
compliant. The Company will continue to make certain investments in its
software and hardware systems and applications to ensure that they are year
2000 compliant. The financial impact to the Company is not anticipated to be
material in any single year.
32
<PAGE>
BUSINESS
OVERVIEW
Horizon produces, processes and markets the leading brand of certified
organic dairy products in the United States, including the leading brand of
certified organic fluid milk. Horizon has become the only dairy to offer
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 has leveraged its brand to create a full line of
refrigerated organic dairy products. The Company believes that consumers are
attracted to Horizon's premium-priced, organic products because of their high
quality and their image as healthy, environmentally-responsible and animal-
friendly products. The Company believes that its distinctive, brightly-colored
flying cow and earth logo appeals to a broad audience of consumers,
particularly mothers and children, and is extendible to additional organic
product categories. Horizon intends to leverage its strong national brand, its
vertically-integrated production, processing and distribution system and its
commitment to the highest organic standards to continue to capitalize on the
growing demand for organic products.
Horizon is committed to driving the continued growth of the organic dairy
category by producing and selling high-quality organic products that address
consumer concerns regarding food safety, environmental responsibility and
animal welfare. The Company believes that its organic standards meet or exceed
all currently existing and proposed governmental certification standards, as
well as all significant private organic certification standards. Horizon's
farm milk is produced by cows that have not been treated with antibiotics or
synthetic growth hormones, such as recombinant bovine growth hormone ("rBGH"),
and which are fed organic feed. 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.
Horizon's sales and distribution strategy is focused on building the Horizon
brand nationwide in conventional supermarkets while maintaining its leading
position in natural foods stores. Horizon currently offers 43 SKUs of premium-
priced organic products under the Horizon brand. Horizon estimates that it is
currently selling its organic products in over 5,000 retail locations,
including conventional and natural foods supermarkets, specialty retailers and
natural foods stores. Horizon distributes its products to these retailers
across the United States through natural foods distributors, dairy
distributors and directly to certain supermarket chains using a team of
regional sales managers who manage a network of natural and conventional food
brokers. Although Horizon's products initially were sold primarily through
natural foods supermarkets and other natural foods stores, a significant part
of Horizon's sales growth has occurred through the Company's increasing
penetration of conventional supermarkets. According to SPINS/A.C. Nielsen, a
food industry data service, for the four weeks ended February 1998, Horizon
was the leading brand of organic fluid milk sold in conventional supermarkets,
with a market share of 64% and a combined market share of 73%, including the
Juniper Valley Farms brand which the Company recently acquired. Additionally,
for the same period Horizon achieved 20% all commodity volume ("ACV")
distribution, a measurement of national supermarket distribution, of its
organic fluid milk, up eight percentage points from the prior year.
Horizon has built its national presence by establishing an extensive,
vertically-integrated production, processing and distribution system. This
system includes two Company-owned organic dairy farms, strategically-located
organic farm milk producers, a Company-owned farm milk separator and a network
of geographically-dispersed dairy processors. The majority of Horizon's
organic farm milk is produced at the Idaho Dairy, the Company's organic dairy
farm in Southern Idaho, where the Company also grows a significant amount of
organic feed and performs first stage farm milk processing with its own farm
milk separator. The Idaho Dairy is the largest organic dairy in the country,
with over 4,000 certified organic cows. Horizon recently completed
construction of the Maryland Dairy, its second organic dairy farm, which has
over 500 certified organic cows, from which Horizon supplies farm milk for
products sold in the Eastern United States. Horizon sources the remainder of
its organic farm milk supply through supply arrangements with independent
dairy cooperatives and farmers located throughout the United States. Horizon's
network of third-
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party, certified organic processors manufacture and package the organic fluid
milk and organic dairy products, including yogurt, sour cream, butter and
cheese.
Horizon recently completed the acquisition of the Juniper Valley Farms brand
of organic fluid milk and organic dairy products from Worcester, an affiliate
of Elmhurst Dairy (a large regional conventional dairy). Juniper Valley Farms
is the leading brand of organic fluid milk in the metro New York market, the
largest mass market for organic fluid milk sales in the United States. In
connection with this acquisition, Horizon also acquired Worcester's supply
agreements with its network of organic dairy farmers in New York and entered
into a long-term processing agreement with Worcester. The Company believes
that this acquisition will enable the Company to increase its market
penetration in the Northeastern United States through access to a
complementary production, processing and distribution system and to lower the
processing cost of its organic dairy products by directing an increased volume
of organic farm milk to Worcester and its affiliated processors. The Company
intends to transition Juniper Valley Farms branded products to the Horizon
brand over the next 12 months.
In June 1998, Horizon entered into agreements with Suiza, a leading
manufacturer and distributor of fresh milk and related dairy products, shelf-
stable and refrigerated food and beverage products, frozen food products,
coffee and plastic containers. The Company believes that its relationship with
Suiza will provide it with opportunities to enhance the Company's market
penetration in a number of key markets nationally. The Company's arrangement
with Suiza will consist of an investment by Suiza in the Company pursuant to
the Stock Purchase Agreement and processing and distribution agreements with
certain of Suiza's subsidiaries. See "Prospectus Summary--Recent Events",
"Risk Factors--Risks Related to the Company's Relationship with Suiza Foods
Corporation" and "Description of Capital Stock--Concurrent Placement".
THE ORGANIC DAIRY OPPORTUNITY
The dairy category represents approximately 10% of the overall $447 billion
United States retail food market, and includes fluid milk and other dairy
products such as butter, cheese and yogurt. The $9 billion retail market for
fluid milk, much of which is consumed by children, is characterized mainly by
regional brands and supermarket private-label brands. The organic dairy
category is growing as a segment of the overall dairy market. According to
SPINS/A.C. Nielsen, as of the four weeks ended February 21, 1998, sales of
organic fluid milk in conventional supermarkets increased 73% in 1998 from
1997. The Company believes that this growth is driven by increasing consumer
concerns regarding the permitted use of antibiotics and synthetic growth
hormones, such as rBGH, in conventional cows and the permitted use of
synthetic fertilizers, pesticides, herbicides and genetic engineering in
conventional livestock feed. In December 1997, the federal government
published proposed national regulations to 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 final regulations are expected
to be implemented in 1999.
Horizon believes that the trends driving the growth of the organic dairy
category are consistent with the trends driving growth of all organic foods.
The Natural Foods Merchandiser reported that sales of organic foods grew to
approximately $3.5 billion in 1996 from $2.9 billion in 1995, reflecting a
continuation of the double-digit compound annual growth rates which the
organic foods industry has experienced since the mid 1980's. Horizon believes
that a number of long-term trends are significantly contributing to this
growth. According to the New Hope/Hartman Study, increasing consumer awareness
and concerns about food freshness, purity and safety, and health and nutrition
issues among mainstream consumers is driving the continued growth in demand
for organic products in mainstream grocery distribution channels. In addition,
these trends have also supported a shift in the distribution of natural foods
products reflected by the growth in the number of large natural foods
supermarkets such as Whole Foods Markets and Wild Oats Markets. Horizon
believes that these trends will continue to grow as the large "baby boom"
generation continues to mature and raise families. According to published
industry statistics, sales of organic foods represent only one percent of
total food sales, providing significant growth potential.
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The Company believes that, to date, the relative penetration of organic
dairy products in the total dairy industry has been less than the penetration
of other organic food products in their respective categories. The Company
believes that this is due, in part, to the difficulty of managing the supply,
production and distribution chain for perishable, refrigerated products. The
recent development of organic dairies, like the Company, is beginning to meet
consumer demand for organic dairy products.
STRATEGY
Horizon's goal is to strengthen its position as the leading brand of organic
dairy products and to continue to drive the growth of the organic dairy
market. The key elements of Horizon's growth strategy include the following:
Build Brand Awareness. The Company believes that building the Horizon brand
and consumer loyalty will enable it to grow the organic dairy market and
capture the majority of that growth. The Company believes that its distinctive
product packaging, which stands out in crowded refrigerated dairy cases, is a
key element to its branding strategy. Horizon intends to build additional
brand awareness by continuing to educate consumers about the value of organic
products, conducting consumer and trade promotions and by increasing its
marketing spending as a percentage of sales. Horizon plans to focus its
marketing 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.
Expand Organic Fluid Milk Distribution in Mass Market. The Company has
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 enables it to capture shelf space and gain credibility
with retailers while creating consumer awareness of the Horizon brand. As
demand for Horizon's organic fluid milk products develops in each conventional
supermarket, Horizon is then able to introduce other organic dairy products,
such as yogurt, cheese and butter.
Extend Brand Identity. The Company believes that it can continue to grow the
market for organic products through the introduction of additional organic
dairy and non-dairy products. The Company believes that its distinctive,
brightly-colored flying cow and earth logo appeals to a broad audience of
consumers, particularly mothers and children, and is extendible to additional
organic product categories. The Company intends to continue to build its
family of products both through the internal development of organic dairy
products which further leverage the Company's vertically-integrated
production, processing and distribution system as well as through
acquisitions, licensing and co-branding arrangements for other complementary
organic products. For example, Horizon recently acquired the Juniper Valley
Farms brand which includes new product categories such as organic orange
juice. The Company currently licenses its brand to Glenwood Foods, L.L.C. for
use in connection with the sale of organic eggs. In addition, the Company will
consider other licensing and co-branding arrangements where the Company's
organic dairy products can be used as ingredients in other organic products,
such as cheese on pizza.
Optimize Supply Chain Logistics. The Company intends to continue to focus on
improving the logistics of producing and processing organic fluid milk and
other organic dairy products, including reducing the transportation costs and
delivery time for organic farm milk and finished goods. Horizon began
operations with a single source of organic farm milk located in Wisconsin and
a fluid milk processor located in Iowa which provided the Company's organic
fluid milk to customers nationwide. Horizon has improved the efficiency of its
supply chain by adding geographically-dispersed organic farm milk producers
and processors. Horizon currently sources organic farm milk from producers in
six regions across the United States and uses five fluid milk processors.
Increase Organic Farm Milk Supply. Horizon believes that a strategically-
located, proprietary organic farm milk supply is a significant competitive
advantage in the organic dairy market. Horizon has established a proprietary
supply through its ownership of two organic dairy farms combined with a long-
term organic farm milk supply arrangement. In addition, with the recent
acquisition of the Juniper Valley Farms brand, the
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Company has acquired a significant network of farm milk producers located in
New York. The Company intends to continue to expand its organic farm milk
supply, both through supply arrangements with dairy cooperatives and
independent farmers as well as through the possible establishment of
additional Company-owned organic dairy farms.
Optimize Use of Organic Farm Milk Components. Horizon believes that its
ability to sell all of the components of its organic farm milk at a premium
price is a key to increasing profitability and maximizing the value of the
Horizon brand. To achieve that objective, the Company has developed a full
line of organic dairy products which use all components of the organic farm
milk and a farm milk separator to capture excess butterfat, or "cream", which
is then used to make value added organic dairy products such as organic butter
and cream cheese. The separator also enables the Company to inventory for
later sale the organic premium of the components of the organic farm milk in
products such as cheese and non-fat dry milk powder.
Enter New Distribution Channels. Horizon believes that there is an
opportunity for growing the organic dairy market in additional distribution
channels such as food service, food ingredients and international markets. In
that regard, Horizon has entered into a technical services agreement to assist
Takanashi Milk Products, Ltd., a Japanese dairy, in establishing an organic
dairy in Japan to produce and market organic dairy products under the Horizon
brand.
COMPANY VALUES/PHILOSOPHY
Horizon was founded by Mark Retzloff and Paul Repetto out of their desire to
build an organic food business which could serve as a model for the production
of healthy foods using sustainable farm practices, and to apply their skills
and experience in the natural foods industry in a socially responsible manner.
Mark and Paul combined their efforts with the Company's current Chairman, Marc
Peperzak, owner of several of the largest dairy farms in the United States,
whose experience in the conventional dairy business, interest in organic dairy
farm practices and access to resources helped build the Company's Idaho Dairy.
Mark, Paul and Marc have developed a senior management team led by Barney
Feinblum, a natural foods industry veteran. Each member of the senior
management team has at least 20 years experience in the food industry, shares
the founders' vision and is committed to growing the Company.
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<PAGE>
Horizon's commitment to conducting business in a socially responsible manner
includes producing the highest quality organic dairy products while supporting
sustainable agriculture principles and employing ethical business practices in
its dealing with all of its stakeholders. Horizon's Belief Statement is as
follows:
[Graphic including the caption Horizon(R) Beliefs with the following text
and the Horizon logo: We believe that organic agricultural practices are a
proven and sustainable method to produce food without environmental pollution
and resource degradation.
We believe that producing food using organic agricultural practices results
in products which are not only flavorful, but are safe, healthy and wholesome
as well.
We believe that food can and should be produced in harmony with nature, and
that animals used for food production should be raised and nurtured with
respect for their natural patterns.
We believe that for Horizon to prosper, we must conduct our business with
integrity and in a consistently ethical manner concerning relationships with
our employees, our suppliers, our consumers and the society at large.
We believe that Horizon's success depends on our ability to serve those who
buy our products. We seek to provide a climate of confidence, credibility and
satisfaction with our consumers and our customers by producing quality organic
dairy foods and services that cultivate repeat business.
We believe that a proper measure of Horizon's success is profitability,
because profits assure our ability to provide employment opportunities,
attract the capital required to grow, and serve as a validation of our beliefs
and practices.]
Horizon believes that organic products offer the following benefits:
Food Safety. The proliferation of organic foods and the growth of the
natural foods industry has been driven primarily by consumer concern with food
safety. Horizon's organic standards, which meet or exceed all currently
existing or proposed governmental certification standards, as well as all
significant private organic certification standards, prohibit the use of
antibiotics, growth hormones, synthetic pesticides and other farm chemicals
and genetic engineering.
Environmental Responsibility. According to industry reports, agriculture is
a significant contributor to the contamination of community water supplies as
a result of synthetic fertilizer and pesticide runoff.
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Moreover, there is increasing concern about the health of farm workers exposed
to agricultural chemicals. The Horizon organic dairy farm model forbids the
use of synthetic fertilizers, pesticides and herbicides and includes
comprehensive waste recycling and composting.
Animal Welfare. Organic farm practices emphasize access to fresh air and
exercise and prohibit injecting cows with growth hormones. Horizon strives to
maintain a healthy herd using these standard organic farm practices as well as
through milk parlor and farm cleanliness, close animal observation,
preventative care and the use of natural and homeopathic medications. Horizon
believes that a clean-living cow makes a good glass of milk.
Preserving Family Farms and Rural Communities. According to industry
reports, a significant percentage of small, family-owned farms cease
operations every year due to intense competition. The impact of this loss in
the rural communities in which these family farms predominate can be profound.
Horizon believes that the demand for organic products, organic feed and
organic farm milk in particular, has created a new market which is well-served
by small, family-owned farms. Horizon supplements its internal supply of
organic farm milk with purchases from dairy cooperatives and independent dairy
farms which consist of an aggregate of over 125 family-owned dairy farms. In
addition, over 500 other family-owned farms supply Horizon with organic
livestock feed and other organic ingredients for Horizon's organic products.
HORIZON ORGANIC DAIRY STANDARDS
Currently, there is a wide range of organic standards which are applied 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 outsourced, 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 organic standards meet or exceed all currently
existing and proposed governmental certification standards, as well as all
significant private organic certification standards. The farm milk which
Horizon 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 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 65% 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 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'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. All of Horizon's third party producers, processors
and milk transporters currently are meeting the applicable organic food
standards.
In December 1997, the federal government published proposed national
regulations to standardize organic certification requirements as part of the
Organic Foods Production Act which was enacted as part of the 1990 United
States Farm Bill. This law will provide for a minimum federal standard that
all organic producers will have to follow in order to be "certified" organic,
and will include a seal to provide consumers with assurance that products sold
as "organic" meet these minimum standards. The USDA comment period is
scheduled to end May 1, 1998 and Horizon, along with other organic dairy
producers, has been lobbying to bring the proposed standards in line with more
rigorous existing standards. The Organic Trade Association anticipates that
the final regulations will be implemented in 1999.
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Horizon believes that the proposed regulations under the Organic Foods
Production Act, if adopted in the form initially proposed, would permit
competitors to sell fluid milk and other dairy products labeled as "organic"
which would not satisfy Horizon's internal organic standards. Horizon incurs
significant costs to produce organic products which adhere to its rigorous
standards, and competitors whose "organic" practices are not as rigorous may
be able to compete with Horizon on the basis of price by producing lower cost
"organic" milk and selling it at prices which undercut Horizon's prices.
Horizon does not intend to lower its organic standards and intends to continue
to compete on the basis of the quality and consistency of its products. There
can be no assurance that Horizon will be able to compete successfully against
lower cost competitors in any of its markets. See "Risk Factors--Risks Related
to the Implementation of the Proposed Federal Organic Certification
Regulations".
Horizon's fluid milk and dairy products are primarily certified organic by
Quality Assurance International, Inc., an accredited international private
certification firm which performs inspection and organic certification for a
variety of companies including Smuckers Beverage (a division of The J.M.
Smucker Company) and Ventura Coastal Corp.
PRODUCTS
Horizon currently markets 43 SKUs of premium-priced organic products under
the Horizon brand, including eight SKUs of fluid milk and 31 SKUs of other
dairy products such as cheese, yogurt, butter, sour cream, cottage cheese and
four SKUs of eggs. Horizon recently acquired the Juniper Valley Farms brand of
organic products, including 22 SKUs of organic fluid milk and two SKUs of
organic orange juice. The Company intends to transition the Juniper Valley
Farms branded products to the Horizon brand over the next 12 months.
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The following table sets forth the Horizon organic product line:
THE HORIZON FAMILY OF ORGANIC PRODUCTS
<TABLE>
<CAPTION>
FLUID MILK CHEESE YOGURT
<S> <C> <C>
Whole Milk, half gallon Mozzarella Cheese (8 oz.) Plain Fat Free Yogurt (48
(64 oz.) Shredded Mozzarella Cheese oz., 24 oz. and 6 oz.)
2% Reduced Fat Milk, (6 oz.) Vanilla Fat Free Yogurt (24
half gallon (64 oz.) Mozzarella Stick Cheese oz. and 6 oz.)
and quart (32 oz.) (6 oz.) Peach Fat Free Yogurt
1% Low Fat Milk, half Monterey Jack Cheese (6 oz.)
gallon (64 oz.) (8 oz.) Strawberry Banana Fat Free
Fat Free Milk, half Shredded Monterey Jack Yogurt (6 oz.)
gallon (64 oz.) and Cheese (6 oz.) Strawberry Fat Free Yogurt
quart (32 oz.) Sharp Cheddar Cheese (6 oz.)
1% Low Fat Chocolate (8 oz.) Apricot Mango Fat Free Yogurt
Milk, quart (32 oz.) Shredded Sharp Cheddar (6 oz.)
Half & Half, pint (6 oz.) Raspberry Fat Free Yogurt
(16 oz.) Reduced Fat Cheddar (6 oz.)
(8 oz.) Cappuccino Fat Free Yogurt
Shredded Reduced Fat (6 oz.)
Cheddar (6 oz.) Cherry Fat Free Yogurt
Grated Parmesan Cheese (6 oz.)
(3.5 oz.) Blueberry Fat Free Yogurt
(6 oz.)
</TABLE>
<TABLE>
<CAPTION>
OTHER DAIRY PRODUCTS NON-DAIRY PRODUCTS
<S> <C>
Butter, salted and unsalted (1 lb.) Extra Large White Eggs, dozen*
Small Curd Cottage Cheese (16 oz.) Large White Eggs, dozen*
Low Fat, Small Curd Cottage Cheese Jumbo White Eggs, dozen*
(16 oz.) Medium White Eggs, dozen*
Cream Cheese (8 oz.)
Neufchatel Cheese (8 oz.)
Low Fat Sour Cream (12 oz.)
Sour Cream (12 oz.)
</TABLE>
-------------------
* Designates products sold by Glenwood Foods, L.L.C. under license from
Horizon.
ORGANIC PRODUCTS CURRENTLY SOLD UNDER THE JUNIPER VALLEY FARMS BRAND
FLUID MILK NON-HOMOGENIZED FLUID MILK
Whole Milk, half gallon (64 oz.) and Whole Milk, half gallon (64 oz.)
quart (32 oz.) and quart (32 oz.)
2% Reduced Fat Milk, half gallon (64 1% Low fat Milk, half gallon (64
oz.) and quart (32 oz.) oz.) and quart (32 oz.)
1% Low Fat Milk, half gallon (64 oz.) Fat Free Milk, half gallon (64
and quart (32 oz.) oz.) and quart (32 oz.)
Fat Free Milk, half gallon (64 oz.)
and quart (32 oz.)
Half & Half, pint (16 oz.)
Heavy Cream, pint (16 oz.)
ASEPTIC MILK NON-DAIRY PRODUCTS
Whole Milk, quart (32 oz.) Orange Juice, half gallon (64 oz.)
2% Reduced Fat Milk, quart (32 oz.) and quart (32 oz.)
Fat Free Milk, quart (32 oz.)
2% Chocolate Milk, quart (32 oz. and
cup (8 oz.)
Lactose Free Fat Free Milk, quart
(32 oz.)
MARKETING
Horizon's marketing strategy is designed to continue to build awareness of
the Horizon 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 products carry the Company's distinctive, brightly-colored flying cow and
earth logo as well as 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 recently 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.
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Horizon also engages in other traditional consumer and trade marketing
activities, including public relations activities, consumer coupons, product
sampling and trade promotions. Horizon plans to increase its marketing
spending as a percentage of sales as part of its strategy to increase consumer
awareness of the Horizon brand and the value of organic products through
additional consumer-oriented marketing activities, such as consumer promotions
and advertising. Horizon 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.
Horizon'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, L.L.C.
for use in connection with the sale of organic eggs. In addition, the Company
will consider other licensing and co-branding arrangements where the Company's
organic dairy products can be used as ingredients in other organic products,
such as cheese on pizza.
SALES AND DISTRIBUTION
Horizon's sales and distribution strategy is focused on building the Horizon
brand nationwide in conventional supermarkets while maintaining its leading
position in natural foods stores. Horizon currently offers 43 SKUs of premium-
priced organic products under the Horizon brand. Horizon estimates that it is
currently selling its organic products in over 5,000 retail locations,
including conventional and natural foods supermarkets, specialty retailers and
natural foods stores. Horizon distributes its products to retailers across the
United States through natural foods distributors, dairy distributors and
directly to supermarket chains. Horizon'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's internal customer service
team to meet the daily order and logistic needs of the Company's customers. In
addition, Horizon runs national marketing programs with the two largest
natural foods retailers, Whole Foods Markets and Wild Oats Markets.
Although Horizon's primary markets were initially natural foods supermarkets
and other natural foods stores, a significant part of Horizon's sales growth
has occurred through the Company's increasing penetration of conventional
supermarkets. According to SPINS/A.C. Nielsen, for the four weeks ending
February 28, 1998, Horizon was the leading brand of organic fluid milk sold in
conventional supermarkets, with a market share of 64% and a combined market
share of 73%, including the Juniper Valley Farms brand which the Company
recently acquired. Additionally, for the same period, Horizon achieved 20% ACV
distribution of its organic fluid milk, up eight percentage points from the
prior year.
The Company believes it must continue to optimize efficiencies in its
distribution channels and manage supply chain logistics nationwide in order to
maximize profitability. The Company provides next-day delivery to most of its
retail customers because its organic fluid milk processors are located within
one day's drive of the Company's major mass markets, permitting delivery of
finished goods with maximum shelf life. Finished products with longer shelf
lives, such as cheese and yogurt, are currently stored at public warehouses
located in San Francisco and Chicago and at a customer's warehouse located
outside of New York City, and are shipped nationally through third-party
trucking companies as orders are received from customers.
In order to support its national distribution objectives, Horizon has
established a national delivered pricing policy with three pricing zones
across the United States. The pricing zones are determined by delivery
distance from the Company's regional fluid milk processor or warehouse. In
addition, the Company offers allowances to customers who pick up products.
Horizon's distributors generally deliver the Company's products directly to
the retail stores. Horizon's retail supermarket chain customers typically take
delivery of Horizon's products at the customer's distribution warehouse. In
fiscal 1997, the Company's largest account was United Natural Foods, a
national distributor
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which is comprised of four regional distributors who have independent
purchasing arrangements with the Company. For such period, these four regional
distributors accounted for approximately 25% of the Company's sales.
In June 1998, Horizon entered into agreements with Suiza, a leading
manufacturer and distributor of fresh milk and related dairy products, shelf-
stable and refrigerated food and beverage products, frozen food products,
coffee and plastic containers. The Company believes that its relationship with
Suiza will provide 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. See "Prospectus Summary--Recent Events" and "Risks
Factors--Risks Related to the Company's Relationship with Suiza Foods
Corporation."
PRODUCTION AND PROCESSING
Horizon believes that one of its most significant competitive advantages is
its strategically-located, proprietary organic farm milk supply and its
ability to maximize the use of all components of the organic farm milk.
Horizon 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 processors.
Since 1995, Horizon 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 began operations with a single source of organic farm milk
located in Wisconsin and a fluid milk processor located in Iowa which
delivered the Company's organic fluid milk to customers nationwide. Horizon
has improved the efficiency of its supply chain by adding geographically-
dispersed organic farm milk producers and processors. Horizon currently
sources organic farm milk from producers in six regions across the United
States and uses five fluid milk processors.
Organic Milk Supply. The majority of Horizon's organic farm milk is produced
at the Company's Idaho Dairy, where the Company also grows a significant
amount of organic feed and performs first stage farm milk processing. The
Idaho Dairy is the largest organic dairy in the country, with over 4,000
certified organic cows. The Idaho Dairy encompasses over 3,800 acres,
including almost 2,000 acres of certified organic crop land. In fiscal 1997,
the Idaho Dairy provided over 75% of Horizon's requirements for organic farm
milk. 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 for later sale the organic premium of the organic farm
milk in products such as cheese and non-fat dry milk powder.
Horizon recently completed construction of the Maryland Dairy, a
strategically-located milk supply, from which Horizon supplies farm milk for
products sold in the Eastern United States. The Maryland Dairy encompasses
over 450 acres, which the Company anticipates will be able to produce
certified organic feed on the farm land in the third quarter of 2000. The
Maryland Dairy began milking its first certified organic cows in March 1998.
The Company currently has a permit to maintain 556 certified organic cows at
the Maryland Dairy, while the milk parlor is designed to milk 1,000 cows per
day. The Company's ability to operate the Maryland Dairy profitably depends,
in part, on its ability to secure operating permits for additional cows. The
Company plans to apply for additional permits over the next 24 months. The
permitting process will require that the Company make additional capital
expenditures at the Maryland Dairy to accommodate the addition of such cows.
There can be no assurance that the Company will be able to obtain the
requisite permits to increase the number of cows at the Maryland Dairy. See
"Risk Factors--Risks Related to Establishing New Organic Dairy Farms".
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
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principally in Wisconsin. CROPP sells organic fluid milk and other dairy
products in competition with the Company under the Organic Valley brand. In
connection with the Juniper Valley Farms brand acquisition, Horizon acquired
supply agreements with a network of certified organic dairy farmers in New
York. Horizon intends to supply products to markets in the Northeastern United
States sourced from these organic dairy farmers.
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 more than half of the
Company's current milk supply originates from the Company's dairy farms. 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. To address processing logistics, Horizon 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's customers.
Horizon has established relationships with 17 dairy processors across the
United States. The dairy processors include five fluid milk processing
locations and twelve dairy product processors which process the Company's
organic farm milk into chocolate milk, aseptic milk, yogurt, butter, cheese
and sour cream. The Company also uses three refrigerated warehouses (two
public warehouses and one customer warehouse) where it inventories organic
dairy products. As part of the acquisition of the Juniper Valley Farms brand,
Horizon entered into a long-term processing agreement with Worcester as a
result of which Horizon believes that it will be able to lower the cost of its
organic dairy products by directing an increased volume of organic farm milk
to Worcester and its affiliated processors.
In June 1998, Horizon entered into agreements with Suiza, a leading
manufacturer and distributor of fresh milk and related dairy products, shelf-
stable and refrigerated food and beverage products, frozen food products,
coffee and plastic containers. The Company believes that its relationship with
Suiza will provide it with opportunities to enhance the Company's market
penetration in a number of key markets nationally. The Company's arrangement
with Suiza will include processing and distribution agreements with certain of
Suiza's subsidiaries. See "Prospectus Summary--Recent Events" and "Risk
Factors--Risks Related to the Company's Relationship with Suiza Foods
Corporation".
Transportation. Transportation costs represent a significant portion of
Horizon's costs of sales. Horizon outsources 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 continuously strives to reduce
transportation costs by strategically locating producers and processors as
close as possible to customers.
ACQUISITIONS
Horizon recently completed the acquisition of the Juniper Valley Farms brand
from Worcester. Juniper Valley Farms is the leading brand of organic fluid
milk in the metro New York market, the largest mass market for organic fluid
milk sales in the United States. In connection with the acquisition of the
Juniper Valley Farms brand, Horizon also acquired supply agreements with a
significant network of organic dairy farmers in New York and entered into a
long-term processing agreement with Worcester. The Company believes that the
acquisition will enable the Company to increase its market penetration in the
Northeastern United States through access to a complementary production and
distribution system. The Company intends to transition the Juniper Valley
Farms branded products to the Horizon brand over the next 12 months. See "Risk
Factors--Potential Difficulties of Integrating Juniper Valley Farms
Operations".
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The Company may supplement its internal growth through additional strategic
acquisitions of organic dairy businesses. The Company is not currently
pursuing any specific acquisitions. See "Risk Factors--Risks Related to
Internal Growth Strategy and Possible Acquisitions".
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's target retail markets. Most of these
competitors have greater financial, operational and marketing resources than
Horizon. Horizon believes that the proposed regulations under the Organic
Foods Production Act, if adopted in the form initially proposed would permit
competitors to sell fluid milk and other dairy products labeled as "organic",
which would not satisfy Horizon's own organic standards. Competitors that
produce "organic" products to less rigorous standards may have lower
production costs than Horizon and thus be able to undercut Horizon's prices.
The Company's principal competitors in the market for organic fluid milk
vary by region and include Organic Valley/CROPP Cooperatives (which is
marketed by CROPP, a dairy cooperative located in Wisconsin which supplies the
Company with organic fluid milk), Organic Cow of Vermont, Inc. (a regional
organic dairy located in New England), Alta Dena Certified Dairy (a regional
organic dairy located in Southern California) and Straus Family Creamery (a
regional organic dairy located in Northern California). Many of these
competitors also sell other organic dairy products in competition with Horizon
on a national basis.
The Company's principal competitors in the market 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), Springfield Creamery (a regional organic and conventional
dairy located in Oregon) and Brown Cow West, Inc. (a regional organic and
conventional dairy located in Northern California). In addition, Horizon
expects increased competition from both new and existing competitors in its
markets and there can be no assurance that the Company will be able to compete
effectively in the future. See "Risk Factors--Risks Related to the
Implementation of the Proposed Federal Organic Certification Regulations" and
"--Competition".
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 and three
trademark applications pending. 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 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. In addition, Horizon has
proprietary product formulations and processes and has built up proprietary
sources of organic ingredients. However, there can be no assurance that some
or all of the trade secrets and other know-how that Horizon considers
proprietary could be developed, could otherwise become known by others or
could be deemed to be in the public domain. See "Risk Factors--Risks
Associated with Reliance on Intellectual Property Rights".
GOVERNMENT REGULATION
Organic Certification. The federal government has proposed national
regulations to 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 final regulations are expected to be implemented in
1999. Horizon believes that
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its own long-standing rigorous standards exceed both the existing organic
certification requirements and the proposed regulations under the Organic
Foods Production Act. See "--Horizon Organic Dairy Standards".
United States Dairy Support Program and Federal Milk Marketing Orders. The
Company's primary raw ingredient for its organic dairy products is organic
farm milk. The wholesale price of farm milk purchased from dairy producers by
dairy processors for fluid milk bottling is determined 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 farm milk. Organic milk is
presently considered to be the same as farm milk for federal and state minimum
pricing purposes. The Company pays organic dairy producers, on a current
basis, amounts significantly in excess of the minimum prices required by
federal, state or regional authorities. As a result of these regulations, the
Company also must pay "pooling charges" and "compact over-order charges" and
administrative assessments for government mandated marketing programs. 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, as it does in New
England, its business, financial condition and results of operations may be
materially adversely affected. For fiscal 1997, the Company paid over $500,000
for pooling, compact and administrative assessment charges.
On a monthly basis federal and state market orders determine the minimum
price processors are required to pay for farm milk. Farm milk which is used to
produce fluid milk is categorized as Class I, cultured products and ice cream
as Class II, and butter, powdered milk and hard cheese as Class III and Class
III-A. The market orders set the "basic formula price" per one hundred pounds
of Class III milk, and establish incremental increases in the price for Class
I and Class II milk. Class I differentials are based on the location of the
plant while Class II differentials are the same in all market orders.
Additionally, processors pay a "butterfat differential" based on whether the
milk contains more or less than 3.5% butterfat.
The price actually paid by processors is based on the market order price
discussed above plus administrative and handling fees and premiums that may be
shared by the cooperative or independent producer. Cooperatives also generally
provide a receiving credit to processors which is based on processing plants
receiving deliveries evenly seven days a week. Payments for the market order
price and for the Class I and butterfat differentials are coordinated through
the market order administrator, but payments for premiums and other fees
charged by the producer are made directly to the cooperative or independent
producer. As a result of this pricing mechanism, processors in the same market
order areas pay essentially the same price for farm milk, and there is rarely
any shortage in the amount of farm milk available for Class I or Class II
products. Dairy producers receive a minimum blended price for their farm milk
based upon the total "pool" of dollars paid by processors in a given
geographical region and pursuant to these regulations. This process is known
as "pooling" and the difference between the farmers' blended or uniform price
and the amount actually paid by the processor for the milk is a "pooling
charge".
The Company contracts with milk processors to process fluid milk and is
responsible through those processors for these minimum farm milk prices,
pooling charges, compact charges and administrative assessments, the costs of
which are passed through to the Company by the processors of the organic milk.
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. The "pooling" of minimum price milk proceeds by
these regulatory authorities does affect the actual minimum payments received
by organic dairy producers and can affect the Company's total costs which are
tied through milk supply contracts to the underlying formula prices.
In addition, states in New England have established, and certain other
states are in the process of attempting to form, regional milk-price compacts
designed to provide farmers within the compact states with
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a minimum price which will result in higher milk prices than the federally
mandated minimum prices. For example, the Northeast Interstate Dairy Compact
has resulted in farm milk prices higher than federal order minimum prices.
These charges are assessed as "compact over-order charges." As with the
federal milk market orders, these charges are not known or predictable in
advance and may increase the Company's costs.
Federal price support programs set the price the federal government will pay
for certain products such as hard cheese and non-fat dry milk; this support
price program can influence the Class III and Class III-A prices for milk
which in turn can impact the fluid milk price which is derived from the Class
III price. The federal government is phasing out price supports through 1999,
at which time price supports will be replaced with a loan program under which
loans for specified products will be available at the reduced 1999 support
price.
On November 6, 1997, a federal judge in Minnesota enjoined the USDA from
collecting Class I differentials in most federal market orders that establish
the federally mandated minimum price of farm milk, beginning with November
farm milk sales. The USDA has obtained a stay of this ruling pending the
outcome of the USDA's appeal to the U.S. Court of Appeals for the 8th Circuit.
The outcome of this litigation is uncertain. Additionally, the USDA has
proposed new rules for the federal milk marketing program which have been
published for public comment. The comment period expires April 30, 1998. The
USDA is also considering, as part of formal rulemaking, a proposal to
establish a temporary price floor for farm milk. A price floor may result in
higher prices for farm milk; however, the level of any such price floor and
the impact on the farm milk price cannot be predicted at this time. The
outcomes of the USDA's proposed rules and the price floor proposal are
uncertain.
Since Horizon, as a milk processor, pays significantly more than any
regulated minimum prices, management does not believe that these matters
should have a material adverse effect on the Company's business; however,
neither the outcome of the court proceedings, the final form of any new
federal regulations or existence or location of state compacts, the raw milk
price level, pooling or compact charges, nor the effect of such matters on the
Company can be predicted with any certainty. See "Risk Factors--Possibility of
Adverse Effects Resulting From United States Dairy Support Program and Federal
Milk Marketing Orders".
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
waste water retention structures (i.e., lagoons) and are subject to site
investigation for analysis of compliance. Horizon 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 in the foreseeable future.
Other Environmental Regulations. The Company is subject to certain federal,
state and local environmental 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's facilities discharge biodegradable wastewater into municipal
waste treatment facilities at levels that require the Company to pay monthly
wastewater surcharges to municipal water treatment authorities. These
authorities may, however, require the Company to limit the level of discharges
and construct pre-treatment facilities or take other action to reduce effluent
discharge in the future.
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The Company maintains above-ground 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 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, 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'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 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 "Risk
Factors--Possibility of Adverse Effects Due to Public Health, Safety and
Environmental Regulations".
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EMPLOYEES
As of March 31, 1998, the Company had 115 full-time employees and two part-
time employees. Management believes that the Company's relations with its
employees are good.
PROPERTIES/FACILITIES
Horizon 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 owns this property, which serves
as security for the Idaho Dairy loan with Farm Credit Services and the Term
Loan with U.S. Bancorp. The Maryland Dairy consists of over 450 acres,
including 109,059 square feet of production and office space (including
barns). Horizon owns this property which serves as security for the Term Loan
with U.S. Bancorp and two Term Loans with Peoples Bank of Kent County,
Maryland. Horizon also leases a 13,050 square foot facility in Longmont,
Colorado for its corporate headquarters. The Company believes that its
facilities are suitable for the Company's purposes. See Note 9 to the
Company's Consolidated Financial Statements.
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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
April 30, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Marcus B. Peperzak(1)........ 49 Chairman of the Board of Directors
President, Chief Executive Officer and
Barnet M. Feinblum(1)........ 50 Director
Vice President, Marketing, and Secretary and
Paul B. Repetto.............. 61 Director
Mark A. Retzloff............. 49 Vice President, Sales and Director
Don J. Gaidano............... 49 Vice President, Finance & Administration,
Chief Financial Officer, Treasurer and
Assistant Secretary
Jay C. Wilson................ 49 Vice President, Operations
J. Thomas Clark(2)........... 49 Director
Clark R. Mandigo II(3)....... 55 Director
Thomas D. McCloskey, Jr.(3).. 51 Director
Richard L. Robinson(2)(3).... 68 Director
</TABLE>
- ---------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Marcus B. Peperzak has served as a director of the Company since April 1994
and Chairman of the Board of Directors since November 1997. Since October
1973, Mr. Peperzak has held the position of Chief Executive Officer of Aurora
and its affiliates, one of the nation's largest production dairy farms. Mr.
Peperzak received a B.S. degree from the University of California at Berkeley
and completed the Harvard Business School Agribusiness Executive Program.
Barnet M. Feinblum has served as the President, Chief Executive Officer and
a director of the Company since May 1995. From July 1993 through March 1995,
Mr. Feinblum was the President of Natural Venture Partners, a private
investment company. From June 1992 until August 1993, Mr Feinblum served as
the Vice Chairman of Celestial Seasonings, Inc., a large herbal tea company
("Celestial"). From August 1976 until June 1992, Mr. Feinblum held various
positions with Celestial, including President, Chief Executive Officer, Chief
Operating Officer, Vice President--Finance and Chairman of the Board of
Directors. Mr. Feinblum received a B.S. degree from Cornell University and a
M.B.A. from the University of Colorado.
Paul B. Repetto, a co-founder of the Company, has served as Secretary and a
director of the Company since December 1991. Mr. Repetto served as the
Company's Vice President, Operations from December 1991 until December 1997
and is currently serving as the Company's Vice President, Marketing. From 1988
to December 1991, Mr. Repetto served as President of Westbrae/Little Bear
Natural Foods, the main unit of Vestro Foods, a public company marketing a
wide variety of food products. Prior to 1988, Mr. Repetto was President of
Natural Protein Products, a natural snack company he acquired. Prior to 1978,
Mr. Repetto held senior positions with private advertising agencies. Mr.
Repetto has served on the Steering Committee of the Organic Foods Alliance and
on the Board of the Organic Foods Production Association of North America, the
predecessor organizations to the Organic Trade Association. Mr. Repetto
received a B.S. degree from the Massachusetts Institute of Technology.
Mark A. Retzloff, a co-founder of the Company, has served as a director of
the Company since December 1991. Mr. Retzloff has held several positions with
the Company, including President and Treasurer from December 1991 to May 1995,
Vice President, Sales and Marketing and Treasurer from May 1995 to May 1997,
and Vice President, Sales since May 1997. Mr Retzloff co-founded Alfalfa's,
Inc., a natural foods supermarket chain, and served as its President and
Chairman of the Board of Directors from July 1978 to June 1990. Mr. Retzloff
also co-founded a national chain of natural foods grocery stores under the
trade name
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"Rainbow Grocery" with which he was employed from 1974 through 1979. Mr
Retzloff has served on the Board of Directors of the Organic Trade Association
since September 1992 and as its President since September 1996. Mr. Retzloff
received a B.S. degree from the University of Michigan.
Don J. Gaidano has served as Vice President, Finance & Administration, Chief
Financial Officer, Treasurer and Assistant Secretary of the Company since May
1997. From April 1994 until April 1997, Mr. Gaidano worked as a private
financial consultant for food manufacturers and distributors. From 1974 until
April 1994, Mr. Gaidano held various positions with Bromar, Inc., a food
brokerage business, including Executive Vice President, Chief Financial
Officer, Controller, Corporate Secretary, Treasurer and a director. Mr.
Gaidano received a B.S. degree from the University of Santa Clara and is a
Certified Public Accountant.
Jay C. Wilson has served as Vice President, Operations of the Company since
March 1998. From April 1996 until March 1998, Mr. Wilson served as Vice
President of Business Development at Dole Foods Hawaii, a division of Dole
Food Company, Inc. From January 1992 until April 1996, Mr. Wilson worked in
two divisions of Borden, Inc., as the Region Operations Manager for Meadow
Gold Dairies Western Region, and as President and General Manager of Meadow
Gold Dairies Hawaii. Mr. Wilson received a B.S. degree and a M.B.A. from the
University of Minnesota.
J. Thomas Clark has served as a director of the Company since April 1994.
Since November 1978, Mr. Clark has served as the President of Clark's Market,
an independent grocery store, and in July 1995, he founded Clark's Natural
Foods, a natural foods store. Mr. Clark received a B.S. degree from the
University of Colorado.
Clark Mandigo II has served as a director of the Company since July 1996.
Since 1991, Mr. Mandigo has been self-employed as a business consultant and
investor and has owned an interest in a Papa John's Pizza franchise since
April 1995. He currently serves as a director of Lone Star Steakhouse & Saloon
Inc., a retail restaurant chain and as a Trustee of Accolade Funds. Mr.
Mandigo received a B.A. and a J.D. degree from the University of Kansas.
Thomas D. McCloskey, Jr. has served as a director of the Company since April
1994 and served as Chairman of the Board of Directors from May 1994 until
November 1997. Mr. McCloskey has served as Chairman of Cornerstone Holdings,
LLC (and predecessor corporation), an investment firm since 1981. Mr.
McCloskey received a B.A. degree from the University of Notre Dame and a
M.B.A. from The Wharton School of the University of Pennsylvania.
Richard L. Robinson has served as a director of the Company since July 1996.
Mr. Robinson has been the Chairman and Chief Executive Officer of Robinson
Dairy, Inc. since 1975. Mr. Robinson serves as a director of Asset Investors,
Inc. and U.S. Exploration, Inc. Mr. Robinson received a B.S. degree from
Colorado State University.
Pursuant to the Stockholder Agreement between the Company and Suiza, Suiza
will be entitled to designate one person for election to the Company's Board
of Directors (the "Board") until such time as Suiza owns less than five
percent of the Company's Common Stock calculated on a fully diluted basis. The
Company's Board has adopted a resolution to increase the size of the Board
from eight persons to nine persons effective upon the closing of the
Concurrent Placement, which will occur immediately after the closing of this
offering. Suiza is expected to designate a representative to serve as a Class
I director no later than five days after the closing of the Concurrent
Placement. See "Prospectus Summary--Recent Events" and "Description of Capital
Stock--Concurrent Placement".
BOARD OF DIRECTORS
The Company currently has eight authorized directors. In April 1998, the
Company's Board approved, subject to stockholder approval, the amendment and
restatement of the Company's Certificate of Incorporation to provide for,
among other things, a classified Board. In accordance with the terms of the
Company's Certificate of Incorporation, the terms of office of the Board will
be divided into three classes:
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Class I, whose term will expire at the annual meeting of stockholders to be
held in 1999 and which will initially include Messrs. Retzloff and Clark and
the Suiza designee; Class II, whose term will expire at the annual meeting of
stockholders to be held in 2000 and which will initially include Messrs.
Repetto, Mandigo and Robinson; and Class III, whose term will expire at the
annual meeting of stockholders to be held in 2001 and which will initially
include Messrs. Feinblum, McCloskey and Peperzak. At each annual meeting of
stockholders, beginning with the 1999 annual meeting, the successors to
directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following
election or until their successors have been duly elected and qualified.
COMMITTEES
The Board currently has three standing committees, the Executive Committee,
the Audit Committee and the Compensation Committee.
The Executive Committee consists of Messrs. Peperzak and Feinblum. The
Executive Committee is authorized to make option grants of up to 30,000 shares
per year, hire and terminate officers (other than the Company's Chief
Executive Officer or Chief Financial Officer) and approve certain banking
matters, including authorizing the Company to incur indebtedness.
The Audit Committee consists of Messrs. Clark and Robinson. The Audit
Committee makes recommendations to the Board regarding the engagement of the
Company's independent certified public accountants and reviews the internal
accounting procedures of the Company and the scope and results of the
Company's annual audit.
The Compensation Committee consists of Messrs. Mandigo, McCloskey and
Robinson. The Compensation Committee administers the Company's stock option
plan, including making recommendations to the Board with respect to awards
thereunder, and the Company's stock purchase plan. The Compensation Committee
also determines the compensation of the elected officers of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board was formed in 1997, and
during fiscal 1997, its members were Messrs. Peperzak, Mandigo, McCloskey and
Robinson. Other than Mr. Peperzak, none of the other members of the
Compensation Committee were executive officers of the Company. No executive
officer of the Company serves as a member of the Board of Directors or
Compensation Committee of any entity that has one or more executive officers
serving as a member of the Company's Board or Compensation Committee.
Compensation of Mr. Peperzak was determined by the entire Board with a view to
attracting and retaining talented individuals to serve as directors and
officers of the Company. See "Certain Transactions" for a description of
certain transactions with these board members.
DIRECTORS' COMPENSATION
Each of the Company's non-employee directors is entitled to receive a grant
of options exercisable for 3,000 shares of the Company's Common Stock at the
Company's next annual meeting with an exercise price equal to the fair market
value of the Company's Common Stock as reported on the Nasdaq National Market
on the date of such annual meeting. Each non-employee director is entitled to
a fee of $1,000 for each Board meeting attended and $500 for each Committee
meeting attended and any such fees are to be paid in grants of shares of the
Company's Common Stock, calculated by dividing the relevant amount by the per-
share price, which will be equal to the fair market value of the Company's
Common Stock as reported on the Nasdaq National Market on the date of such
meeting. Each non-employee director elected to serve as a director for the
first time after the offering will receive an option grant exercisable for
3,000 shares of the Company's Common Stock upon his or her appointment to the
Board. Directors also are reimbursed for certain expenses in connection with
attendance at Board and Committee meetings.
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<PAGE>
Prior to this offering, the Company's non-employee directors received no
compensation other than option grants. On May 15, 1997, Messrs. McCloskey,
Clark, Mandigo and Robinson (the "Non-Employee Directors") and Mr. Peperzak
each received an option to purchase 3,000 shares of the Company's Common Stock
at an exercise price of $4.85 per share. On December 18, 1997, the Non-
Employee Directors each received an option to purchase 3,000 shares of the
Company's Common Stock at an exercise price of $6.50 per share and Mr.
Peperzak received an option to purchase 15,000 shares of the Company's Common
Stock at an exercise price of $6.50 per share. As of November 1997, Mr.
Peperzak receives an annual salary of $72,000 as compensation for his service
as Chairman of the Board.
STOCK OPTION PLANS
Equity Incentive Plan. The Company adopted its stock option plan (the
"Equity Incentive Plan") on October 25, 1995, which was approved by vote of
the stockholders on May 9, 1996. On December 18, 1997, the Board amended the
Equity Incentive Plan to increase from 250,000 to 750,000 the number of shares
of the Company's Common Stock authorized for issuance under the Equity
Incentive Plan, which was approved by a vote of the stockholders on April 30,
1998. As of March 31, 1998, the Company had granted, pursuant to the Equity
Incentive Plan, options for a total of 286,375 shares of Common Stock, none of
which have been exercised and 7,000 of which have been forfeited.
On April 14, 1998, the Board approved the amendment and restatement of the
Equity Incentive Plan, which was approved by a vote of the stockholders on
April 30, 1998. As amended, the Equity Incentive Plan permits the granting of
options intended to qualify as incentive stock options ("Incentive Stock
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") to employees (including officers and employee
directors), and options that do not so qualify ("Nonstatutory Stock Options",
and collectively with Incentive Stock Options, the "Options") to employees
(including officers and employee directors) and consultants and non-employee
directors. In addition, the Equity Incentive Plan permits the granting of
stock bonuses and the right to acquire restricted stock (options, stock
bonuses and rights to purchase restricted stock are hereinafter referred to as
"Stock Awards"). No person is eligible to be granted Options covering more
than 250,000 shares of the Company's Common Stock in any calendar year. The
Equity Incentive Plan is administered by the Board or a committee appointed by
the Board.
The exercise price of Options granted under the Equity Incentive Plan is
determined by the Board in accordance with the guidelines set forth in the
Equity Incentive Plan. The exercise price of Incentive Stock Options granted
pursuant to the Equity Incentive Plan cannot be less than 100% of the fair
market value of the Common Stock on the date of the grant and the exercise
price of Incentive Stock Options granted to any person who at the time of
grant owns stock representing more than 10% of the total combined voting power
of all classes of the Company's capital stock or any of its affiliates must be
at least 110% of the fair market value of the Company's Common Stock on the
date of grant, and the term of such Incentive Stock Options cannot exceed five
years. The exercise price of a Nonstatutory Stock Option is determined by the
Board. Options granted under the Equity Incentive Plan vest at the rate
specified in the option agreement.
Any stock bonuses or restricted stock purchase awards granted under the
Equity Incentive Plan will be in such form and will contain terms and
conditions as the Board deems appropriate. The purchase price under any
restricted stock purchase agreement will not be less than 85% of the fair
market value of the Company's Common Stock on the date of the award. Stock
bonuses may be awarded for no consideration.
Upon certain changes of control of the Company, all outstanding Stock Awards
under the Equity Incentive Plan must either be assumed or substituted by the
surviving entity. If the surviving entity does not assume or substitute such
Stock Awards, then with respect to Stock Awards held by persons whose
continuous service has not terminated prior to such change of control event,
any Company repurchase option or reacquisition right with respect to shares
acquired by such persons under a Stock Award will lapse immediately prior to
such event, the vesting of options held by such persons will be accelerated,
the time during which such Stock Awards may be exercised will be accelerated
and such Stock Awards will be terminated if not exercised prior to such change
of control event.
52
<PAGE>
Additional Options. The Company has nonstatutory stock options outstanding
covering 288,393 shares of Common Stock (the "NSO Options") which were granted
outside of a written plan. Generally, the NSO Options were granted with
exercise prices equal to or greater than the fair market value of the Common
Stock on the date of grant and expire on the fifth anniversary of the date of
grant. The NSO Options have a weighted average exercise price of $2.39 per
share and 237,393 NSO Options were exercisable as of March 31, 1998.
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 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 six months. The Board has currently authorized an offering
commencing on the effectiveness of the initial public offering of the
Company's Common Stock and ending December 31, 1998, with sequential six-month
offerings thereafter.
Employees are eligible to participate in the Purchase Plan if they have been
employed by the Company or a United States affiliate of the Company for at
least three months preceding the beginning of the offering and work at least
twenty hours per week and at least five months per calendar year. 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 will be equal to 85% of the
lower of the fair market value of the Common Stock on the commencement date of
each offering or the relevant 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 of 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.
401(K) PLAN
The Company sponsors a qualified defined contribution retirement plan,
called the Horizon Organic Dairy 401(k) Plan (the "401(k) Plan") under which
eligible employees may elect to defer their current compensation by up to
certain statutorily prescribed annual limits ($10,000 in 1998) and to
contribute such amount to the 401(k) Plan. The 401(k) Plan provides for the
Company to match a participant's contribution in an amount up to 3% of such
participant's compensation. The 401(k) Plan is intended to qualify under
Section 401 of the Code, so that contributions by employees or by the Company
to the 401(k) Plan, and income earned on such contributions, are not taxable
to the employees until withdrawn, and so that contributions by the Company
will be deductible by the Company when made. The trustee for the 401(k) Plan
is American United Life Insurance Company. The 401(k) Plan permits employees
to direct investment of their accounts in the 401(k) Plan among a selection of
mutual funds.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the two other most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 for services
rendered to the Company during fiscal 1997 (collectively, the "Named Executive
Officers"):
53
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
---------------- ------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($)(1) ($)(1) (#) ($)(2)
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Barnet M. Feinblum..................
President and Chief Executive
Officer $125,000 $44,109 40,000 $3,577
Paul B. Repetto.....................
Vice President, Marketing and Sec-
retary 115,000 22,310 22,500 3,291
Mark A. Retzloff....................
Vice President, Sales 115,000 30,878 22,500 3,291
</TABLE>
- ---------------------
(1) Includes amounts, if any, deferred pursuant to Section 401(k) of the Code.
(2) Represents matching contributions made by the Company to the 401(k) Plan.
The following table sets forth each grant of stock options made during
fiscal 1997 to each of the Named Executive Officers:
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE APPRECIATION
SHARES UNDERLYING GRANTED TO EXERCISE FOR OPTION TERMS(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------------
NAME GRANTED(1) FISCAL YEAR(2) ($/SHARE) DATE 5% 10%
---- ----------------- -------------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Barnet M. Feinblum...... 20,000 9.34% $4.85 5/13/2002 $ 123,799 $ 156,219
20,000 9.34 6.50 1/10/2003 165,917 209,366
Paul B. Repetto......... 10,000 4.67 4.85 5/13/2002 61,900 78,110
12,500 5.84 6.50 1/10/2003 103,698 130,854
Mark A. Retzloff........ 10,000 4.67 4.85 5/13/2002 61,900 78,110
12,500 5.84 6.50 1/10/2003 103,698 130,854
</TABLE>
- ---------------------
(1) 25% of the options vest and will become exercisable upon the first
anniversary of the grant date and will become exercisable as to the
remainder of the grant in three equal annual installments thereafter.
(2) Based on 214,125 total options granted in fiscal 1997.
(3) The potential realizable value is calculated assuming that the fair market
value of Common Stock on the date of the grant as determined by the Board
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and the Common
Stock received therefor is sold on the last day of the term of the option
for the appreciated price. The 5% and 10% rates of appreciation are
mandated by the rules of the Securities and Exchange Commission (the
"SEC") and do not represent the Company's estimate or projection of future
increases in the price of its Common Stock.
The following table sets forth information with respect to (i) the number of
unexercised options held by the Named Executive Officers as of December 31,
1997 and (ii) the value of unexercised in-the-money options (i.e., options for
which the fair market value of the Common Stock exceeds the exercise price as
of December 31, 1997). None of the Named Executive Officers exercised Options
during fiscal 1997:
54
<PAGE>
FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT DEC. 31, 1997 DEC. 31, 1997
(#) ($)
------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
---- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Barnet M. Feinblum....... 101,000 109,000 $319,800 $415,550
Paul B. Repetto.......... 17,500 30,000 86,145 38,685
Mark A. Retzloff......... 17,500 30,000 86,145 38,685
</TABLE>
- ---------------------
(1) Based on the estimated fair market value of the Common Stock as of
December 31, 1997 ($6.50 per share, as determined by the Board), minus the
per share exercise price, multiplied by the number of shares underlying
the options.
EMPLOYMENT AGREEMENTS
Messrs. Feinblum, Repetto, Retzloff (each, an "Executive") have entered into
Amended Executive Employment Agreements (collectively, the "Employment
Agreements") with effective dates as of January 1, 1998. The Employment
Agreement with Mr. Feinblum provides that he will receive an annual salary of
$140,000, which may be adjusted annually by the Compensation Committee, and
the Employment Agreements with Messrs. Repetto and Retzloff provide that they
will each receive an annual salary of $120,000, which may be adjusted annually
by the Compensation Committee. Additionally, for the year ended December 31,
1998, each Executive is eligible to receive incentive bonuses in an amount up
to 60% (90% for Mr. Feinblum) of his base salary and the Compensation
Committee may increase such percentages for the year ended December 31, 1999.
The Employment Agreements also provide that each Executive will be entitled to
(i) four weeks paid vacation, (ii) participation in any employee benefit plans
the Company makes available to its other employees, (iii) life insurance in
the minimum amount of $100,000, (iv) disability insurance providing at least
60% of such Executive's base salary or $6,000 per month ($7,000 per month for
Mr. Feinblum), whichever amount is less, and (v) reimbursement of reasonable
business expenses. Mr. Feinblum's Employment Agreement also provides that all
135,000 of the incentive stock options granted to him under the stock option
agreement dated June 1, 1995 are fully vested and exercisable. All of the
Employment Agreements expire on December 31, 2000. Mr. Repetto's Employment
Agreement anticipates that he will retire as an operating officer of the
Company on December 31, 1999. Each Employment Agreement provides that the
Company may terminate the Executive at any time. If the Executive is
terminated without cause or if the Executive terminates his Employment
Agreement for cause, the Company is obligated to pay the Executive's salary
for a period equal to the longer of (i) twelve months after the date of
termination or (ii) the remainder of the employment period. In such case, the
Executive also is entitled to a pro rata incentive bonus for the year in which
termination occurs. The Employment Agreements also contain noncompete
provisions which prohibit the Executives, without the consent of the Company,
for a period of twenty-four months after the termination or expiration of the
Executive's employment with the Company from (i) owning more than 5% of the
outstanding stock of a publicly-traded competitive company; (ii) owning any
stock of a privately held competitive company; (iii) participating in the
financing, operation, management or control of any competitive company; and
(iv) soliciting employees of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors,
officers, employees and agents to the fullest extent permitted by Delaware
law. In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty to
the Company and its stockholders. This provision of the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of non-
monetary relief would remain
55
<PAGE>
available under Delaware law. Each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company, for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for any transaction from which the director derived
an improper personal benefit, for improper transactions between the director
and the Company and for improper distributions to stockholders and improper
loans to directors and officers. This provision also does not affect a
director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
The Company intends to enter into indemnity agreements with each of its
directors and executive officers pursuant to which the Company will indemnify
each director and executive officer against expenses and losses incurred for
claims brought against them by reason of their being a director or executive
officer of the Company, and the Company maintains directors' and officers'
liability insurance.
There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, nor is the Company
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
56
<PAGE>
CERTAIN TRANSACTIONS
SUNRISE ORGANIC FARMS, INC.
Related Party Affiliations. Marcus B. Peperzak was the majority stockholder,
Chairman, Chief Executive Officer and President of Sunrise, formerly known as
Aurora Dairy Corporation of Idaho and currently is the Chairman of the Board
and a significant stockholder of the Company and Aurora, Aurora Dairy
Corporation of Colorado ("ADC-Colorado"), Aurora Dairy Corporation of Texas
("ADC-Texas") and United States Dairy Company L.L.C. ("USDC") (collectively,
the "Aurora Affiliates"). Thomas D. McCloskey, Jr. also was a stockholder of
Sunrise and currently is a director of the Company and stockholder of USDC.
Dairy Lease for Idaho Dairy. On April 1, 1994, the Company entered into a
dairy farm lease agreement with Sunrise to lease a portion of the Idaho Dairy
for the purpose of raising cows to produce organic milk through December 31,
1999 (the "Dairy Lease"). During fiscal 1995 and 1994, the Company paid
Sunrise approximately $80,000 and $88,000, respectively, as lease payments
under the Dairy Lease. The Dairy Lease was terminated on May 31, 1995 in
connection with the Asset Exchange (as defined below).
Asset Exchange Transaction. On May 31, 1995, the Company transferred all of
its operating assets in the Idaho Dairy, including cattle and feed inventory
(the "Operating Assets"), to Sunrise (the "Asset Exchange"). As partial
consideration for the Asset Exchange, the Company received 90,373 shares of
Sunrise common stock, which represented a 23.8% equity interest in Sunrise,
based on a price per share of Sunrise common stock of $20.24. As additional
consideration for the Asset Exchange, Sunrise assumed approximately $2.5
million of the Company's liabilities relating to the Idaho Dairy. Concurrent
with the Asset Exchange, the Dairy Lease was terminated, a recapitalization of
Sunrise took place, the Company received an option through December 31, 1999
to purchase all of Mr. Peperzak's Sunrise common stock at an option price of
$20.24 per share, and Mr. McCloskey was appointed to the Sunrise board of
directors as the Company's appointee.
Supply Agreement. In conjunction with the Asset Exchange, the Company and
Sunrise entered into a supply agreement (as amended, the "Supply Agreement")
which provided that the Company would purchase its organic fluid milk
requirements for certain western states from Sunrise, to the extent Sunrise
could supply the Company's volume requirements, and Sunrise agreed to sell its
organic fluid milk only to the Company. In fiscal 1997, 1996 and 1995, the
Company paid Sunrise approximately $1.8 million, $5.1 million and $646,000,
respectively for organic fluid milk. Under the terms of the Supply Agreement,
the Company was required to purchase a percentage of its forecasted volume
(the "Required Minimum Purchase") from Sunrise. The Company paid Sunrise
approximately $23,000 and $114,000 in fiscal 1996 and 1995, respectively, for
failing to make the Required Minimum Purchases. The Supply Agreement was
terminated upon the closing of the Sunrise Acquisition (as defined below).
1996 Promissory Notes. On April 1, 1996, the Company loaned $650,000 to
Sunrise (the "Sunrise Bridge Loan"). Sunrise used the Sunrise Bridge Loan to
convert an additional portion of the Idaho Dairy to organic production and to
purchase additional cows. The Sunrise Bridge Loan was cancelled and replaced
with another promissory note with a principal amount of $650,000 dated July 1,
1996 (the "Sunrise Promissory Note") which had an interest rate of 12.5% per
annum and a final maturity date of December 31, 1999. Sunrise made total
interest payments to the Company in the amount of approximately $19,000 and
$72,000 under the Sunrise Bridge Loan and Sunrise Promissory Note,
respectively. The Sunrise Promissory Note was repaid in connection with the
Sunrise Acquisition (as defined below).
1996 Equity Financing and Repayment of Certain Indebtedness. On April 1,
1996, the Company issued bridge loan promissory notes which had an interest
rate of 15% per annum (the "Bridge Loan Promissory Notes") of which a portion
were to certain affiliates of the Company in order to fund the Sunrise Bridge
Loan. The Bridge Loan Promissory Notes were repaid upon closing of the sale of
approximately $2.3 million of the
57
<PAGE>
Company's equity securities (the "1996 Equity Financing"). See "--Related
Party Loans". On July 9, 1996, the Company closed the 1996 Equity Financing.
At the same time, the Company purchased 17,293 newly issued shares of Sunrise
common stock for $20.24 per share.
Sunrise Acquisition. In fiscal 1997, the Company purchased the shares of
Sunrise's capital stock that it did not already own in two closings (the
"Sunrise Acquisition"). On March 20, 1997, pursuant to the Company's
acquisition agreement with Sunrise (the "Sunrise Acquisition Agreement"), the
Company purchased 176,216 shares of Sunrise common stock from the other
Sunrise stockholders at a purchase price of $20.24 per share in exchange for
the Company's issuance of unsecured subordinated promissory notes in the
aggregate amount of approximately $3.6 million (the "Sunrise Notes"). See "--
Related Party Loans". On May 29, 1997, the Company purchased the remaining
117,478 shares of Sunrise common stock at a price of $20.24 per share of
Sunrise common stock in exchange for (i) the issuance to the other Sunrise
stockholders of an aggregate of 490,245 shares of the Company's Common Stock
at a value of $4.85 per share, (ii) the issuance to the other Sunrise
stockholders warrants exercisable for an aggregate of 69,118 shares of the
Company's Common Stock at an exercise price of $5.34 per share, and (iii) the
cancellation of the Sunrise Promissory Note.
Management Agreement. From 1994 until November 1997, certain of the Aurora
Affiliates managed the Idaho Dairy and the Maryland Dairy pursuant to a
management agreement (as amended and restated, the "Management Agreement")
which provided that the Aurora Affiliates would receive certain management
fees and the reimbursement of reasonable expenses. Pursuant to the Management
Agreement, Sunrise paid the Aurora Affiliates approximately $60,000, $259,000
and $545,000 (of which approximately $446,000 was paid in shares of Sunrise
common stock) during fiscal 1997, 1996 and 1995, respectively. Pursuant to the
Management Agreement, the Company paid the Aurora Affiliates, $210,000 and
$20,000 in fiscal 1997 and 1995, respectively, prior to the consummation of
the Sunrise Acquisition. The Management Agreement was terminated in November
1997.
AURORA AND AFFILIATES
Sublease. The Company subleases approximately 3,600 square feet of its
office space under the office lease to Aurora. The term of the sublease runs
from October 1, 1997 through December 31, 1998. Aurora currently pays
approximately $1,900 per month to the Company for these subleased premises.
Cattle Sales and Exchanges. In fiscal 1995, Sunrise purchased 394 cows from
Aurora for $1,004 per cow. Aurora reimbursed Sunrise $8,000 for animals that
Sunrise culled from such cows. In fiscal 1996, Sunrise sold 148 cows to Aurora
for $1,207 per cow. Also in fiscal 1996, Sunrise (i) exchanged 200 of its
mature cows for 600 of ADC-Colorado's cows and (ii) sold cows to Aurora for
$84,000. In fiscal 1997, the Idaho Dairy (i) paid Aurora $160,000 for cows
Aurora delivered to a third-party organic cattle farm on behalf of Sunrise and
(ii) sold 40 cows to Aurora for approximatley $48,000.
In fiscal 1997, the Idaho Dairy sold 531 conventional cows to ADC-Texas, 521
conventional cows to ADC-Colorado and 614 conventional cows to USDC for an
approximate aggregate net purchase price of $1.7 million, of which $250,000
was financed by the delivery of a subordinated promissory note (the "Cattle
Sale Subordinated Promissory Note") by ADC-Colorado to the Company. The
outstanding principal amount of the Cattle Sale Subordinated Promissory Note
is due upon the earlier of (i) November 24, 1999 or (ii) at such time as the
Company pays all amounts due ADC-Colorado under the Sunrise Acquisition
Agreement. The Cattle Sale Subordinated Promissory Note bears interest at
prime plus one percent.
Hay Sales. In fiscal 1997, the Idaho Dairy sold approximately $78,000 of hay
to ADC-Colorado.
MCCLOSKEY CANYON RANCH
The Company periodically houses and feeds certain of its cattle on a ranch
owned by an entity controlled by Mr. McCloskey. As consideration for such
housing and feeding, the Company paid such entity
58
<PAGE>
approximately $155,000 in fiscal 1997. Sunrise paid such entity $48,500, and
$91,000 in fiscal 1997 and 1996, respectively.
DIRECTORS' AFFILIATIONS WITH COMPANY PROCESSORS AND CUSTOMERS
Robinson Dairy, which is one of the Company's milk processors, is controlled
by Richard L. Robinson, a director of the Company. The Company paid Robinson
Dairy approximately $660,000, $286,000 and $5,000 in fiscal 1997, 1996 and
1995, respectively, to process organic fluid milk. Clark's Market, which
purchases Horizon products through one of the Company's distributors, is
controlled by J. Thomas Clark, a director of the Company.
RELATED PARTY LOANS
The following table sets forth for the fiscal year indicated certain
information concerning loans made by certain related parties to the Company
and the principal amount of each loan.
<TABLE>
<CAPTION>
RELATED PARTY LENDER 1995(1) 1996(2) 1997
-------------------- -------- -------- ----------
<S> <C> <C> <C>
Thomas D. McCloskey, Jr....................... $125,000
Marcus B. Peperzak............................ 125,000 $2,566,213(3)
J. Thomas Clark............................... 125,000
Julie Feinblum................................ $100,000
Paul B. Repetto............................... 25,000
TPM Investments (affiliate of Mr. McCloskey).. 300,000
Aurora Dairy Pension & Profit Sharing Plan
(Marcus B. Peperzak, trustee)................ 200,000 166,944(3)
Aurora Dairy Corporation...................... 252,988(3)
Aurora Capital Corporation.................... 26,777(3)
McCloskey Trust............................... 500,000(4)
-------- -------- ----------
Total....................................... $375,000 $625,000 $3,512,922
======== ======== ==========
</TABLE>
- ---------------------
(1) Represents such person's interest in a Revolving Line of Credit Note,
dated May 31, 1995, for $375,000, which had an interest rate at prime plus
three percent through December 31, 1995 and an interest rate of prime plus
four percent through December 31, 1996 (the "Revolving Line of Credit
Note").
(2) Bridge Loan Promissory Notes. See "--Sunrise Organic Farms, Inc.--1996
Promissory Notes."
(3) The Sunrise Notes bear interest at prime plus one percent. See "--Sunrise
Organic Farms, Inc.--Sunrise Acquisition".
(4) This Senior Subordinated Promissory Note, dated May 29, 1997, bears
interest at a rate equal to 11% per annum.
On May 31, 1995, the Company issued the Revolving Line of Credit Note and
100,000 shares of the Company's Common Stock pro rata to Messrs. McCloskey,
Peperzak and Clark in satisfaction of a previous note from the Company to such
persons which was dated October 4, 1994, had a principal amount of $500,000
and bore interest at prime plus one percent. All principal and interest of
approximately $31,000 on the Revolving Line of Credit Note was paid to Messrs.
McCloskey, Peperzak and Clark by the Company on December 14, 1995.
The holders of Bridge Loan Promissory Notes had the option of converting the
principal amount of their Bridge Loan Promissory Notes into shares of the
Company's Common Stock at a price per share of $3.22. Ms. Feinblum, the wife
of Barnet Feinblum, received $19,500 in cash and 25,000 shares of the
Company's Common Stock in satisfaction of her Bridge Loan Promissory Note. Mr.
Repetto received 10,000 shares of the Company's Common Stock in exchange for
the cancellation of his Bridge Loan Promissory Note and the payment by Mr.
Repetto of $7,200 to the Company. TPM Investments and Aurora Dairy Pension &
Profit
59
<PAGE>
Sharing Plan received $300,000 and $200,000 in cash, respectively, in
satisfaction of their Bridge Loan Promissory Notes.
The Sunrise Notes and the Senior Subordinated Promissory Note will be repaid
with a portion of the proceeds of the offering. See "Use of Proceeds".
GUARANTEES
Mr. Peperzak has guaranteed certain of the Company's debt obligations as set
forth below:
<TABLE>
<CAPTION>
OUTSTANDING AMOUNT
OF GUARANTEE OR
PRIMARY LIABILITY
TYPE OF OBLIGATION AS OF MARCH 31, 1998
------------------ --------------------
<S> <C>
Idaho Dairy-Farm Credit Services real estate loan...... $3,821,000
Idaho Dairy-Capital Leases............................. $ 662,000
</TABLE>
Under a continuing guarantee agreement, the Company has agreed to pay Mr.
Peperzak a guarantee fee equal to one percent (1%) per annum for all debt he
personally guarantees for the Idaho Dairy. Mr. Peperzak received approximately
$55,000 from the Company in fiscal 1997. Pursuant to a similar arrangement,
Sunrise paid Mr. Peperzak guarantee fees of approximately $214,000 and $94,000
in fiscal 1996 and 1995, respectively. The amount received by Mr. Peperzak in
fiscal 1996 included amounts accrued in fiscal 1995 with relation to such
guarantees and certain amounts prepaid for 1997 with relation to such
guarantees. In fiscal 1997, Mr. Peperzak repaid the Company approximately
$70,000 of the amount he had received in fiscal 1996 as prepayment for the
fiscal 1997 guarantees.
ALTERNATIVE FINANCING
Certain stockholders of the Company have executed irrevocable commitments to
purchase certain securities of the Company if this offering is not completed.
All such commitments were executed prior to the filing of the Registration
Statement of which this Prospectus is a part and the Company will not accept
any additional commitments after such filing. If this offering is completed,
the alternative financing will not be consummated and the Company's
stockholders will be released from their commitments to participate in the
alternative financing.
- ---------------------
Management believes the terms of all of the the foregoing transactions were
fair to the Company. All future transactions with affiliates will be subject
to the approval of the Company's disinterested directors and will be on terms
believed by such directors to be no less favorable to the Company than those
available from unaffiliated third parties.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998, as adjusted to
give effect to the sale by the Company of the shares offered hereby (assuming
no exercise of the Underwriters' over-allotment option) and the Concurrent
Placement by (i) each stockholder (or group of affiliated stockholders) known
by the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, (ii) each Named Executive Officer, (iii) each
director of the Company and (iv) all current directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED(2)
NUMBER OF SHARES -----------------------------------
BENEFICIALLY OWNED PRIOR TO AFTER OFFERING
PRIOR TO OFFERING AND OFFERING AND AND CONCURRENT
BENEFICIAL OWNER(1) CONCURRENT PLACEMENT(2) CONCURRENT PLACEMENT PLACEMENT
------------------- ----------------------- -------------------- --------------
<S> <C> <C> <C>
Thomas D. McCloskey, Jr.(3)...... 972,516 19.1% 10.6%
Marcus B. Peperzak(4)............ 604,498 11.8 6.6
Boulder Ventures II, L.P.(5)..... 559,496 11.1 6.1
1634 Walnut Street, Suite 301
Boulder, CO 80302
Suiza Foods Corporation(6)....... -- * 12.0%
3811 Turtle Creek Blvd,
Suite 1950, LB 50
Dallas, TX 75219
Paul B. Repetto(7)............... 435,000 8.6 4.7
Mark A. Retzloff(8).............. 385,282 7.6 4.2
Barnet M. Feinblum(9)............ 316,843 6.1 3.4
Leonard A. Lauder................ 293,517 5.8 3.2
767 Fifth Avenue
New York, NY 10153
J. Thomas Clark(10).............. 170,333 3.4 1.9
Clark R. Mandigo II(11).......... 85,966 1.7 *
Richard L. Robinson(12).......... 49,824 * *
All executive officers and
directors as a group (10
persons)(13).................... 3,027,262 56.4 32.0
</TABLE>
- ---------------------
* Indicates beneficial ownership of less than one percent.
(1) Unless otherwise set forth, all addresses are c/o the Company, 6311
Horizon Lane, Longmont, Colorado 80503.
(2) This table is based upon information supplied by officers, directors and
principal stockholders. Unless otherwise indicated in the footnotes to
this table and subject to community property laws where applicable, the
Company believes that each of the stockholders named in this table has
sole voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 5,056,341 shares
of Common Stock outstanding as of March 31, 1998 and 9,156,341 shares of
Common Stock outstanding after completion of the offering and the
Concurrent Placement, adjusted as required by rules promulgated by the
SEC. All warrants are currently exercisable and share amounts include
stock options exercisable within 60 days of March 31, 1998.
(3) Includes 33,111 shares and warrants to purchase 4,668 shares of Common
Stock held by McCloskey Children's Trust; 25,000 shares held by the
McCloskey Trust, of which Mr. McCloskey is a trustee; 737,457 shares held
by the Thomas D. McCloskey, Jr. and Bonnie P. McCloskey Revocable Trust
1994, of which Mr. McCloskey is a trustee (collectively, the "Trust
Shares"); and 155,280 shares held by McCloskey Ventures LLC, of which Mr.
McCloskey is a manager (the "LLC Shares"). Mr. McCloskey disclaims any
beneficial interest in the Trust Shares and the LLC shares, except to the
extent of his pecuniary interest in the LLC Shares arising from his roles
therein. Also includes 17,000 shares subject to stock options.
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(4) Includes 128,688 shares and warrants to purchase 779 shares held by
Aurora Dairy Corporation Pension Plan Trust, of which Mr. Peperzak is
trustee. Also includes warrants to purchase 42,570 shares held by Mr.
Peperzak and 17,000 shares subject to stock options.
(5) Includes 412,372 shares held by Boulder Ventures II, L.P., 139,624 shares
held by Boulder Ventures, L.P. and 7,500 shares held by Boulder
Investors, L.P.
(6) Percentage beneficially owned after the offering and Concurrent Placement
includes 1,100,000 shares of Common Stock to be purchased by Suiza
pursuant to the Concurrent Placement.
(7) Includes 20,000 shares subject to stock options.
(8) Includes 14,000 shares held by his spouse, an aggregate of 42,000 shares
held in trust for his three children and 20,000 shares subject to stock
options.
(9) Includes 29,045 shares held by his spouse, an aggregate of 11,618 shares
held in trust for his two children and 160,000 shares subject to stock
options.
(10) Includes 17,000 shares subject to stock options.
(11) Includes an aggregate of 23,236 shares held in trust for his three
children and 2,000 shares subject to stock options.
(12) Includes 2,000 shares subject to stock options.
(13) Includes 2,719,245 shares, 260,000 shares subject to stock options and
warrants to purchase 48,017 shares held by directors and executive
officers of the Company and entities affiliated with such persons. See
Notes 3, 4 and 7 through 12 above. Although Suiza is expected to
designate a representative on the Board following the closing of this
offering and the Concurrent Placement, the calculation of shares for all
executive and officers as a group does not include the 1,100,000 shares
to be issued to Suiza in connection with the Concurrent Placement.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a
summary description only and is qualified in its entirety by the provisions of
the Certificate of Incorporation and Bylaws, which have been filed as exhibits
to the Company's Registration Statement, of which this Prospectus is a part.
Upon the closing of this offering, the Company's authorized capital stock
will consist of 30,000,000 shares of Common Stock, $0.001 par value per share,
and 5,000,000 shares of preferred stock, $0.001 par value per share. As of
March 31, 1998 there were 5,056,341 shares of Common Stock outstanding held of
record by 143 stockholders.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of preferred
stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, holders of the Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference
of any then outstanding preferred stock. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock to be outstanding upon completion of this offering will be,
fully paid and nonassessable.
WARRANTS
The Company has warrants outstanding to purchase 69,118 shares of the
Company's Common Stock, subject to adjustment in certain circumstances, which
warrants were issued in connection with the Sunrise Acquisition (the "Sunrise
Warrants"). The exercise price of the Sunrise Warrants is $5.34 per share and
such warrants expire on March 20, 1999. Additionally, the Company has warrants
outstanding to purchase 3,500 shares of the Company's Common Stock, subject to
adjustment in certain circumstances, which warrants were issued in connection
with the acquisition of the Juniper Valley Farms brand (the "Juniper Valley
Warrants"). The exercise price of the Juniper Valley Warrants is $8.00 per
share and such warrants expire on April 8, 2000.
PREFERRED STOCK
The Board has the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without
any further vote or action by stockholders. The issuance of preferred stock
could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of preferred stock.
CONCURRENT PLACEMENT
Pursuant to the Stock Purchase Agreement, Horizon has agreed to sell to
Suiza up to 1,100,000 shares of Common Stock upon the closing of the
Concurrent Placement, which is scheduled to close immediately after the
closing of the offering. Suiza will purchase shares in the Concurrent
Placement at the Price to Public less 3 1/2% (one-half of the Underwriting
Discount); provided that the price to Suiza will not be less than $11.00 nor
more than $15.00, and further provided that to the extent the net price to
Suiza is in excess of $13.54, the number of shares in the Concurrent Placement
will be reduced so that the aggregate Suiza investment in the Concurrent
Placement will not exceed $14,900,000. The Concurrent Placement is subject to
the closing of
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the offering at a minimum Price to Public of $9.00 per share. In connection
with the execution of the Stock Purchase Agreement, the Company also entered
into the Stockholder Agreement with Suiza. The Stockholder Agreement provides
the following:
Exclusivity Period. Suiza has agreed that for a five-year period (the
"Exclusivity Period") Suiza will not introduce any organic white fluid milk
products for sale under Suiza's brands. The Exclusivity Period will be
automatically extended for additional one-year terms so long Suiza or any of
its subsidiaries are processing organic white fluid milk for Horizon, unless
Suiza and Horizon agree otherwise.
Preemptive Rights. So long as Suiza's fully diluted ownership percentage is
at least five percent, Suiza has the right to purchase from the Company
additional shares of capital stock of the Company in connection with any
proposed public or private sale of capital stock by the Company, subject to
certain exceptions. This preemptive right entitles Suiza to purchase a number
of shares equal to the product of(a) the lesser of (i) Suiza's fully diluted
ownership percentage immediately prior to the proposed issuance and (ii)
Suiza's fully diluted ownership percentage immediately after the closing of
the Concurrent Placement, and (b) the number of shares issued in the proposed
issuance.
Right to Designate Board Representative. Suiza will be entitled to designate
one person for election to the Company's Board until such time as Suiza owns
less than five percent of the Company's Common Stock calculated on a fully
diluted basis.
Standstill and Transfer Restrictions. Suiza has agreed, with certain
exceptions, that neither it nor its affiliates will acquire any voting
securities if, after such purchase or acquisition, Suiza's Voting Ownership
Percentage (as defined in the Stockholder Agreement) would exceed 25% (the
"Suiza Standstill"). The Suiza Standstill terminates upon the earlier of (i)
the eighteen (18) month anniversary of the termination of the Exclusivity
Period (for a total minimum standstill period of six and one-half years), or
(ii) the date on which the Board, without prior written consent from Suiza,
takes any action to approve a merger or other business combination in which
the holders of the voting securities of Horizon would hold less than 50% of
the voting power of the surviving corporation after the closing of such
transaction. The Stockholder Agreement also prohibits Suiza from soliciting
proxies with respect to any voting securities or participating in any election
contest as defined in the Securities Exchange Act of 1934, as amended. Suiza
also has agreed not to transfer any of its shares in a private transaction,
with certain exceptions, to a person who has not agreed to be bound by the
Stockholder Agreement.
Drag-Along Obligation. Suiza has agreed that it will consent to, and vote
its shares in favor of, any sale of the Company approved by the Company's
Board.
Right of First Refusal on Sale of Stock to Suiza Competitor. Suiza has a
right of first refusal to purchase shares of the Company's Common Stock from
the Company if certain competitors of Suiza make offers to purchase those
shares, except in connection with the sale of stock in connection with a sale
of the Company. This right of first refusal is not subject to the limitations
of the Suiza Standstill.
Right of First Negotiation. Horizon has agreed to give Suiza a right of
first negotiation to acquire the Company in the event that Horizon's Board
determines that it is in the best interest of the Company and its stockholders
to sell the Company. In such event, Suiza has a limited period of exclusivity
to negotiate to acquire Horizon. This right of first negotiation does not
apply to an unsolicited bid by a third party to acquire the Company.
Registration Rights. After the closing of the Concurrent Placement, Suiza
will have certain rights with respect to the registration of its shares of
Common Stock under the Securities Act. If the Company proposes to register any
of its securities under the Securities Act after the offering and the
Concurrent Placement, for either its own account or the account of other
security holders, Suiza is entitled to receive notice of such registration
and, subject to certain limitations, to include its shares of Common Stock
therein. Such
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<PAGE>
registration rights are subject to the ability of the underwriters of any
offering to limit the number of shares included in such registration. In
addition, commencing with the date that is 180 days after the date of this
Prospectus, Suiza may require the Company, on not more than two occasions
within a six-month period, to register its registrable securities on Form S-3
when such form becomes available to the Company. Generally, the Company is
required to bear all registration expenses incurred in connection with the
first two such registrations on Form S-3.
In addition, in connection with the closing of the Concurrent Placement,
Suiza is requiring that certain principal stockholders (the "Horizon Major
Stockholders") and their affiliates enter into the Major Stockholder
Agreement, which gives Suiza (i) a right of first negotiation to purchase
certain shares of the Company's Common Stock from the Horizon Major
Stockholders, with certain exceptions, and (ii) a right of first refusal to
purchase shares of the Company's Common Stock from the Horizon Major
Stockholders if certain competitors of Suiza make offers to purchase those
shares from a Horizon Major Stockholder. The Horizon Major Stockholders will
also agree to vote their shares in favor of Suiza's designee to the Company's
Board. See "Management--Executive Officers and Directors".
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock. The
existence of this provision would be expected to have anti-takeover effects
with respect to transactions not approved in advance by the Board, such as
discouraging takeover attempts that might result in a premium over the market
price of the Common Stock.
Upon the closing of this offering, the Company's Certificate of
Incorporation will provide for a Board that is divided into three Classes. The
directors in Class I will hold office until the first annual meeting of
stockholders following this offering, the directors in Class II will hold
office until the second annual meeting of stockholders following this
offering, and the directors in Class III will hold office until the third
annual meeting of stockholders following this offering (or in each case, until
their successors are duly elected and qualified or until their earlier
resignation, removal from office or death), and, after each such election, the
directors in each such class will then serve in succeeding terms of three
years and until their successors are duly elected and qualified. The
classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
the Company and may maintain the incumbency of the Board, as the
classification of the Board generally increases the difficulty of replacing a
majority of the directors.
The Company's Certificate of Incorporation and Bylaws will further provide
that any action required or permitted to be taken by stockholders of the
Company must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing. Special meetings
of the stockholders of the Company may be called only by the Board, the
Chairman of the Board or the Chief Executive Officer. The Company's
Certificate of Incorporation also will provide that the authorized number of
directors may be changed only by resolution of the Board, and that, subject to
the rights of the holders of any series of preferred stock, no director can be
removed without cause, and directors can only be removed for cause by a
majority vote of the stockholders. These and other provisions contained in the
Certificate of Incorporation and Bylaws could delay or make more difficult
certain types of transactions involving an actual or potential change in
control of the Company or its management (including transactions in which
stockholders might otherwise receive a premium for their shares over then
current prices) and may limit the
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ability of stockholders to remove current management of the Company or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of the Company's Common Stock.
LIMITATIONS ON DIRECTOR LIABILITY
The Certificate of Incorporation provides that, to the fullest extent
permitted by the General Corporation Law of the State of Delaware as the same
exists or as may hereafter be amended, directors of the Company will not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty or otherwise.
LISTING
The Company has made application for listing the Common Stock on the Nasdaq
National Market under the trading symbol HCOW.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. has been appointed as the transfer agent and
registrar for the Company's Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering and the Concurrent Placement, the Company
will have outstanding an aggregate of 9,156,341 shares of Common Stock,
assuming (i) no exercise of warrants to purchase 72,618 shares of Common
Stock, (ii) no exercise of the Underwriters' over-allotment option, and (iii)
no exercise of options to purchase 567,768 shares of Common Stock outstanding
as of March 31, 1998. Of these shares, the 3,000,000 shares of Common Stock
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act ("Affiliates"). The remaining 5,056,341 shares of Common Stock
held by existing stockholders and the shares issued in the Concurrent
Placement are "restricted securities" as that term is defined in Rule 144
under the Securities Act (the "Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or 701 promulgated under the
Securities Act, which rules are summarized below. As a result of the
contractual restrictions described below and the provisions of Rules 144 and
701, additional shares will be available for sale in the public market as
follows: (i) no Restricted Shares will be eligible for immediate sale on the
date of this Prospectus; (ii) 318,342 Restricted Shares (plus 24,143 shares of
Common Stock issuable to employees and consultants pursuant to stock options
that are then vested) will be eligible for sale 90 days after the date of this
Prospectus; (iii) 4,700,124 Restricted Shares will be eligible for sale upon
expiration of the lock-up agreements (the "Lock-Up Agreements") 180 days after
the date of this Prospectus, subject to restrictions on such sales by
Affiliates; and (iv) the remainder of the Restricted Shares, including the
shares issued in the Concurrent Placement, will be eligible for sale from time
to time thereafter upon expiration of their respective one-year holding
periods, subject to restrictions on such sales by Affiliates and certain
vesting provisions.
The Company's officers, directors and certain stockholders have agreed,
pursuant to the Lock-Up Agreements, that they will not, without the prior
written consent of Hambrecht & Quist LLC directly or indirectly offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
during the 180-day period commencing on the Effective Date. The Company has
agreed that it will not, without the prior written consent of Hambrecht &
Quist LLC, directly or indirectly offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock during such 180-day period except
for the sale of the shares of Common Stock in this offering, the issuance of
options and shares of Common Stock pursuant to employee benefit plans set
forth in the Prospectus, and the issuance of shares of Common Stock upon
exercise of warrants or options presently outstanding. Any shares subject to
the Lock-Up Agreements may be released at any time without notice by Hambrecht
& Quist LLC.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, an Affiliate of the Company, or person (or persons whose
shares are aggregated) who has beneficially owned Restricted Shares for at
least one year will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Company's Common Stock or (ii) the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice
of the sale is filed with the SEC. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice, and the availability
of current public information about the Company. A person (or persons whose
shares are
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aggregated) who is not deemed to have been an Affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has
beneficially owned Restricted Shares for at least two years is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares (such shares,
"701 Shares") pursuant to a written compensatory plan or contract is entitled
to rely on the resale provisions of Rule 701 under the Securities Act, which
permits Affiliates and non- Affiliates to sell their Rule 701 Shares without
having to comply with Rule 144's holding period restrictions, in each case
commencing 90 days after the date of this Prospectus. In addition, non-
Affiliates may sell Rule 701 Shares without complying with the public
information, volume and notice provisions of Rule 144.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Equity Incentive Plan and Purchase Plan and shares reserved for issuance
outside of any plan no earlier than 90 days after the date of this Prospectus.
Based on the number of stock options outstanding and options and shares
reserved for issuance at March 31, 1998, such registration statement would
cover approximately 1.3 million shares. Such registration statement is
expected to be filed and to become effective as soon as practicable after the
date hereof. Shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to Affiliates, be available for sale
in the open market, unless such shares are subject to vesting restrictions
with the Company or the Lock-Up Agreements described above. See "Management".
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist
LLC, Piper Jaffray Inc. and Hanifen, Imhoff Inc., have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC............................................
Piper Jaffray Inc. ..............................................
Hanifen, Imhoff Inc. ............................................
---------
Total.......................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters. The
Representatives have advised the Company that the Underwriters do not intend
to confirm discretionary sales in excess of 5% of the shares of Common Stock
offered hereby.
The Company has granted to the Underwriters an option, exercisable no later
that 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discount, set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased
by it shown in the above table bears to the total number of shares of Common
Stock offered hereby. The Company will be obligated, pursuant to the option,
to sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company's officers, directors and certain stockholders of the Company,
who will own in the aggregate 5,800,124 shares of Common Stock after this
offering and the Concurrent Placement, have agreed that they will not, without
the prior written consent of Hambrecht & Quist LLC, offer, sell, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares
of Common Stock or securities exchangeable for or convertible into shares of
Common Stock owned by them during the 180-day period following the date of
this Prospectus. The Company has agreed that it will not, without the prior
written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of
any share of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of
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Common Stock during the 180-day period following the date of this Prospectus,
except that the Company may issue shares upon the exercise of options granted
and warrants outstanding prior to the date hereof, and may grant additional
options under the Equity Incentive Plan, provided that, without the prior
written consent of Hambrecht & Quist LLC, such additional options shall not be
exercisable during such period.
Piper Jaffray Inc. is affiliated with U.S. Bancorp, which is a lender to the
Company pursuant to the $2.0 million Term Loan and $10.0 million Line of
Credit (see "Use of Proceeds"). As of the date of this prospectus, U.S.
Bancorp has advanced approximately $2.0 million and $8.7 million to the
Company pursuant to the Term Loan and Line of Credit, respectively. The
Company intends to repay the Term Loan and the outstanding balance on the Line
of Credit with a portion of the proceeds from this offering. The decision of
Piper Jaffray Inc. to underwrite the offering was made independently of U.S.
Bancorp, which had no involvement in determining whether or when to underwrite
the offering or the terms thereof. Piper Jaffray Inc. will not receive any
benefit from this offering other than its respective portion of the
underwriting commission payable by the Company. Since it is anticipated that
more than 10 percent (10%) of the proceeds from this offering (excluding
underwriting commissions) will be received by an affiliate of Piper Jaffray
Inc., this offering is being conducted pursuant to Rule 2710(c)(8) of the NASD
Conduct Rules. In accordance with such rule, Hambrecht & Quist LLC has agreed
to act as a qualified independent underwriter ("QIU") pursuant to the
requirements of Rule 2720(c)(3) of the NASD Conduct Rules. In connection with
Rule 2720(c)(3), the initial public offering price of the Company's Common
Stock will be set at a price which is no higher than that recommended by
Hambrecht & Quist LLC, as a QIU. Moreover, Hambrecht & Quist LLC, as a QIU,
has performed due diligence investigations and has reviewed and participated
in the preparation of this Prospectus.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be
determined by negotiation among the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price are
prevailing market and economic conditions, revenues and earnings of the
Company, market valuations of other companies engaged in activities similar to
the Company, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, the Company's
management and other factors deemed relevant. The estimated initial public
offering price range set forth on the cover of this preliminary prospectus is
subject to change as a result of market conditions and other factors.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of Common Stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq Stock Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
An aggregate of 210,000 shares of the Common Stock offered hereby have been
reserved for purchase from the Underwriters through a directed share program
by persons having relationships with the Company. Such sales will be at the
initial public offering price. The number of shares of Common Stock available
for sale to the general public in the offering will be reduced to the extent
such persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the
same terms as the other shares offered hereby.
70
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward llp, Boulder, Colorado. Certain legal
matters will be passed upon for the Underwriters by Brobeck, Phleger &
Harrison LLP, Palo Alto, California and Denver, Colorado.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997 and for the fiscal years ended December 31, 1995, December 28, 1996
and December 31, 1997, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Sunrise Organic Farms, Inc. for the fiscal year
ended December 31, 1996 have been audited by Eide Helmeke PLLP, Fargo, North
Dakota, independent certified public accountants. Such financial statements
have been included herein in reliance upon the report of Eide Helmeke PLLP.
The financial statements as of December 31, 1996 were audited by Eide Helmeke
PLLP, who merged with Charles Bailly & Company PLLP as of May 1, 1998, and
whose report dated April 9, 1997, expressed an unqualified opinion.
The statements in this Prospectus under the captions "Risk Factors--
Possibility of Adverse Effects Resulting from United States Dairy Support
Program and Federal Milk Marketing Orders" and "Business--Government
Regulation", solely insofar as they constitute summaries of USDA and state
dairy regulatory provisions, have been reviewed and approved by Ober, Kaler,
Grimes and Shriver, as experts on such matters, and are included herein in
reliance upon that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the SEC, Washington, D.C., 20549, a Registration
Statement on Form S-1 under the Act, with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is
made to the Registration Statement and the exhibits and schedules filed as
part thereof. Statements contained in this Prospectus as to the contents of
any contract or document filed as an exhibit to the Registration Statement are
qualified by reference to such exhibit as filed. A copy of the Registration
Statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the SEC in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048, and copies of all or any part of the Registration
may be obtained from such offices upon the payment of the fees prescribed by
the SEC. The SEC maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the SEC. The address of the SEC's World Wide Web site
is http://www.sec.gov.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HORIZON ORGANIC HOLDING CORPORATION
Independent Auditors' Report of KPMG Peat Marwick LLP.................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8
SUNRISE ORGANIC FARMS, INC.
Independent Auditor's Report............................................. F-21
Financial Statements:
Balance Sheet............................................................ F-22
Statement of Income...................................................... F-24
Statement of Stockholders' Equity........................................ F-25
Statement of Cash Flows.................................................. F-26
Notes to Financial Statements............................................ F-27
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Horizon Organic Holding Corporation:
We have audited the accompanying consolidated balance sheets of Horizon
Organic Holding Corporation and subsidiaries (Company) as of December 28, 1996
and December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1995, the
52 weeks ended December 28, 1996 and the year ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion in these consolidated
financial statements based on our audits. We did not audit the financial
statements of Sunrise Organic Farms, Inc. (Aurora Dairy Corporation of Idaho,
Inc.) (Sunrise), a 23.78 percent and 26.825 percent owned investee company as
of December 31, 1995 and December 28, 1996, respectively. The Company's
investment in and advances to Sunrise at December 28, 1996 were $2,624,000, of
which $863,000 represents the Company's proportionate share of Sunrise's net
assets. The Company recognized losses from Sunrise of $85,000 and $158,000 for
the year ended December 31, 1995 and the 52 weeks ended December 28, 1996,
respectively, of which $44,000 and $77,000, respectively, represents the
Company's proportionate equity in losses recognized by Sunrise. The financial
statements of Sunrise were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts
included for Sunrise, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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, based on our audits and the report of the other auditors,
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 28, 1996 and December 31, 1997 and
the results of their operations and their cash flows for the year ended
December 31, 1995, the 52 weeks ended December 28, 1996 and the year ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Boulder, Colorado
May 6, 1998
F-2
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 28, 1996, DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 600 404 811
Trade accounts receivable, less allowance for
doubtful accounts of $48 in 1996, $49 in 1997
and $55 in 1998................................. 1,177 2,393 2,749
Inventories...................................... 561 4,870 4,436
Deferred tax assets.............................. -- 55 56
Other current assets............................. 44 292 433
------- ------ ------
Total current assets........................... 2,382 8,014 8,485
------- ------ ------
Property, Equipment and Cattle:
Cattle, net...................................... -- 7,652 8,541
Property and equipment, net...................... 104 14,238 14,670
------- ------ ------
Total property, equipment and cattle........... 104 21,890 23,211
------- ------ ------
Other Assets:
Note receivable from Aurora Dairy Corporation.... -- 250 250
Goodwill, net of accumulated amortization of
$102 in 1997 and $141 in 1998................... -- 2,205 2,166
Other assets, net................................ 122 378 389
Investment in and advances to Sunrise Organic
Farms, Inc...................................... 2,624 -- --
------- ------ ------
Total other assets............................. 2,746 2,833 2,805
------- ------ ------
Total Assets................................. $ 5,232 32,737 34,501
======= ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash overdrafts.................................. $ 169 -- --
Trade accounts payable........................... 753 3,841 4,080
Current portion of long-term debt................ -- 553 575
Term loan........................................ 244 -- --
Payable to affiliates............................ 513 -- --
Other accrued expenses........................... 275 685 1,310
Income taxes payable............................. 14 -- --
------- ------ ------
Total current liabilities...................... 1,968 5,079 5,965
------- ------ ------
Long-Term Liabilities:
Long-term debt, less current portion............. -- 17,960 18,970
Deferred income tax liabilities.................. -- 812 770
------- ------ ------
Total long-term liabilities...................... -- 18,772 19,740
------- ------ ------
Total liabilities.............................. 1,968 23,851 25,705
------- ------ ------
Stockholders' Equity (Deficit):
Preferred stock, $.001 par value, authorized
2,000,000 shares; no shares issued or
outstanding..................................... -- -- --
Common stock, $.10 par value; authorized
10,000,000 shares; issued and outstanding
3,648,700 shares in 1996........................ 365 -- --
Common stock, $.001 par value; authorized
8,000,000 shares; issued 5,172,418 and
5,176,341 shares and outstanding 5,052,418 and
5,056,341 shares in 1997 and 1998, respective-
ly.............................................. -- 5 5
Additional paid-in capital....................... 4,248 11,834 11,859
Accumulated deficit.............................. (1,349) (2,371) (2,486)
------- ------ ------
Treasury stock, 120,000 shares in 1997 and
1998, at cost................................. -- (582) (582)
------- ------ ------
Total stockholders' equity..................... 3,264 8,886 8,796
------- ------ ------
Total Liabilities and Stockholders' Equity... $ 5,232 32,737 34,501
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1995, 52 WEEKS ENDED DECEMBER 28, 1996,
YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
-------------
1995 1996 1997 1997 1998
------ ------ ------ ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $7,246 15,986 29,565 6,134 10,102
Cost of sales........................... 5,517 11,425 22,639 5,113 7,055
------ ------ ------ ----- ------
Gross profit........................ 1,729 4,561 6,926 1,021 3,047
------ ------ ------ ----- ------
Operating expenses:
Selling............................... 1,620 3,270 5,656 1,147 2,132
General and administrative............ 633 1,066 2,384 399 581
------ ------ ------ ----- ------
Total operating expenses............ 2,253 4,336 8,040 1,546 2,713
------ ------ ------ ----- ------
Operating income (loss)............. (524) 225 (1,114) (525) 334
------ ------ ------ ----- ------
Other income (expense):
Equity in loss of Sunrise Organic
Farms, Inc........................... (85) (158) -- -- --
Interest income....................... -- 68 53 -- --
Interest expense, net of interest
capitalized of $330 during 1997...... (35) (94) (1,126) (153) (492)
Other, net............................ (2) -- (35) -- --
------ ------ ------ ----- ------
Total other expense................. (122) (184) (1,108) (153) (492)
------ ------ ------ ----- ------
Income (loss) from continuing
operations before income taxes and
minority interest.................. (646) 41 (2,222) (678) (158)
------ ------ ------ ----- ------
Income tax benefit (expense)............ 30 (14) 513 64 43
Minority interest in loss of
subsidiary............................. -- -- 687 571 --
------ ------ ------ ----- ------
Income (loss) from continuing
operations......................... (616) 27 (1,022) (43) (115)
------ ------ ------ ----- ------
Discontinued dairy operations:
Loss from operations (net of income
tax benefit of $113)................. (406) -- -- -- --
Gain on disposal (net of income tax
expense of $143)..................... 513 -- -- -- --
------ ------ ------ ----- ------
Income from discontinued
operations......................... 107 -- -- -- --
------ ------ ------ ----- ------
Net income (loss)................... $ (509) 27 (1,022) (43) (115)
====== ====== ====== ===== ======
Net income (loss) per share basic and
diluted:
Continuing operations................. $ (.22) .01 (.23) (.01) (.02)
Operations discontinued and sold...... .04 -- -- -- --
------ ------ ------ ----- ------
Net income (loss) per share........... $ (.18) .01 (.23) (.01) (.02)
====== ====== ====== ===== ======
Weighted average shares outstanding:
Basic................................. 2,791 3,264 4,488 3,659 5,056
Diluted............................... 2,791 3,283 4,488 3,659 5,056
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1995, 52 WEEKS ENDED DECEMBER 28, 1996,
YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ ----------------- PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
---------- ------ --------- ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995.... 2,672,300 $ 267 -- $ -- $ 1,657 $ (867) $ -- $ 1,057
Issuance of common stock
upon conversion of a
portion of a note payable
to stockholder........... 100,000 10 -- -- 115 -- -- 125
Issuance of common stock
for cash................. 100,000 10 -- -- 115 -- -- 125
Net loss.................... -- -- -- -- -- (509) -- (509)
---------- ----- -------- ---- ------- ------ ----- -------
Balance at December 31,
1995........................ 2,872,300 287 -- -- 1,887 (1,376) -- 798
Issuance of common stock
upon conversion of certain
director bridge loans.... 55,212 6 -- -- 172 -- -- 178
Issuance of common stock
for cash, net of offering
costs.................... 721,188 72 -- -- 2,189 -- -- 2,261
Net income.................. -- -- -- -- -- 27 -- 27
---------- ----- -------- ---- ------- ------ ----- --------
Balance at December 28,
1996........................ 3,648,700 365 -- -- 4,248 (1,349) -- 3,264
Exercise of employee stock
options.................. 15,300 1 -- -- 50 -- -- 51
Issuance of common stock
for cash, net of offering
costs.................... -- -- 855,423 1 4,005 -- -- 4,006
Acquisition of common
stock.................... -- -- (120,000) -- -- -- (582) (582)
Issuance of common stock
for senior subordinated
notes payable............ -- -- 155,000 -- 752 -- -- 752
Exchange of subsidiary stock
for common stock......... (3,664,000) (366) 3,664,000 4 362 -- -- --
Exercise of employee stock
options.................. -- -- 7,750 -- 39 -- -- 39
Stock issued for
acquisition.............. -- -- 490,245 -- 2,378 -- -- 2,378
Net loss.................... -- -- -- -- -- (1,022) -- (1,022)
---------- ----- -------- ---- ------- ------ ----- --------
Balance at December 31,
1997........................ -- -- 5,052,418 5 11,834 (2,371) (582) 8,886
Issuance of stock for services
(unaudited).............. -- -- 3,923 -- 25 -- -- 25
Net loss
(unaudited).............. -- -- -- -- -- (115) -- (115)
---------- ----- -------- ---- ------- ------ ----- --------
Balance at March 31, 1998
(unaudited)................. -- $ -- 5,056,341 $ 5 $ 11,859 $ 2,486 $ (582) $ 8,796
========== ====== ========= ===== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995, 52 WEEKS ENDED DECEMBER 28, 1996,
YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
--------------
1995 1996 1997 1997 1998
----- ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $(509) 27 (1,022) (43) (115)
Adjustments to reconcile net income
(loss) to net cash from operating
activities:
Provision for doubtful accounts...... 29 19 7 7 7
Depreciation and amortization........ 111 56 1,150 76 551
Equity in loss of Sunrise Organic
Farms, Inc.......................... 85 158 509 209 --
Interest receivable from Sunrise
Organic Farms, Inc.................. -- (39) -- -- --
Loss on sale of cattle and
equipment........................... 80 -- 1,006 -- 402
Accretion on senior subordinated
notes payable....................... -- -- 44 -- 20
Deferred income tax benefit.......... -- -- (513) (64) (43)
Gain on disposal of dairy
operations.......................... (656) -- -- -- --
Minority interest in loss of
subsidiary.......................... -- -- (687) (571) --
Change in operating assets and
liabilities:
Trade accounts receivable........... (277) (634) 523 821 (363)
Accounts receivable from
stockholders....................... 144 -- -- --
Inventories......................... 469 (537) (2,690) 20 434
Other current assets................ (9) (35) (220) (190) (115)
Feed deposits....................... 41 -- -- -- --
Trade accounts payable.............. 238 2 1,996 108 239
Payable to affiliates............... 262 251 (513) (513) --
Other accrued expenses.............. 33 241 167 (5) 625
Income taxes payable................ -- 14 (14) (14) --
Deferred rent payable............... (3) -- -- -- --
----- ------ ------- ------ ------
Net cash provided by (used in)
operating activities.............. 38 (477) (257) (159) 1,642
----- ------ ------- ------ ------
Cash flows from investing activities:
Purchase of Sunrise Organic Farms,
Inc.................................. -- -- (3,566) (3,566) --
Investment in Sunrise Organic Farms,
Inc.................................. -- (350) -- -- --
Advance to Sunrise Organic Farms,
Inc.................................. -- (650) -- -- --
Purchases of equipment................ (33) (145) (3,472) (42) (670)
Proceeds from equipment sales......... 5 1 66 -- 45
Purchases of cattle, including
interest capitalized of $330 in
1997................................. (257) -- (3,595) -- (1,716)
Proceeds from cattle sales............ 34 -- 279 -- 183
Cash transferred in disposal of dairy
operations........................... (66) -- -- -- --
Other assets.......................... (18) (47) 285 3 (39)
----- ------ ------- ------ ------
Net cash used in investing
activities........................ (335) (1,191) (10,003) (3,605) (2,197)
----- ------ ------- ------ ------
</TABLE>
F-6
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995, 52 WEEKS ENDED DECEMBER 28, 1996 YEAR ENDED
DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996 1997 1997 1998
------ ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Increase (decrease) in cash
overdrafts..................... $ 20 149 (642) (169) --
Proceeds from line of credit.... 1,326 6,759 24,411 -- 11,450
Repayments of line of credit.... (835) (6,933) (23,918) -- (10,380)
Repayments of term loan......... (375) (131) (244) (31) --
Proceeds from long-term debt,
other than line of credit...... -- -- 6,881 3,566 --
Repayments of long-term debt,
other than line of credit...... -- -- (440) -- (108)
Loan to Aurora Dairy
Corporation.................... -- -- (250) -- --
Proceeds from director bridge
loans.......................... -- 775 -- -- --
Repayments of director bridge
loans.......................... -- (597) -- -- --
Proceeds from issuance of common
stock, net..................... 125 2,261 4,848 52 --
Payments to acquire treasury
stock.......................... -- -- (582) -- --
Loan origination costs.......... -- (20) -- -- --
------ ------- -------- ------- --------
Net cash provided by
financing activities........ 261 2,263 10,064 3,418 962
------ ------- -------- ------- --------
Net increase (decrease) in cash
and cash equivalents............ (36) 595 (196) 346 407
Cash and cash equivalents at
beginning of year............... 41 5 600 600 404
------ ------- -------- ------- --------
Cash and cash equivalents at end
of year......................... $ 5 600 404 253 811
====== ======= ======== ======= ========
Supplemental disclosure of cash
flow information:
Cash paid during the year for
interest, net of amount
capitalized of $330............ $ 151 97 1,024 8 458
====== ======= ======== ======= ========
Cash paid during the year for
income taxes................... $ -- -- 31 23 --
====== ======= ======== ======= ========
Noncash investing and financing
activities:
Additional capital lease
obligations................... $ -- -- 88 -- 50
====== ======= ======== ======= ========
The Company purchased the
remaining 73.175% of common
stock of Sunrise Organic
Farms, Inc. in connection with
this acquisition, assets
acquired and liabilities were
assumed as follows:
Fair value of assets
acquired..................... $ -- -- 23,751 18,610 --
Cash paid for common stock.... -- -- (3,566) (3,566) --
Company stock issued for
common stock................. -- -- (2,378) -- --
------ ------- -------- ------- --------
Liabilities assumed.......... $ -- -- 17,807 15,044 --
====== ======= ======== ======= ========
Common stock issued for
services........................ $ -- -- -- -- 26
====== ======= ======== ======= ========
Sale of dairy net assets in
exchange for investment in
Sunrise Organic Farms, Inc...... $1,829 -- -- -- --
Issuance of common stock upon
conversion of debt:
Director bridge loans........... -- 178 -- -- --
Long-term debt payable to
stockholder.................... 125 -- -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, DECEMBER 28, 1996 AND DECEMBER 31, 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Horizon Organic Holding Corporation (Company) is involved in the production
and marketing of organic milk and other organic dairy products sold to natural
food stores and supermarkets nationwide.
The Company was established in October 1991 and, prior to May 1997, was
involved only in the marketing of organic milk and other organic dairy
products except for a portion of 1994 and 1995 in which the Company produced
conventional milk through a dairy operation which was disposed of May 31,
1995. In March 1997, the Company acquired and began producing organic milk
through a dairy operation located in Idaho from which the Company had
previously purchased milk.
On January 1, 1996, the Company changed its fiscal year end from December 31
to the Saturday nearest to December 31, beginning with the fiscal year ended
December 28, 1996. On June 30, 1997, the Company changed its fiscal year to a
December 31 year end. Accordingly, the accompanying consolidated financial
statements are presented for the year ended December 31, 1995, the 52 weeks
ended December 28, 1996 and the year ended December 31, 1997.
Unaudited Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements as of March 31, 1998
and for the three months ended March 31, 1997 and 1998, are unaudited but, in
the opinion of management, include all adjustments, consisting of normal
recurring adjustments, which are necessary for a fair presentation of
financial condition, results of operations, and cash flows. The operating
results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Prior to 1997, the Company consisted of one entity, Horizon Organic Dairy,
Inc. For the year ended December 31, 1997, the consolidated financial
statements include the accounts of all subsidiaries including Horizon Organic
Dairy, Inc.; Horizon Organic Dairy, Idaho Farm, Inc.; and Horizon Organic
Dairy, Maryland Farm, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
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.
Inventories
Inventories are stated at the lower of cost (average cost or first-in,
first-out method) or market.
Property, Equipment and Cattle
Property, equipment and cattle are carried at cost. Property (other than
land) is depreciated using accelerated methods over the estimated useful lives
which range from 20 to 27 years. Equipment and cattle are depreciated using an
accelerated method over the estimated useful lives which range from five 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-8
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Assets
Other assets consist principally of loan origination fees and artwork and
plates. The cost of artwork and plates are amortized using the straight-line
method over three years. The loan origination fees are amortized using the
interest method over the term of the respective loan. Accumulated amortization
of loan origination fees, organization costs and artwork at December 28, 1996
and December 31, 1997 totaled $45,000 and $103,000, respectively.
Goodwill
Goodwill, which represents 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 of 15 years.
Advertising Costs
Advertising costs are expensed in the fiscal year incurred. Advertising
costs, which are included in selling expenses, totaled $260,000, $51,000 and
$33,000 during 1995, 1996 and 1997, respectively.
Income Taxes
The Company operated as an S corporation for federal income tax purposes
through May 31, 1995. On June 1, 1995, the Company terminated its S
corporation election. Since June 1, 1995, the Company has accounted for income
taxes in accordance with Statement of Financial Accounting Standards No. 109
(SFAS No. 109), Accounting for Income Taxes.
Under SFAS No. 109, 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.
Earnings Per Share
The Company has adopted the requirements for Statement of Financial Account
Standards No. 128, Earnings Per Share (SFAS 128) for all periods presented.
SFAS 128 requires that a disclosure of "basic" earnings per share and
"diluted" earnings per share. Basic earnings per share is computed by dividing
income (loss) available to common stockholders by the weighted average number
of common shares outstanding. Diluted earnings per share is computed by
dividing income (loss) 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. The dilutive effect of the exercise of options and warrants has
not been included in the calculation of diluted earnings per share because the
effect in loss years is antidilutive.
Stock Option Plan and Stock Option Agreements
Prior to January 1, 1996, the Company accounted 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. As such, compensation expense was
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
Accounting for Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net income disclosures for
F-9
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
employee stock option grants made in 1995 and thereafter as if the fair-value-
based method defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures required by SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
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.
Employee Benefit Plan
The Company has a defined contribution retirment plan (Plan) 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.
The Plan provides for the Company to match an employee's contribution in an
amount up to 3% of such employee's compensation. The Company contributed
$33,000 to the Plan for the year ended December 31, 1997.
Significant Customers
The Company has a distributor which is comprised of four regional
distributors who have independent purchasing arrangements with the Company.
Net sales to these regional distributors, individually, is less than 10% of
total net sales.
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.
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 presentation.
(3) ACQUISITION OF SUNRISE ORGANIC FARMS, INC.
At December 28, 1996, the Company owned a 26.825% interest in Sunrise
Organic Farms, Inc. (Sunrise). The remaining interest in Sunrise was owned by
certain stockholders and directors of the Company. The Company accounted for
its investment in Sunrise using the equity method. On March 20, 1997, the
Company entered into an agreement with Sunrise to acquire the remaining
73.175% (293,694 shares) of Sunrise's issued and outstanding common stock. The
purchase took place in two separate closings. At the first closing on March
20, 1997, the Company purchased 176,216 shares of Sunrise common stock at
$20.24 per share for an
F-10
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
aggregate purchase price of $3,566,514. Payment was made with subordinated
promissory term notes. At the second closing on May 29, 1997, the Sunrise
stockholders assigned their remaining 117,478 shares of common stock in
Sunrise valued at $20.24 per share to the Company in exchange for $2,377,688
of the Company's common stock based on the estimated fair value of the common
stock. Also, at the second closing, the Sunrise stockholders received, on a
pro rata basis, warrants to acquire 69,118 shares of the Company's common
stock at an exercise price of approximately $5.34 or 110% of the per share
purchase price paid by the investors in the private placement for the
Company's stock of $4.85 per share. These warrants expire in March 1999.
The acquisition has been accounted for by the purchase method and the
results of operations of Sunrise have been included in the Company's
consolidated financial statements from January 1, 1997, with a corresponding
minority interest recorded for Sunrise's proportionate share of losses for the
period from January 1, 1997 through May 31, 1997. The excess of the purchase
price over the fair value of the net identifiable assets acquired of
$2,306,736 has been recorded as goodwill.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Sunrise as if the
acquisition had occurred at the beginning of 1997 and 1996, after giving
effect to certain adjustments, including amortization of goodwill, additional
depreciation expense, increased interest expense on debt related to the
acquisition, and related income tax effects. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company and Sunrise constituted a single entity during
such periods.
<TABLE>
<CAPTION>
52 WEEKS ENDED YEAR ENDED
DECEMBER 28, DECEMBER 31,
1996 1997
-------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net sales........................................ $21,921 29,565
======= ======
Net loss......................................... $ (741) (1,974)
======= ======
</TABLE>
(4) INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Grain and feed..................................... $-- 3,662
Crops growing, fertilizer and other................ -- 325
Finished goods..................................... 475 820
Raw materials...................................... 86 63
---- -----
$561 4,870
==== =====
</TABLE>
(5) INVESTMENT IN AND ADVANCES TO SUNRISE ORGANIC FARMS, INC.
The Company's share of Sunrise's undistributed losses prior to the 1997
acquisition totaled $44,000 (23.78%) for the period from June 1, 1995 through
December 31, 1995 and $77,000 (26.825%) for the 52 weeks ended December 28,
1996. The losses recognized by the Company include the amounts stated above
and amortization of intangible assets recognized by the Company in excess of
the Company's proportionate share of Sunrise's net assets as reflected in
Sunrise's financial statements.
In June 1996, the Company advanced $650,000 to Sunrise under the terms of a
note receivable. The note bore interest at a rate of 12.5%. The note was due
and payable in full upon the earlier of December 31, 1999 or upon any
occurrence of an event of default, as defined. Interest was payable monthly,
commencing
F-11
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
April 30, 1997, unless Sunrise's audited results do not show a profit. Accrued
interest totaling $39,000 is included in "investment in and advances to
Sunrise" at December 28, 1996. The note receivable was eliminated through the
purchase of Sunrise.
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Land and water rights............................... $ -- 2,799
Dairy and feedlot................................... -- 8,600
Rolling stock, vehicles and farm equipment.......... -- 1,373
Cream separator..................................... 551
Employee housing.................................... -- 930
Intermediate crop life.............................. -- 50
Office equipment and other.......................... 173 477
---- ------
173 14,780
Less accumulated depreciation..................... (69) (542)
---- ------
Total property and equipment...................... $104 14,238
==== ======
</TABLE>
Included in property and equipment is $2,790,000 of purchases of land, dairy
and feedlot, rolling stock, vehicles and farm equipment, and employee housing
for the construction of a dairy in Maryland which began production in 1998.
The Company expects to incur additional costs of approximately $500,000 to
complete the construction of this dairy in 1998.
(7) CATTLE
Cattle consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Number of head--milking cows....................... -- 4,566
Number of head--replacement heifers................ -- 1,949
---- -----
Total cattle....................................... -- 6,515
==== =====
Cost--milking cows................................. $-- 6,568
Cost--replacement heifers.......................... -- 1,511
---- -----
-- 8,079
Less accumulated depreciation.................... -- (427)
---- -----
$-- 7,652
==== =====
</TABLE>
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.
(8) LINE OF CREDIT AND TERM LOAN
In November 1995, the Company entered into a credit agreement with a finance
company, providing for two types of advances. The credit agreement, as amended
in October 1996, provided for advances based on 75% of the Company's eligible
trade accounts receivable, up to $2,000,000 (line of credit). The credit
F-12
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
agreement also provided for an additional advance in the form of a term loan
in the amount of $275,000 (term loan). The aggregate amount outstanding on the
line of credit and the term loan could not exceed $2,000,000. Borrowings under
the credit agreement were secured by substantially all assets of the Company.
Amounts outstanding under the line of credit and term loan as of December 28,
1996 were $244,000. The credit agreement was terminated in 1997 and replaced
by the revolving line of credit (note 9).
(9) LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
-------------
<S> <C> <C>
Subordinated notes payable with interest payable in monthly
installments at prime (8.5% at December 31, 1997) plus 1%,
with the unpaid balance due upon the earlier of March 20,
2002, or the Company completing an initial public offer-
ing........................................................ $ -- 3,566
Senior subordinated notes payable with interest at 11%, pay-
able in quarterly installments with the unpaid balance due
upon the earlier of May 29, 2003, or the Company completing
an initial public offering................................. -- 2,392
Note payable to Farm Credit Services with interest at 7.79%,
payable in monthly installments with the unpaid balance due
July 1, 2010, personally guaranteed by a stockholder....... -- 3,851
Revolving line of credit with U.S. Bancorp Ag Credit, Inc.
with maximum borrowing of $10,000,000 with interest at
prime plus 1.25%, secured by substantially all assets of
the Company, due June 30, 1999............................. -- 6,953
Note payable to 44 Exchange Services with interest at 8%,
payable in monthly installments with the unpaid balance due
October 27, 2002 secured by certain property............... -- 100
Note payable to Peoples Bank of Kent County, Maryland with
interest at 9%, payable in monthly installments with the
unpaid balance due October 27, 2002 secured by certain
property................................................... -- 700
Obligations under capital leases with terms from two to five
years with imputed interest rates ranging from 7.42% to
13.46% secured by related equipment some of which are per-
sonally guaranteed by a stockholder........................ -- 951
----- -------
Total long-term debt...................................... -- 18,513
Less current portion........................................ -- (553)
----- -------
Long-term debt, excluding current portion................. $-- 17,960
===== =======
</TABLE>
On May 29, 1997, in connection with the senior subordinated notes (Notes)
due May 29, 2003, the Company issued 155,000 shares of its $.001 par value
common stock. Accordingly, the Company recorded the $3,100,000 face amount
notes net of $752,000 which is being accreted using the interest method over
the term of the Notes. Interest expense of $44,000 was recorded in 1997 in
connection with this transaction.
The revolving line of credit, subordinated notes and notes payable 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, and which require the Company to meet certain financial
provisions.
F-13
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate maturities of long-term debt on December 31, 1997 were as follows
(in thousands):
<TABLE>
<S> <C>
December 31:
1998............................................................... $ 553
1999............................................................... 7,206
2000............................................................... 170
2001............................................................... 101
2002............................................................... 4,429
Thereafter......................................................... 6,054
-------
Total............................................................ $18,513
=======
</TABLE>
The aggregate maturities of long-term debt reflect contractual due dates and
do not consider expected payments on long-term debt from the proceeds of a
proposed equity offering.
The Company plans to repay long-term debt with a face amount of
approximately $14.7 million at December 31, 1997 from the proceeds of a
proposed equity offering expected to close in fiscal 1998. The repayment of
debt with a face amount of $3.1 million will result in a loss on
extinguishment. As of December 31, 1997, the loss on extinguishment would have
been approximately $439,000, net of related income tax effects.
(10) INCOME TAXES
Income tax (expense) benefit attributable to income (loss) from continuing
operations consisted of (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1995:
U.S. federal........................................ $ 26 -- 26
State............................................... 4 -- 4
---- --- ---
$ 30 -- 30
==== === ===
52 weeks ended December 28, 1996:
U.S. federal........................................ $(11) -- (11)
State............................................... (3) -- (3)
---- --- ---
$(14) -- (14)
==== === ===
Year ended December 31, 1997:
U.S. federal........................................ $-- 452 452
State............................................... -- 61 61
---- --- ---
$-- 513 513
==== === ===
</TABLE>
Income tax (expense) benefit attributable to income (loss) from continuing
operations differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax income (loss) from continuing operations as a
result of the following (in thousands):
F-14
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 28, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax (expense)
benefit............................ $ 220 (14) 755
(Increase) reduction in income taxes
resulting from:
State and local income taxes, net
of federal benefit............... 3 (2) 40
Permanent differences............. (1) (6) (60)
Change in valuation allowance..... (115) (2) 122
Adjustment for partial year S Cor-
poration loss.................... (77) -- --
1997 pre-acquisition losses pur-
chased........................... -- -- (348)
Other, net........................ -- 10 4
----- --- ----
$ 30 (14) 513
===== === ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Trade accounts receivable, due to allowance for
doubtful accounts............................. $ 18 19
Inventories, due to additional costs
inventoried for tax purposes.................. 4 12
Equipment and cattle depreciation differences.. 3 169
Compensated absences, due to accrual for
financial reporting purposes.................. 6 20
Net operating loss carryforwards............... -- 987
Write off of intangibles in purchase account-
ing........................................... -- 94
Start-up costs capitalized for tax............. -- 170
Investment in Sunrise, due to differences in
basis......................................... 91 --
---- ------
Total gross deferred tax assets.............. 122 1,471
Less valuation allowance for deferred tax as-
sets.......................................... (122) --
---- ------
Net deferred tax assets...................... -- 1,471
Deferred tax liabilities--
step-up of property, equipment and cattle in
acquisition................................... (2,228)
---- ------
Net deferred tax liabilities................. $ -- (757)
==== ======
</TABLE>
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 the level of historical taxable income and
projections for future taxable income 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, the valuation allowance of $122,000 in 1996 has been reduced to
$-0- in 1997.
F-15
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, the Company has net operating loss carryforwards for
U.S. federal income tax purposes of $2,598,000 which are available to offset
future federal taxable income and expire in the following years (in
thousands):
<TABLE>
<S> <C>
2011.................................................................. $1,870
2012.................................................................. 728
------
Total............................................................... $2,598
======
</TABLE>
(11) DISPOSAL OF DAIRY OPERATIONS
On May 31, 1995, the Company transferred the assets and liabilities of its
dairy operations to Sunrise (formerly Aurora Dairy Corporation of Idaho, Inc.)
(ADCI) in exchange for 90,373 shares of Sunrise common stock with an estimated
fair value of $1,829,000 or $20.24 per share, resulting in a gain of $656,000
on the disposal of the dairy operations. In connection with this transaction,
a lease agreement and management agreement with ADCI were terminated. In 1995,
the Company incurred rental expenses totaling $80,000 under the dairy lease
and management fees of $20,000. Additionally, the Company received an option
to purchase the shares of Sunrise common stock currently owned or thereafter
acquired by the president of Sunrise (228,141 shares at December 28, 1996 and
December 31, 1995) at an option price of $20.24 per share through December 28,
1996 and December 31, 1999 and at appraised value beginning January 1, 2000 to
December 31, 2005. The president and affiliates of Sunrise owned approximately
32% and 31% of the common stock of the Company at December 31, 1997 and 1996,
respectively.
The Company's discontinued dairy operations as well as the gain on disposal
have been reflected as discontinued operations in the Company's 1995 statement
of operations. Such discontinued operations had revenues of $967,000 for the
year ended December 31, 1995.
(12) STOCKHOLDERS' EQUITY
In 1995, the Company's Chief Executive Officer purchased 100,000 shares of
common stock for $125,000 by exercising options.
The Company completed a private offering (Offering) of its $.10 par value
common stock during July 1996 for $2.5 million. The Offering consisted of
776,400 shares of common stock at $3.22 per share. The Company received
proceeds of $2,322,000 which was reduced by net offering costs of $61,000 for
721,188 of the shares in the Offering. The remaining 55,212 shares, also at
$3.22 per share, extinguished $178,000 of director bridge loans. The proceeds
were used to: 1) expand the Company's product line to include cream cheese and
other dairy products; 2) advance funds to Sunrise totaling $650,000; 3) repay
$597,000 of director bridge loans; and 4) provide working capital. The Company
repaid $597,000 of the $775,000 director bridge loans in cash.
The Company completed a private offering (Second Offering) of its $.001 par
value common stock on May 29, 1997. The Second Offering consisted of 855,423
shares of common stock at approximately $4.85 per share. Simultaneously, the
Company exchanged all the common stock of Horizon Organic Dairy, Inc. for
common stock of the Company so that only the Company's common stock was
outstanding as of May 29, 1997. The Company received proceeds of $4,149,000
which was reduced by $143,000. Also on May 29, 1997, the Company acquired
120,000 shares of its $.001 par value common stock at $4.85 per share.
On May 29, 1997, the Company issued 155,000 shares of its $.001 par value
common stock in connection with the issuance of the senior subordinated notes
payable due May 29, 2003 (note 9).
In connection with the acquisition of Sunrise, the Company issued 490,245
shares of its $.001 par value common stock at an estimated value of $2,378,000
for common stock of Sunrise.
F-16
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) STOCK OPTION PLAN AND STOCK OPTION AGREEMENTS
In October 1995, the Company reserved 250,000 shares of its common stock for
an incentive stock option plan (Plan) it implemented for key employees. In
December 1997 the Company reserved an additional 500,000 shares for the Plan.
Options are granted at the discretion of the Board of Directors with an
exercise price equal to the stock's estimated fair market value at date of
grant as determined by the Board of Directors.
In fiscal 1995 a total of 345,000 shares were granted by the Board. 100,000
nonqualified shares were granted to the Company's Chief Executive Officer and
were exercised in 1995. 90,000 nonqualified shares were granted to directors
that vested immediately and expire in 2004. 135,000 nonqualified shares were
granted to the Chief Executive Officer that vest 10% in 1995, 20% in 1996, 30%
in 1997, and 40% in 1998, and expire in 2001. 20,000 qualified shares were
granted to employees that fully vest in five years; 25% per year beginning one
year after the grant date and expire in 2000.
In 1996, 113,943 shares were granted by the Board. 70,000 qualified shares
were granted to employees that fully vest in five years; 25% per year
beginning one year after the grant date and expire in 2001. 25,000
nonqualified shares were granted to directors and vest in five years; 25% per
year beginning one year after grant date and expire in 2001. 2,143
nonqualified shares were granted to an outside consultant that vest
immediately and expire in 1999. 16,800 qualified shares were granted to
employees that vest immediately and expire in 1997.
In fiscal 1997 a total of 214,125 shares were granted by the Board. 4,000
nonqualified shares were granted to outside agents that vest immediately and
expire in 2000. 186,125 qualified shares were granted to employees that fully
vest in five years; 25% per year beginning one year after grant date and
expire in 2002. 9,000 qualified shares were granted to employees that fully
vested on November 1, 1997 and expired on November 30, 1997. 15,000
nonqualified shares were granted to directors that fully vest in five years,
or 25% per year beginning one year after grant date and expire in 2002.
The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $0.26, $0.70 and $1.12, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1995--no expected dividend yield, risk-free
interest rates ranging from 5.55% to 7.56% depending on the life of the
option, and expected option lives ranging from 5 to 9 years; 1996--no expected
dividend yield, risk-free interest rates ranging from 5.44% to 6.73% depending
on the life of the option, and expected option lives ranging from 3 to 5
years; 1997--no expected dividend yield, risk-free interest rates ranging from
5.78% to 5.80% depending on the life of the option, and expected option lives
ranging from 3 to 4 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, or net loss increased, to the
pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
FOR FISCAL YEAR
------------------
1995 1996 1997
----- ---- ------
<S> <C> <C> <C>
Net income (loss), as reported........................... $(509) 27 (1,022)
===== === ======
Net income (loss), pro forma............................. $(544) 14 (1,037)
===== === ======
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effect on the reported net income (loss) for future periods because options
vest over several years and additional awards are made each year. In addition,
compensation cost for options granted prior to January 1, 1995, has not been
considered.
F-17
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity during the years indicated was as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF RANGE OF AVERAGE
SHARES EXERCISE PRICES EXERCISE PRICE
--------- --------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1994........ --
Granted........................... 345,000 $1.25--$2.10 $1.63
Exercised......................... (100,000) $1.25 $1.25
--------
Balance at December 31, 1995........ 245,000 $1.25--$2.10 $1.78
Granted........................... 113,943 $2.00--$3.50 $3.29
Canceled.......................... (5,000) $2.00 $2.00
--------
Balance at December 28, 1996........ 353,943 $1.25--$3.50 $2.53
Granted........................... 214,125 $4.85--$6.50 $5.60
Exercised......................... (23,050) $3.38--$5.05 $3.94
Canceled.......................... (4,750) $3.38--$5.05 $4.52
--------
Balance at December 31, 1997........ 540,268 $1.25--$6.50 $3.28
========
Number of options exercisable at
December 31,1997................... 188,629 $1.25--$4.85 $1.51
========
</TABLE>
Canceled options are a result of employee terminations or forfeitures.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE NUMBER WEIGHTED-
NUMBER REMAINING EXERCISABLE AT AVERAGE EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE DECEMBER 31, 1997 PRICE
-------------- ----------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
$1.25........ 225,000 4.7 163,035 $1.25
2.00....... 18,000 3.0 7,500 2.00
3.22--
3.50....... 92,143 3.3 14,094 3.27
4.85--
6.50....... 205,125 4.4 4,000 4.85
------- -------
540,268 3.8 188,629 $3.28
======= === ======= =====
</TABLE>
(14) LEASES
The Company has several noncancelable operating leases, primarily for office
space and office equipment, expiring at various dates from 1998 to 2007. These
leases generally require the Company to pay all executory costs such as
maintenance and insurance. Rent expense totaled $38,000 in 1995, $57,000 in
1996 and $151,000 in 1997.
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, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ended December 31:
1998..................................................... $ 416 236
1999..................................................... 416 223
2000..................................................... 276 199
2001..................................................... 160 176
Thereafter............................................... 303 170
----- -----
Total minimum lease payments........................... 1,571 1,004
=====
Less amounts representing interest......................... (620)
-----
Present value of minimum capital lease payments........ 951
Less current portion....................................... (349)
-----
Capital lease obligations, less current portion........ $ 602
=====
</TABLE>
F-18
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade accounts
receivable, other current assets, other assets, trade accounts payable, cash
overdrafts, payable to affiliates and other accrued expenses approximate fair
value because of the short maturity of these instruments.
The carrying amount of the note receivable approximates fair value because
the interest rate currently offered by the Company approximates rates
currently offered by lending institutions for loans of similar terms to
companies with comparable credit risk and because the interest rate is
variable.
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.
(16) RELATED PARTY TRANSACTIONS
The Company subleases a portion of its office to a company controlled by a
director and stockholder of the Company. The term of the sublease runs from
October 1, 1997 through December 31, 1998. Rental income under the agreement
is approximately $1,900 per month.
A director and stockholder of the Company owns a ranch at which the Company
periodically stores and feeds the Company's cattle for $1.60 per day, per cow.
The Company incurred expenses of approximately $155,000 under this informal
agreement in 1997.
One of the Company's milk processors is controlled by a director of the
Company. Payments to this processor for milk processing were $5,000, $286,000
and $660,000 during 1995, 1996 and 1997, respectively.
Since its inception, the Company has relied in part on loans from related
parties to fund its capital needs. These loans bore interest rates consistent
with market rates of interest had the Company obtained these loans from
independent third parties. No amounts under these loans were due as of
December 31, 1995 and December 28, 1996. Amounts due to related parties under
these loans as of December 31, 1997 were $6,667,000.
The Company pays fees to one of its directors for the guarantee of certain
debt at one percent of the amount guaranteed. During 1997, the Company paid
approximately $55,000 to this director in connection with guarantee fees.
The Company paid management fees to a company controlled by one of its
directors for management of its dairy operations. The Company paid
approximately $210,000 in management fees in 1997. The agreement terminated in
November 1997.
(17) PURCHASE COMMITMENTS
The Company has entered into an agreement with an unaffiliated supplier to
purchase certified organic milk through December 31, 1998. The agreement
requires minimum weekly purchases by the Company which are based on forecasted
requirements, not to be less than established minimums. To the extent that the
Company does not make the required minimum purchases it is required to pay
amounts equal to the difference between the selling price of certified organic
milk and the selling price of conventional milk to the supplier for the
supplier's loss of the organic premium it would have received had the Company
made its required purchases. The Company paid for losses of organic premiums
in connection with milk supply
F-19
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contracts in 1995 and 1996 of $198,000 and $73,000, respectively. The Company
did not incur losses of organic premiums in connection with milk supply
contracts in 1997.
(18) SUBSEQUENT EVENT
On April 8, 1998, the Company acquired certain assets including inventory
and the Juniper Valley Farms brand name for $6,000,000. The acquisition was
financed with two new notes payable; $2,000,000 payable to a bank which bears
interest at prime plus 2% and is due July 31, 1998 and $4,000,000 of which is
non-interest bearing and is due July 8, 1998. The Company also issued a
warrant exercisable for 3,500 shares of common stock with an exercise price of
$8.00 per share which expires April 8, 2000.
F-20
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
WESTMINSTER, COLORADO
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
WITH INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Sunrise Organic Farms, Inc.
(f/k/a Aurora Dairy Corporation of Idaho, Inc.)
Westminster, Colorado
We have audited the accompanying balance sheet of Sunrise Organic Farms,
Inc. (f/k/a Aurora Dairy Corporation of Idaho, Inc.), as of December 31, 1996
and the related statements of operations, stockholders' equity and cash flows
for the year ended 1996. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sunrise Organic Farms,
Inc. (f/k/a Aurora Dairy Corporation of Idaho, Inc.), as of December 31, 1996
and the results of its operations and its cash flows for the year ended 1996
in conformity with generally accepted accounting principles.
/s/ Eide Helmeke PLLP
April 9, 1997
Fargo, North Dakota
F-21
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
BALANCE SHEET-ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Current Assets:
Cash............................................................ $ 5,292
Accounts receivable milk........................................ 306,440
Accounts receivable related party (Note 12)..................... 828,349
Accounts receivable other....................................... 27,287
Inventories (Note 3)............................................ 1,338,464
Prepaid expenses................................................ 294,359
-----------
Total current assets.......................................... 2,800,191
-----------
Cattle:
Cattle (Note 4)................................................. 7,766,729
Accumulated depreciation (loss)................................. (960,235)
-----------
Total cattle.................................................. 6,806,494
-----------
Property and Equipment:
Dairy operations................................................ 3,241,674
Farming operations.............................................. 2,652,652
Equipment and vehicles.......................................... 1,314,981
-----------
7,209,307
Accumulated depreciation (loss)................................. (971,600)
-----------
Total property and equipment.................................. 6,237,707
-----------
Other Assets:
Loan fees and origination costs, net of accumulated amortization
of $23,604
(Note 1) ...................................................... 101,898
Goodwill, net of accumulated amortization of $69,454 (Note 2)... 149,985
Investments (Note 1)............................................ 356,000
Capital retainage with cooperatives (Note 1).................... 262,055
Deferred income taxes (Note 8).................................. 520,000
-----------
Total other assets............................................ 1,389,938
-----------
Total Assets................................................ $17,234,330
===========
</TABLE>
See accompanying Notes to Financial Statements
F-22
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
BALANCE SHEET--LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Current Liabilities:
Accounts payable--trade......................................... $ 381,535
Accrued expenses................................................ 179,124
Current portion of deferred income taxes (Note 8)............... --
Current portion of long-term debt (Note 6)...................... 175,506
Current portion of liability under capital leases (Note 7)...... 245,655
-----------
Total current liabilities..................................... 981,820
-----------
Commitments and Contingencies (Note 9)
Long-Term Debt:
Notes payable, net of current portion (Note 6).................. 11,601,518
Liabilities under capital leases, net of current portion (Note
7)............................................................. 482,252
-----------
Total long-term debt.......................................... 12,083,770
-----------
Deferred income taxes, net of current portion (Note 8)............ 520,000
-----------
Total liabilities............................................. 13,585,570
-----------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock--no stated value; authorized--10,000,000 shares;
issued and outstanding--401,360 shares ........................ 5,814,695
Accumulated deficit............................................. (2,165,955)
-----------
Total stockholders' equity.................................... 3,648,740
-----------
Total Liabilities and Stockholders' Equity.................. $17,234,330
===========
</TABLE>
See accompanying Notes to Financial Statements
F-23
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Income:
Milk sales...................................................... $11,162,181
-----------
11,162,181
-----------
Operating Expenses:
Cattle costs.................................................... 1,834,651
Milk marketing costs............................................ 291,703
Feed costs...................................................... 6,644,959
Operating payroll............................................... 1,223,788
Dairy operating expenses........................................ 1,304,041
General and administrative...................................... 550,725
-----------
Total operating expenses...................................... 11,849,867
-----------
Operating Loss.................................................... (687,686)
-----------
Interest expense................................................ (571,240)
-----------
Net Loss Before Income Taxes...................................... (1,258,926)
Benefit from Income Taxes
Deferred........................................................ 975,000
-----------
Total Benefit from Income Tax................................. 975,000
-----------
Net Loss.................................................... $ (283,926)
===========
</TABLE>
See accompanying Notes to Financial Statements
F-24
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995...... $5,386,979 $ 0 $(1,882,029) $3,504,950
Issuance of 21,132 shares of
common stock.................. 427,716 -- -- 427,716
Net loss....................... -- -- (283,926) (283,926)
---------- --- ----------- ----------
Balance, December 31, 1996...... $5,814,695 $ 0 $(2,165,955) $3,648,740
========== === =========== ==========
</TABLE>
See accompanying Notes to Financial Statements
F-25
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Cash Flows from Operating Activities:
Net loss......................................................... $ (283,926)
Non-cash items included in net income:
Depreciation and amortization.................................. 985,007
Loss on sale of property, equipment and cattle................. 999,244
Deferred income taxes.......................................... (975,000)
Changes in working capital items:
Accounts receivable............................................ (190,475)
Inventories.................................................... 132,325
Prepaid expenses............................................... (287,973)
Accounts payable............................................... (459,313)
Accounts expenses.............................................. 62,478
----------
Net cash used in operating activities........................ (17,633)
Cash Flows from Investing Activities:
Purchase of cattle............................................... (3,472,129)
Proceeds from the sale of cattle................................. 1,698,223
Purchase of property and equipment............................... (131,249)
Proceeds from the sale of property and equipment................. 9,000
Disbursement for loan fees....................................... (37,625)
Other assets..................................................... (133,182)
----------
Net cash used in investing activities........................ (2,066,962)
----------
Cash Flow from Financing Activities:
Capital contributions............................................ --
Proceeds from issuance of common stock........................... 427,716
Proceeds from line of credit borrowings.......................... 1,539,113
Proceeds from issuance of long-term debt......................... 1,200,000
Payments on long-term debt....................................... (912,394)
Payments on capital leases....................................... (242,051)
----------
Net cash provided by financing activities.................... 2,012,384
----------
Net decrease in Cash............................................... (72,211)
Cash, Beginning of Year............................................ 77,503
----------
Cash, End of Year.................................................. $ 5,292
==========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest....................................... $ 281,262
==========
Supplemental Schedule of Non-Cash Financing Activities
Capital lease obligations incurred for use of equipment.......... $ 275,961
==========
</TABLE>
See accompanying Notes to Financial Statements
F-26
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Sunrise Organic Farms, Inc. (f/k/a Aurora Dairy Corporation of Idaho, Inc.)
was formed on April 28, 1993, pursuant to the laws of the state of Colorado.
Sunrise Organic Farms, Inc. (the Company) is primarily involved in the
commercial and organic dairy and farming industry.
Use of Estimates
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Harvested and growing crop inventories are stated at the lower of
accumulated cost or market. Purchased grain and feed inventories and other
inventories are stated at the lower of cost (first-in, first-out) or market.
The Company follows a policy of hedging certain feed inventory. These hedges
are made to reduce the price risk of market fluctuations. These futures
contracts qualify as hedges under the criteria established in Statement of
Financial Accounting Standards No. 80 "Accounting for Futures Contracts".
Accordingly gains or losses arising from closed hedging transactions are
included as a cost of the feed inventory and reflected in the statement of
operations when the product is sold.
Cattle, Property and Equipment
Cattle, property and equipment are carried at cost. The Company provides for
depreciation on cattle, property and equipment using the straight-line method
over the estimated useful lives of the property, which range as follows:
<TABLE>
<S> <C>
Cattle........................................................... 5 years
Buildings and improvements....................................... 25-40 years
Milking barns.................................................... 15-25 years
Equipment........................................................ 10-15 years
Vehicles......................................................... 5 years
Intermediate-life plants......................................... 5 years
Soil conversion costs............................................ 4 years
</TABLE>
The cost of cattle includes preproductive costs incurred from the time the
cattle arrive at the dairy until they enter the milking herd.
Intermediate-life plants represent perennial plants that have growth cycles
of more than one year. The Company classifies alfalfa as an intermediate-life
plant.
Soil conversion costs include costs incurred converting the land to be
certified as organic. The conversion process began in 1994 and will be
complete in 1997.
F-27
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company computes depreciation on these assets based upon salvage values
ranging from 35% to 80% of cost. Maintenance and repairs of property and
equipment are charged to operations and major improvements are capitalized.
Upon retirement, sale or other disposition of cattle, property and equipment,
the cost and related accumulated depreciation are removed from the appropriate
asset and depreciation accounts and the resulting gain or loss is reflected in
income.
Intangible Assets
Loan fees and origination costs are being amortized using the straight-line
method. Loan fees are amortized over the life of the related loans.
Organization costs are amortized over the estimated useful life of 5 years.
Goodwill relates to the Company's acquisition of certain assets discussed more
fully in Note 2, and is being amortized over the estimated useful life of 5
years.
Investments
Investments consist of Farm Credit Services stock and are stated at cost.
The Farm Credit Services stock is held in conjunction with the bank debt
discussed in Note 6 and will be refunded as the debt is repaid.
Capital Retainage with Cooperatives
Capital retainage with cooperatives represent the Company's ownership
interest in one milk cooperative. The cooperative retains the capital monthly
from the Company's milk sales. According to the bylaws of the cooperative,
capital retained will ultimately be refunded to the Company.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment. As discussed in Note 9, upon termination of "S" Corporation status
for income tax purposes, the Company was required to record additional
deferred income taxes during 1995.
NOTE 2: ISSUANCE OF COMMON STOCK FOR NET ASSETS
On May 31, 1995, the Company issued 82 shares of common stock with a value
of $1,829,113 for certain assets, subject to related liabilities, to Natural
Horizons, Inc. (NHI). Prior to May 31, 1995, the Company had contracted with
NHI to lease one half of its Magic Valley, Idaho dairy facilities to NHI and
had contracted to manage and oversee NHI's organic milk production operations.
Effective May 31, 1995, this agreement was terminated upon the Company
acquiring NHI's organic milk production operation.
The excess of the total acquisition cost over the fair value of the net
assets acquired of $219,438 is being amortized over five years by the
straight-line method.
F-28
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The acquisition has been accounted for as a purchase and results of
operations of NHI since the date of acquisition are included in the financial
statements. The assets acquired and liabilities assumed are summarized as
follows:
<TABLE>
<S> <C>
Current assets.................................................. $ 569,181
Dairy herd and cattle........................................... 3,036,225
Other assets.................................................... 222,057
Current liabilities............................................. (78,913)
Notes payable, Farm Credit...................................... (2,138,875)
-----------
Net assets acquired........................................... $ 1,609,675
===========
</TABLE>
Unaudited results of operations for the five months ended May 31, 1995, for
Aurora Dairy Corporation of Idaho, Inc. reflect a net loss of approximately
$1,407,000.
NOTE 3: INVENTORIES
Inventories consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Grain and Feed................................................... $1,182,928
Crops growing/fertilizer/other................................... 155,536
----------
$1,338,464
==========
</TABLE>
NOTE 4: CATTLE
The Company has reflected its investment in cattle at cost. The cattle are
being depreciated using the straight-line method of accounting over 5 years
with an estimated salvage value of approximately $550 per head. The following
information relates to the cattle at December 31:
<TABLE>
<CAPTION>
1996
-----
<S> <C>
Number of Head--milking cows........................................... 4,440
Number of Head--replacement heifers.................................... 990
-----
Total Cattle......................................................... 5,430
=====
</TABLE>
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Cost--milking cows............................................... $6,764,549
Cost--replacement heifers........................................ 1,002,180
----------
7,766,729
Less: Accumulated Depreciation................................. (960,235)
----------
$6,806,494
==========
</TABLE>
Depreciation expense on cattle totaled $774,316 for the year ended December
31, 1996.
F-29
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment includes the following at December 31:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Dairy facility:
Land........................................................... $ 105,200
Milking equipment.............................................. 1,008,068
Milking barns.................................................. 585,216
Corrals and fencing............................................ 1,543,190
----------
3,241,674
----------
Farms, feedlot, mill and homes:
Land........................................................... 199,676
Buildings and improvements..................................... 1,755,373
Mobile homes................................................... 286,504
Construction in progress....................................... 36,424
Intermediate life plants....................................... 94,675
Soil conversion costs.......................................... 280,000
----------
2,652,652
----------
Equipment and vehicles......................................... 1,314,981
----------
7,209,307
Less accumulated depreciation................................ (971,600)
----------
$6,237,707
==========
</TABLE>
Depreciation expense on property and equipment totaled $261,246 for the year
ended December 31, 1996.
NOTE 6: LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Revolving line of credit........................................ $ 7,100,000
Term loan....................................................... 4,027,024
Fixed rate subordinated debenture (Related Party)............... 650,000
-----------
11,777,024
Less current maturities....................................... (175,506)
-----------
$11,601,518
===========
</TABLE>
The following is a schedule by year of the approximate maturities of the
long-term debt:
<TABLE>
<S> <C>
Years Ending December 31:
1997.......................................................... $ 175,506
1998.......................................................... 7,289,676
1999.......................................................... 854,991
2000.......................................................... 221,543
2001.......................................................... 239,431
Thereafter.................................................... 2,995,877
-----------
$11,777,024
===========
</TABLE>
F-30
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has a $7,105,265 revolving line-of-credit agreement with a bank.
Advances bear interest, payable monthly, at a variable rate which is subject
to adjustment by the lender from time to time. The Company has the option to
"carve out" any portion of the unpaid loan balance at any time and covert it
to a fixed rate which is based on the yield of certain U.S. Treasury
securities. At December 1996, the revolving line of credit consists of the
following:
<TABLE>
<S> <C>
8.07%, variable rate.............................................. $2,500,000
7.80%, fixed rate................................................. 4,600,000
----------
$7,100,000
==========
</TABLE>
The agreement contains provisions relating to submission of timely financial
information, maintenance of financial ratios, and restriction of ownership
transfers and transactions with affiliates. The note is collateralized by
accounts receivable, inventories, cattle, equipment and other assets, and is
guaranteed by a major stockholder. Principal is due in full on June 1, 1998.
The Company has approximately $5,265 of additional borrowing available on the
line of credit at December 31, 1996.
The Company has a term loan agreement with a bank which bears interest at a
variable rate based on the yield of certain U.S. Treasury securities, subject
to a maximum rate of 13.79%. The current interest rate (7.79% at December 31,
1996) will remain in effect until July 1, 2000. At that date and on that date
every five years thereafter, the interest rate may change by a maximum of
4.00%. The note is payable at monthly payments of $40,253, including interest
through July 1, 2010. The agreement contains provisions relating to the
submission of timely financial information, maintenance of financial ratios
and restriction of certain transactions. The note is collateralized by real
estate and personal property, and is guaranteed by a major stockholder.
The fixed rate debenture is payable annually plus interest on the earlier of
April 30th of each year or within 10 business days of the completion of
audited financial statements. The annual payment is required only if the
Company reports a profit on the audited financial statements or if the payment
is authorized by Farm Credit Services. If the Company does not meet the annual
payment terms, the principal and interest are accrued until the payment
conditions are met or upon maturity of the debenture on December 31, 1999.
NOTE 7: LEASES
At December 31, 1996, equipment with a net book value of approximately
$1,154,000 is being leased. The equipment and the related liability under the
capital leases have been recorded at the present value of the future payments,
discounted at rates ranging from 7.55% to 8.20%.
The following is a schedule by years of the future minimum lease payments
under capital leases together with the present value of then net minimum lease
payments as of December 31, 1996:
<TABLE>
<S> <C>
Years Ending December 31:
1997.............................................................. $290,842
1998.............................................................. 288,660
1999.............................................................. 165,998
2000.............................................................. 67,567
--------
Total minimum lease payments.................................... $813,067
Less: amount representing interest.............................. (85,160)
--------
Present value of net minimum lease payments................... $727,907
========
</TABLE>
F-31
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: INCOME TAX MATTERS
The Company's net deferred tax liabilities consist of the following
components as of December 31:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Deferred tax asset:
Net operation loss carryforward.................................. $520,000
Deferred tax liabilities:
Deferred income taxes relating to the carrying value of property
and equipment for financial reporting purposes in excess of the
carrying value for income tax purposes resulting from differing
depreciation and cost capitalization policies................... 520,000
--------
Net deferred tax liabilities..................................... $ --
========
</TABLE>
The components giving rise to the net deferred tax liabilities described
above are included in the accompanying balance sheets as of December 31, are
as follows:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Non-current assets................................................ $520,000
Noncurrent liabilities............................................ (520,000)
--------
$ --
========
</TABLE>
The components of the (provision for) benefit from income tax benefit
consist of the following:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Currently payable................................................... $ --
Deferred............................................................ 975,000
--------
$975,000
========
</TABLE>
The Company's operating loss carryforwards of approximately $910,000 expire
through the year 2011.
NOTE 9: COMMITMENTS
Leases
The Company leases farm equipment and vehicles under noncancelable operating
leases expiring in various years through September 1997.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1996, for the
remaining terms of the leases and in aggregate are approximately:
<TABLE>
<S> <C>
Year Ending December 31:
1997............................................................... $19,393
1998............................................................... 3,661
</TABLE>
F-32
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The total rental expense included in the income statements for the year
ended December 31, 1996 is approximately $43,800.
Certain operating leases provide for purchase options, and renewal options
at the fair rental value at the time of renewal. In the normal course of
business, operating leases are generally renewed or replaced by other leases.
Retirement Plan
Eligible employees may participate in a pension and profit-sharing plan (the
Plan), which is administered by a stockholder. Participants can elect to defer
up to 15 percent of their annual compensation and have it contributed to the
Plan. The Company may also make an additional employer contribution at the
discretion of the management of the plan sponsor. Company contributions to the
Plan totaled approximately $17,995 in 1996.
Buy-sell Agreement
The Company has entered into a buy/sell agreement with one of its
stockholders. The Company has the option to purchase, in the event of the
termination of employment of the stockholder, all of the shares of stock owned
by such stockholder, for a value as defined in the agreement.
Purchase Commitments
The Company entered into an agreement for the construction and installation
of a milk separator. The costs to complete the separator are estimated to be
$334,100. The separator will be financed by Farm Credit Lease. As of December
31, 1996, the company advanced $80,000 for the separator.
The Company advanced $10,000 in 1996 for the construction of a building. The
cost to complete the building is estimated to be $125,000.
NOTE 10: STOCKHOLDERS' EQUITY
On December 14, 1995, the Company changed the value of its common stock from
$.01 per share to no par value and issued the 379,847,772 additional common
shares necessary to effect a 1,000 for 1 common stock split.
In connection with the assets exchange agreement, discussed in Note 2, the
Company's majority stockholder granted NHI an option to acquire 204,000 shares
of common stock owned by the majority stockholder. The option is exercisable
through December 31, 2005, at exercise prices as specified in the agreement.
The agreement also contains antidilution provisions with respect to the shares
under option.
NOTE 11: CONCENTRATIONS OF CREDIT RISK
The Company sells virtually all of its milk production to two customers. The
agreement with one customer, who is also a stockholder, is described in Note
12.
NOTE 12: RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with NHI which provides that the
Company will sell substantially all of its certified organic milk production
to NHI at prices established by the agreement. The price per hundred weight is
fixed for the period from first production date through December 31, 1996.
F-33
<PAGE>
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Thereafter the price can be adjusted each six months based on market
conditions. The agreement contains provisions for disposition in excess of
NHI's requirements and remedial provisions for product rejected by NHI in
excess of one load per 30 day period. In the event NHI does not purchase
production as requested, the agreement contains remedial provisions for the
Company. The Company has agreed to take all necessary steps to cause milk
production to qualify as certified organic under standards established by a
certifying agency acceptable to NHI. The agreement is effective through
December 31, 1999, and may be terminated in writing by either party after
December 31, 1997. If terminated after December 31, 1997, the effective date
of termination shall be two years from the day of written notice. The
agreement will automatically renew for successive two year terms after
December 31, 1999, subject only to agreement as to pricing between the Company
and NHI. The above is intended as a summary of the agreement and does not
contain all detailed provisions of the agreement.
Approximately 47% of the Company's milk sales for 1996 were subject to the
agreement.
The Company pays a corporation, which is a stockholder, a monthly fee for
management, accounting and administrative services provided by the
corporation. Payments to this stockholder totaled approximately $259,000 in
1996, which includes $446,125 of management services provided by the
corporation in connection with the event discussed in Note 2.
The Company's major stockholder personally guarantees substantially all of
the Company's indebtedness. In exchange for this guarantee, the Company pays a
guarantee fee, which totaled $114,000 in 1996.
The financial statements include the following balances and transactions
with stockholders:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Accounts receivable--milk........................................ $ 564,778
Accounts receivable.............................................. 263,572
Long-term debt................................................... 650,000
Accrued interest................................................. 38,733
Milk sales....................................................... 5,227,587
General and administrative....................................... 576,131
Heifer replacement costs......................................... 90,726
Insurance premiums............................................... 41,764
Prepaid expense.................................................. 100,000
</TABLE>
NOTE 13: SUBSEQUENT EVENT
Subsequent to year end, the issued and outstanding stock of Sunrise Organic
Farms, Inc. was purchased by Horizon Organic Dairy, Inc. and Horizon Organic
Holding Corporation. The acquisition was structured into two phases. The first
phase was the purchase by Horizon Organic Dairy, Inc. of 176,216 shares of
Sunrise Organic Farms, Inc. in exchange for promissory notes in the aggregate
amount of $3,566,514. These shares represented 60% of the stock owned by the
Sunrise Organic Farms, Inc. shareholders other than Horizon Organic Dairy,
Inc.
The second phase of the transaction will be the exchange by the Sunrise
Organic Farms, Inc. shareholders of their remaining 117,748 shares of Sunrise
Organic Farms, Inc. for stock in Horizon Organic Holding Corporation worth
$2,377,676 and warrants for 69,118 shares of Horizon Organic Holding
Corporation's stock. The second closing is expected to occur later in 1997 at
or about the same time as Horizon Organic Holding Company completes a private
placement of its common stock.
F-34
<PAGE>
[Under the caption "Horizon(R) Organic National Production and Distribution
Network": (map of the United States with lines to the following locations with
the following captions: Nonfat Dry Milk Powder Processing, McMinnville, OR;
Cottage Cheese Processing, Eugene, OR; Milk Processing, Petaluma, CA; Contract
Dairy Farms, Modesto, CA; Distribution Warehouse, Union City, CA; Butter
Processing, Sacramento, CA; Milk Processing, Reno, NV; Chocolate Milk
Processing, Cedar City, UT; Horizon Organic Headquarters, Boulder, CO; Milk
Processing, Denver, CO; Cheese Processing, Belleville, Cascade, Fond du Lac,
Plain, and Plymouth, WI; Orange Juice Processing, Groveland, FL*; Egg
Licensee, Jetersville, VA; Horizon Organic Maryland Dairy Farm; Contract Dairy
Farms, Lancaster County, PA; Distribution Warehouse, NY, NY*; Milk Processing,
Roxbury, NY*; Contract Dairy Farms, Upstate NY; Aseptic Milk Processing,
Buffalo, NY*; Distribution Warehouse, Chicago, IL; Contract Dairy Farms, La
Farge, WI; Yogurt and Sour Cream Processing, Richland Center, WI; Cream Cheese
Processing, Luana, IA; Milk Processing, Des Moines, IA; Horizon Organic Idaho
Dairy Farm) over "*Juniper Valley locations" and a key with one green box and
the caption "Operations prior to 1995" and one red box and the caption
"Operations added since 1995." The caption "Horizon(R) owns dairy farms in
Idaho and Maryland and is headquartered in the Boulder, Colorado area. Horizon
began operations in 1992 with a single source of organic farm milk and a
yogurt processor located in Wisconsin and added a fluid milk processor located
in Iowa in 1993. Today, Horizon uses farmers, processors and warehouses in 29
locations across the nation." The Horizon logo]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 33
Management............................................................... 49
Certain Transactions..................................................... 57
Principal Stockholders................................................... 61
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 67
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 71
Additional Information................................................... 71
Index to Financial Statements............................................ F-1
</TABLE>
-----------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRIT-
ERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO OF HORIZON ORGANIC HOLDING CORPORATION]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
HANIFEN, IMHOFF INC.
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the registrant in connection with the
sale of the Common Stock being registered. All the amounts shown are estimates
except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee............................................. $ 11,196.00
NASD filing fee.............................................. 4,295.00
Nasdaq initial listing application fee....................... 72,875.00
Blue sky qualification fee and expenses...................... 5,000.00
Printing and engraving expenses.............................. 200,000.00
Legal fees and expenses...................................... 275,000.00
Accounting fees and expenses................................. 200,000.00
Transfer agent and registrar fees............................ 10,000.00
Miscellaneous................................................ 21,634.00
-----------
Total.................................................... $800,000.00
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Company has
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act.
The Company's Certificate of Incorporation provides for the elimination of
liability for monetary damages for breach of the directors' fiduciary duty of
care to the Company and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Company, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
The Company intends to enter into indemnity agreements with each of its
directors and executive officers pursuant to which the Company will indemnify
each director and executive officer against expenses and losses incurred for
claims brought against them by reason of their being a director or executive
officer of the Company, and the Company maintains directors' and officers'
liability insurance.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1995, the Company has sold and issued the following
unregistered securities:
1. During the period, the Registrant granted stock options to employees,
consultants, directors and officers of the Registrant as provided
below:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
DATE GRANTS SHARE
---- --------- ---------
<S> <C> <C>
February 1995.......................................... 90,000 $1.25
May 1995............................................... 135,000 $2.10
December 1995.......................................... 25,000 $2.00
July 1996.............................................. 50,000 $3.22
July 1996.............................................. 16,800 $3.38
July 1996.............................................. 20,000 $3.54
August 1996............................................ 5,000 $3.22
September 1996......................................... 17,143 $3.50
May 1997............................................... 109,000 $4.85
May 1997............................................... 9,000 $5.05
December 1997.......................................... 96,125 $6.50
March 1998............................................. 27,500 $6.50
-------
Total.............................................. 600,568
=======
</TABLE>
2. During the period, the Registrant sold to employees, consultants,
directors and affiliates of the Registrant (i) an aggregate of 15,300
shares of Common Stock pursuant to the exercise of a stock option at an
exercise price of $3.38 per share for cash in the aggregate amount of
$51,714.00, and (ii) an aggregate of 7,750 shares of Common Stock
pursuant to the exercise of a stock option at an exercise price of
$5.05 per share for cash in the aggregate amount of $39,137.50.
3. On March 29, 1997, the Registrant sold warrants to purchase an
aggregate of 69,118 shares of Common Stock at an exercise price of
$5.34 per share.
4. On May 29, 1997, the Registrant issued subordinated promissory term
notes in the principal amount of $3,566,514 in exchange for the
Company's purchase of 176,216 shares of common stock of Sunrise Organic
Farms, Inc., a Colorado corporation ("Sunrise") at a cash price of
$20.24 per share of Sunrise common stock.
5. On May 29, 1997, the Registrant issued an aggregate of 3,664,000 shares
of its Common Stock to the holders of securities of Horizon Organic
Dairy, Inc., a Colorado corporation pursuant to the Articles of Merger
filed by Horizon Organic Dairy, Inc. wherein each share of Horizon
Organic Dairy, Inc. was exchanged for one (1) share of the Registrant's
Common Stock.
6. On May 29, 1997, the Registrant (i) issued an aggregate of 855,423
shares of its Common Stock at a cash price of $4.85 per share to
accredited investors; and (ii) issued 490,245 shares of its Common
Stock in exchange for 117,478 shares of Common Stock of Sunrise.
7. On May 29, 1997, the Registrant sold senior subordinated notes and
Common Stock of the Company for a purchase price of $50,000 per unit.
Each unit consisted of a $50,000 senior subordinated note and 2,500
shares of the Company's Common Stock. The Company sold 62 units for an
aggregate issuance of $3,100,000 of senior subordinated notes and
155,000 shares of Common Stock at a value of $4.85 per share in
exchange for the accrued interest due and payable by the Company on
such notes in the amount of $751,750 to four accredited investors.
II-2
<PAGE>
8. On October 8, 1997, the Registrant sold an aggregate of 120 shares of
its Common Stock at a cash price of $6.50 per share to two accredited
investors.
9. On December 18, 1997, the Registrant issued 2,000 shares of its Common
Stock at a cash price of $6.50 per share to a consultant in
consideration for services rendered.
10. On January 6, 1998, the Registrant issued 1,923 shares of its Common
Stock at a cash price of $6.50 per share to a consultant in
consideration for services rendered.
11. Immediately following, and dependant upon, the sale of the shares
offered hereby, the Company will sell to Suiza Foods Corporation
("Suiza") up to an additional 1,100,000 shares of Common Stock (the
"Concurrent Placement"), pursuant to a private placement. Suiza will
purchase shares in the Concurrent Placement at the Price to Public
less 3 1/2% (one-half of the Underwriting Discount); provided that the
price to Suiza will not be less than $11.00 nor more than $15.00, and
further provided that to the extent the net price to Suiza is in
excess of $13.54, the number of shares in the Concurrent Placement
will be reduced so that the aggregate Suiza investment in the
Concurrent Placement will not exceed $14,900.000. The Concurrent
Placement is subject to the closing of the offering at a minimum Price
to Public of $9.00 per share.
The sales and issuance of securities in the transactions described in
paragraphs (1) and (2) above were deemed to be exempt from registration under
the Securities Act by virtue of Rule 701 promulgated thereunder in that they
were offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
The sales and issuances of securities in the transactions described in
paragraphs (3) through (11) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) thereof and/or Regulation D
promulgated under the Securities Act. The purchasers in each case represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof. Appropriate legends are affixed to the stock
certificates issued in such transactions. All recipients either received
adequate information about the Company or had access, through employment or
other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1+ Underwriting Agreement.
3.1+ Certificate of Incorporation of the Company.
3.1(a) Form of Certificate of Amendment of Certificate of Incorporation, to
be filed prior to the closing of the offering.
3.2+ Form of Amended and Restated Certificate of Incorporation, to be
effective upon the closing of the offering.
3.3+ Bylaws of the Company.
3.4+ Form of Amended and Restated Bylaws of the Company, to be effective
upon the closing of the offering.
4.1+ Reference is made to Exhibits 3.1 through 3.4
4.2 Specimen stock certificate representing shares of Common Stock of the
Company.
5.1+ Opinion of Cooley Godward llp regarding the legality of the
securities being registered.
10.1+ Form of Shareholders Agreement for the Company.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.2+ 1998 Equity Incentive Plan.
10.3 Form of Company's Stock Option Agreement, as amended.
10.4+ 1998 Employee Stock Purchase Plan.
10.5+ Form of Indemnity Agreement.
10.6+ Form of Warrant to Purchase Common Stock.
10.7+ Warrant to Purchase Common Stock issued to McCabe Mintz & Company.
10.8+ Loan and Security Agreement, dated July 15, 1997, among FBS Ag Credit,
Inc., the Company, Horizon Organic Dairy, Inc. ("HOD"), Horizon
Organic Dairy, Maryland Farm, Inc., and Horizon Organic Dairy, Idaho
Farm, Inc., as amended by the First Amendment to Loan and Security
Agreement dated March 23, 1998, as amended by the Second Amendment to
the Loan and Security Agreement dated April 6, 1998.
10.10+ Note and Stock Purchase Agreement, dated May 29, 1997, among the
Company and the Schedule of Purchasers attached thereto.
10.11+ 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.
10.12+ Asset Purchase Agreement, dated as of April 8, 1998, between the
Company and Worcester Creameries Corp.
10.13+ Amended Executive Employment Agreement, effective January 1, 1998,
between the Company and Barnet Feinblum.
10.14+ Amended Executive Employment Agreement, effective January 1, 1998,
between the Company and Mark A. Retzloff.
10.15+ Amended Executive Employment Agreement, effective January 1, 1998,
between the Company and Paul Repetto.
10.16+ 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.
10.17 Stock Purchase Agreement, dated as of June 5, 1998, between the
Company and Suiza Foods Corporation ("Suiza").
10.18 Stockholder Agreement, dated as of June 5, 1998, between the Company
and Suiza.
11.1+ Statement re: computation of per share earnings.
21.1+ Statement re: subsidiaries of the Company.
23.1+ Consent of Cooley Godward llp (included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Eide Bailly LLP.
23.4+ Consent of Ober, Kaler, Grimes & Shriver.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
99.1+ Report of Eide Bailly LLP.
</TABLE>
- ---------------------
* To be filed by amendment.
+ Previously filed.
(b) Financial Statement Schedules.
None.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Company pursuant to the provisions described in Item 14 or otherwise, the
Company has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer, or controlling person of the Company in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Company undertakes that: (1) for purposes of determining any
liability under the Securities Act, the information omitted from the form of
prospectus as filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Company
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act, each post effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this Amendment No. 3
to Registration Statement No. 333-51465 to be signed on its behalf by the
undersigned, in the City of Longmont, State of Colorado, on the 9th day of
June, 1998.
Horizon Organic Holding Corporation
By:/s/ Barnet M. Feinblum
----------------------
Barnet M. Feinblum
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement No. 333-51465 has been signed below by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Marcus B. Peperzak* Chairman of the
- ------------------------------------- Board of Directors June 9, 1998
MARCUS B. PEPERZAK
President, Chief
/s/ Barnet M. Feinblum Executive Officer, June 9, 1998
- ------------------------------------- Director (Principal
BARNET M. FEINBLUM Executive Officer)
/s/ Don J. Gaidano* Vice President,
- ------------------------------------- Finance & June 9, 1998
DON J. GAIDANO Administration,
Chief Financial
Officer, and
Treasurer
(Principal
Financial and
Accounting Officer)
II-6
<PAGE>
SIGNATURE TITLE DATE
/s/ Paul B. Repetto* Vice President,
- ------------------------------------- Marketing, Director June 9, 1998
PAUL B. REPETTO
/s/ Mark A. Retzloff* Vice President,
- ------------------------------------- Sales, Director June 9, 1998
MARK A. RETZLOFF
/s/ Thomas D. McCloskey, Jr.* Director
- ------------------------------------- June 9, 1998
THOMAS D. MCCLOSKEY, JR.
/s/ J. Thomas Clark* Director
- ------------------------------------- June 9, 1998
J. THOMAS CLARK
/s/ Clark R. Mandigo II* Director
- ------------------------------------- June 9, 1998
CLARK R. MANDIGO II
/s/ Richard L. Robinson* Director
- ------------------------------------- June 9, 1998
RICHARD L. ROBINSON
*By: /s/ Barnet M. Feinblum
------------------------------
Barnet M. Feinblum
Attorney-In-Fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1+ Underwriting Agreement.
3.1+ Certificate of Incorporation of the Company.
3.1(a) Form of Certificate of Amendment of Certificate of Incorporation, to
be filed prior to the closing of the offering.
3.2+ Form of Amended and Restated Certificate of Incorporation, to be
effective upon the closing of the offering.
3.3+ Bylaws of the Company.
3.4+ Form of Amended and Restated Bylaws of the Company, to be effective
upon the closing of the offering.
4.1+ Reference is made to Exhibits 3.1 through 3.4
4.2 Specimen stock certificate representing shares of Common Stock of the
Company.
5.1+ Opinion of Cooley Godward llp regarding the legality of the
securities being registered.
10.1+ Form of Shareholders Agreement for the Company.
10.2+ 1998 Equity Incentive Plan.
10.3 Form of Company's Stock Option Agreement.
10.4+ 1998 Employee Stock Purchase Plan.
10.5+ Form of Indemnity Agreement.
10.6+ Form of Warrant to Purchase Common Stock.
10.7+ Warrant to Purchase Common Stock issued to McCabe Mintz & Co.
10.8+ Loan and Security Agreement, dated July 15, 1997, among FBS Ag
Credit, Inc., the Company, Horizon Organic Dairy, Inc. ("HOD"),
Horizon Organic Dairy, Maryland Farm, Inc., and Horizon Organic
Dairy, Idaho Farm, Inc., as amended by the First Amendment to Loan
and Security Agreement dated March 23, 1998, as amended by the Second
Amendment to the Loan and Security Agreement dated April 6, 1998.
10.9+ Form of Unsecured Subordinated Promissory Note, dated March 20, 1997
of the Company.
10.10+ Note and Stock Purchase Agreement, dated May 29, 1997, among the
Company and the Schedule of Purchasers attached thereto.
10.11+ 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.
10.12+ Asset Purchase Agreement, dated as of April 8, 1998, between the
Company and Worcester Creameries Corp.
10.13+ Amended Executive Employment Agreement, effective January 1, 1998,
between the Company and Barnet Feinblum.
10.14+ Amended Executive Employment Agreement, effective January 1, 1998,
between the Company and Mark A. Retzloff.
10.15+ Amended Executive Employment Agreement, effective January 1, 1998,
between the Company and Paul Repetto.
10.16+ 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.
10.17 Stock Purchase Agreement, dated as of June 5, 1998, between the
Company and Suiza Foods Corporation ("Suiza").
10.18 Stockholder Agreement, dated as of June 5, 1998, between the Company
and Suiza.
11.1+ Statement re: computation of per share earnings.
21.1+ Statement re: subsidiaries of the Company.
23.1+ Consent of Cooley Godward llp (included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Eide Helmeke PLLP.
23.4+ Consent of Ober, Kaler, Grimes & Shriver.
24.1+ Power of Attorney (included on page II-6).
27.1+ Financial Data Schedule.
99.1+ Report of Eide Bailly LLP
</TABLE>
- ---------------------
*To be filed by amendment.
+Previously filed
<PAGE>
EXHIBIT 4.2
[LOGO OF HORIZON ORGANIC HOLDING CORPORATION]
COMMON STOCK
COMMON STOCK
NUMBER
HCOW
SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTIONS ON SHARES
CUSIP 44043T 10 3
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR
VALUE, OF
HORIZON ORGANIC HOLDING CORPORATION
transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of
this Certificate properly endorsed. This Certificate is not valid
until countersigned by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[Don J. Gaidano]
Treasurer
[Seal]
[Barnet M. Feinblum]
President
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
By
Authorized Signature
<PAGE>
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the
Certificate of Incorporation of the Corporation and by any certificate
of determination, the number of shares constituting each class and series,
and the designations thereof, may be obtained by the holder hereof upon
request and without charge at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the
face of this certificate, shall be construed as though they were
written out in full according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with the right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT ___ Custodian____
(Cust) (Minor)
under Uniform Gifts to Minors
Act_______
(State)
UNIF TRF MIN ACT___Custodian (until age____)
(Cust)
_______under Uniform Transfers
(Minors)
to Minors Act_____________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,_____hereby sell(s), assign(s), and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF
ASSIGNEE
Shares of capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint______ Attorney,
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.3
HORIZON ORGANIC HOLDING CORPORATION
STOCK OPTION GRANT NOTICE
HORIZON ORGANIC HOLDING CORPORATION (the "Company"), pursuant to its 1998 Equity
Incentive Plan (the "Plan"), hereby grants to Optionee an option to purchase the
number of shares of the Company's common stock set forth below. This option is
subject to all of the terms and conditions as set forth herein and in
Attachments I, II, and III, which are incorporated herein in their entirety.
Optionee: ___________________________
Date of Grant: ___________________________
Vesting Commencement Date: ___________________________
Shares Subject to Option: ___________________________
Exercise Price Per Share: ___________________________
Expiration Date: ___________________________
TYPE OF GRANT: [] Incentive Stock Option [] Nonstatutory Stock Option
EXERCISE SCHEDULE: [Immediately exercisable.][Same as vesting schedule.]
VESTING SCHEDULE: [25%] vested on the [one year] anniversary of the Vesting
Commencement Date; [25%] vests on each annual anniversary
thereafter.
PAYMENT: By one or a combination of the checked items (as described in
section 6(c) of the Plan):
[] By cash or check [] Pursuant to a Regulation T program/1/
[] By delivery of already-owned shares [] By deferred payment provided that:
(i) At least ____ percent of the exercise price shall be due at the time
of exercise, representing the "par value" of the shares under Delaware
corporate law, at least ____ percent of the exercise price plus accrued
interest shall be due each anniversary of the date of exercise, with final
payment of the remainder of the exercise price, plus accrued interest, due
____ years from the date of exercise or, at the Company's election, upon
termination of your Continuous Service;
(ii) Interest shall be payable at least annually and shall be charged at
the minimum rate of interest necessary to avoid the treatment as interest,
under any applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), of any portion of any amounts other than amounts
stated to be interest under the deferred payment arrangement; and
(iii) To elect the deferred payment alternative, your written notice of
exercise must state that you are electing this payment alternative and, if
the Company so requests, you must tender to the Company a promissory note
and a security agreement covering the purchased shares, both in form and
substance satisfactory to the Company, or such other or additional
documentation as the Company may require.
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionee acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionee further acknowledges that as of the Date of
Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the
entire understanding between Optionee and the Company regarding the acquisition
of stock in the Company and supersede all prior oral and written agreements on
that subject with the exception of (i) options previously granted and delivered
to Optionee under the Plan, and (ii) the following agreements only:
OTHER AGREEMENTS: _____________________________________
_____________________________________
_____________________________________
HORIZON ORGANIC HOLDING CORPORATION OPTIONEE:
By:_______________________________ _____________________________________
Signature
Title:____________________________
Date:_____________________________ Date:________________________________
Attachment I: Stock Option Agreement
Attachment II: 1998 Equity Incentive Plan
Attachment III: Notice of Exercise
- -------------------
/1/ Exercise of an option pursuant to Regulation T, as promulgated by the
Federal Reserve Board, results in either the receipt of cash (or check) by the
Company or the receipt of irrevocable instructions to pay the aggregate exercise
price to the Company from the sales proceeds.
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION
STOCK OPTION AGREEMENT
Pursuant to the Grant Notice and this Stock Option Agreement, the Company
has granted you an option to purchase the number of shares of the Company's
common stock ("Common Stock") indicated in the Grant Notice at the exercise
price indicated in the Grant Notice. Defined terms not explicitly defined in
this Stock Option Agreement but defined in the Plan shall have the same
definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option will vest
as provided in the Grant Notice, provided that (i) vesting will accelerate and
your option will be fully excercisable upon the termination of your Continuous
Service due to death or Disability and (ii) vesting will cease upon the
termination of your Continuous Service for any other reason.
2. EXERCISE PRIOR TO VESTING. If permitted in the Grant Notice (i.e., the
"Exercise Schedule" indicates that your option is "Immediately exercisable"),
and subject to the provisions of this option, you may elect, at any time that is
both (i) during the period of your Continuous Service and (ii) during the term
of your option, to exercise all or part of your option, including the nonvested
portion of your option; provided, however, that:
(a) a partial exercise of your option shall be deemed to cover first
vested shares and then the earliest vesting installment of unvested shares;
(b) any shares so purchased from installments which have not vested as
of the date of exercise shall be subject to the purchase option in favor of the
Company as described in the Company's form of Early Exercise Stock Purchase
Agreement;
(c) you shall enter into the Company's form of Early Exercise Stock
Purchase Agreement with a vesting schedule that will result in the same vesting
as if no early exercise had occurred; and
(d) your option shall not be exercisable with respect to any unvested
installment to the extent such exercise would cause the aggregate fair market
value of any shares subject to incentive stock options granted you by the
Company (valued as of their grant date) which would become exercisable for the
first time during any calendar year to exceed $100,000.
3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of
the exercise price in any manner that is permitted by the Grant Notice.
4. WHOLE SHARES. Your option may only be exercised for whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, your option may not be exercised unless the shares issuable
upon exercise of your option are then registered under the Securities Act or, if
such shares are not then so registered, the Company has determined that such
exercise and issuance would be exempt from the registration requirements of the
Securities Act. The exercise of your option must also comply with other
applicable laws and regulations governing the option, and the option may not be
exercised if the Company determines that the exercise would not be in material
compliance with such laws and regulations.
6. TERM. The term of your option commences on the Date of Grant and expires
upon the earliest of:
<PAGE>
(a) the Expiration Date indicated in the Grant Notice;
(b) the tenth (10th) anniversary of the Date of Grant;
(c) twelve (12) months after your death, if you die during, or within
three (3) months after, the termination of your Continuous Service;
(d) twelve (12) months after the termination of your Continuous Service
due to Disability; or
(e) three (3) months after the termination of your Continuous Service
for any other reason, provided that if during any part of such three (3) month
period the option is not exercisable solely because of the condition set forth
in paragraph 5, in which event the option shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of Continuous Service.
To obtain the federal income tax advantages associated with an
"incentive stock option," the Code requires that at all times beginning on the
date of grant of the option and ending on the day three (3) months before the
date of the option's exercise, you must be an employee of the Company or an
Affiliate of the Company, except in the event of your death or Disability. The
Company has provided for extended exercisability of your option under certain
circumstances for your benefit, but cannot guarantee that your option will
necessarily be treated as an "incentive stock option" if you provide services to
the Company or an Affiliate of the Company as a Consultant or if you exercise
your option more than three (3) months after the date your employment with the
Company terminates.
7. EXERCISE.
(a) You may exercise the vested portion of your option (and the unvested
portion of your option if the Grant Notice so permits) during its term by
delivering a Notice of Exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require.
(b) By exercising your option you agree that:
(i) as a condition to any exercise of your option, the Company
may require you to enter an arrangement providing for the payment by you to the
Company of any tax withholding obligation of the Company arising by reason of
(1) the exercise of your option; (2) the lapse of any substantial risk of
forfeiture to which the shares are subject at the time of exercise; or (3) the
disposition of shares acquired upon such exercise;
(ii) you will notify the Company in writing within fifteen (15)
days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of an incentive stock option that occurs within two (2)
years after the date of your option grant or within one (1) year after such
shares of Common Stock are transferred upon exercise of your option; and
(iii) the Company (or a representative of the underwriters) may,
in connection with the first underwritten registration of the offering of any
securities of the Company under the Securities Act, require that you not sell,
dispose of, transfer, make any short sale of, grant any option for the purchase
of, or enter into any hedging or similar transaction with the same economic
effect as a sale, any shares of Common Stock or other securities of the Company
held by you, for a period of time specified by the underwriter(s) (not to exceed
one hundred eighty
<PAGE>
(180) days) following the effective date of the registration statement of the
Company filed under the Securities Act. You further agree to execute and
deliver such other agreements as may be reasonably requested by the Company
and/or the underwriter(s) which are consistent with the foregoing or which are
necessary to give further effect thereto. In order to enforce the foregoing
covenant, the Company may impose stop-transfer instructions with respect to your
Common Stock until the end of such period.
8. TRANSFERABILITY. Your option is not transferable, except by will or by the
laws of descent and distribution, and is exercisable during your life only by
you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment contract
and nothing in your option shall be deemed to create in any way whatsoever any
obligation on your part to continue in the employ of the Company or an
Affiliate, or of the Company or an Affiliate to continue your employment. In
addition, nothing in your option shall obligate the Company or an Affiliate of
the Company, or their respective stockholders, Board of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
10. NOTICES. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by the Company to you, five (5) days after deposit in
the United States mail, postage prepaid, addressed to you at the last address
you provided to the Company.
11. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of
the Plan, the provisions of which are hereby made a part of your option, and is
further subject to all interpretations, amendments, rules and regulations which
may from time to time be promulgated and adopted pursuant to the Plan. In the
event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION
1998 EQUITY INCENTIVE PLAN
NOTICE OF EXERCISE
Horizon Organic Holding Corporation
6311 Horizon Lane
Longmont, Colorado 80503 Date of Exercise: __________________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase the
number of shares for the price set forth below.
Type of option: ___ Incentive ___ Nonstatutory
Stock option dated: ___________________
Number of shares for
which option is exercised: ___________________
Certificates to be
issued in name of: ___________________
Total exercise price: $___________________
Cash payment delivered
herewith: $___________________
[Value of ______ shares of
stock delivered herewith/2/: $___________________]
[Promissory note delivered
herewith: $___________________]
By this exercise, I agree (i) to provide such additional documents as you may
require pursuant to the terms of the Company's 1998 Equity Incentive Plan, (ii)
to provide for the payment by me to you (in the manner designated by you) of
your withholding obligation, if any, relating to the exercise of the Option, and
(iii) to the extent the Option is an incentive stock option, to notify you in
writing within fifteen (15) days after the date of any disposition of any of the
shares of Common Stock issued upon exercise of this Option that occurs within
two (2) years after the date of grant of the Option or within one (1) year after
such shares of Common Stock are issued upon exercise of the Option.
I further agree that, if required by the Company (or a representative of the
underwriters) in connection with the first underwritten registration of the
offering of any securities of the Company under the Act, I will not to sell,
dispose of, transfer, make any short sale of, grant any option for the purchase
of, or enter into any hedging or similar transaction with the same economic
effect as a sale, any shares or other securities of the Company held by me, for
a period of time specified by the underwriter(s) (not to exceed one hundred
eighty (180) days) following the effective date of a registration statement of
the Company filed under the Act. I further agree
- -----------
/2/ Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.
<PAGE>
to execute and deliver such other agreements as may be reasonably requested by
the Company and/or the underwriter(s) which are consistent with the foregoing or
which are necessary to give further effect thereto. In order to enforce the
foregoing covenant, the Company may impose stop-transfer instructions with
respect to my shares until the end of such period.
Very truly yours,
---------------------------------------
<PAGE>
EXHIBIT 10.17
HORIZON ORGANIC HOLDING CORPORATION
----------------------------
STOCK PURCHASE AGREEMENT
----------------------------
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 5/th/ day of June, 1998
(the "Effective Date") by and among HORIZON ORGANIC HOLDING CORPORATION, a
Delaware corporation (the "Company"), and SUIZA FOODS CORPORATION, a Delaware
corporation ("Purchaser").
WHEREAS, Purchaser and the Company wish to form a strategic relationship,
which will include, among other things, an investment by Purchaser in the
Company;
WHEREAS, the Company has filed a registration statement with the Securities
and Exchange Commission with respect to the planned initial public offering
("IPO") of shares of its Common Stock; and
WHEREAS, the Purchaser is a "qualified institutional buyer" and wishes to
purchase from the Company up to one million one hundred thousand (1,100,000)
shares of its Common Stock in a transaction exempt from registration under the
Securities Act of 1933, as amended, such purchase to close immediately following
the closing of the IPO.
NOW, THEREFORE, the parties hereto agree as follows:
1. SALE OF SHARES; USE OF PROCEEDS
1.1 Sale of Shares. Subject to the terms and conditions hereof, at the
Closing (as hereinafter defined) the Company hereby agrees to issue and sell to
Purchaser and Purchaser agrees to purchase up to one million one hundred
thousand (1,100,000) shares of the Company's Common Stock (the "Shares") at a
price per share equal to the price at which the Company's Common Stock is sold
to the public in the IPO [less 50% of any discount granted to the Company's
underwriters]; provided that price to be paid by Purchaser shall in no event be
less than Eleven Dollars ($11.00) nor greater than Fifteen Dollars ($15.00) (the
"Purchase Price") and further provided, that the aggregate Purchase Price for
the Shares shall not exceed Fourteen Million Nine Hundred Thousand Dollars
($14,900,000). To the extent that the IPO price is in excess of Thirteen Dollars
Fifty-Four Cents ($13.54) then the number of Shares shall be reduced so that the
aggregate Purchase Price shall be no more than Fourteen Million Nine Hundred
Thousand Dollars ($14,900,000).
1.2 Use of Proceeds. The Company will use the proceeds from the sale of
the Shares to finance possible expansion of the Company's dairy facilities,
acquisitions or for working capital and general corporate purposes.
2.
<PAGE>
2. THE CLOSING
2.1 Closing Date. The closing of the purchase and sale of the Shares (the
"Closing") shall occur immediately after the closing of the IPO. The Company
will give Purchaser three (3) business days' notice of the date of the closing
(the "Closing Date"); provided that the Closing Date shall be no later than July
31, 1998. The Company will notify the Purchaser of the IPO price promptly after
it is determined by the Company's pricing committee.
2.2 Delivery. At the Closing (i) Purchaser will deliver to the Company a
check or wire transfer funds in the amount of the Purchase Price of the Shares
and (ii) the Company shall deliver a certificate representing the Shares,
registered in the name of Purchaser.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
Except as otherwise disclosed to the Purchaser in a letter delivered to
them prior to the execution hereof (which letter shall contain appropriate
references to identify the specific section herein to which the information in
such letter relates) ("Company Disclosure Letter"), the Company represents and
warrants to the Purchaser as of the date hereof as follows.
3.1 Organization and Standing; Certificate of Incorporation and Bylaws.
The Company is a corporation duly organized and existing under, and by virtue
of, the laws of the State of Delaware and is in good standing under such laws.
The Company has requisite corporate power and authority to own and operate its
properties and assets, and to carry on its business as presently conducted. The
Company is presently qualified to do business as a foreign corporation in any
foreign jurisdiction in which it does business and in which the failure to
qualify would have a materially adverse effect on the Company. The Company has
furnished the Purchaser with copies of its Certificate of Incorporation and
Bylaws, as amended, which copies are true, correct and complete and contain all
amendments as of the date hereof.
3.2 Corporate Power. The Company has all requisite legal and corporate
power and authority to execute and deliver this Agreement, to sell and issue the
Shares hereunder and to carry out and perform its obligations under the terms of
this Agreement.
3.3 Subsidiaries. Other than Horizon Organic Dairy, Inc., Horizon Organic
Dairy, Maryland Farm, Inc. and Horizon Organic Dairy, Idaho Farm, Inc.
(collectively, the "Subsidiaries"), the Company has no subsidiaries or
affiliated companies and does not otherwise own or control, directly or
indirectly, any equity interest in any corporation, association or business
entity. Horizon Organic Dairy, Inc. is duly organized and existing under, and by
virtue of, the laws of the State of Colorado and are in good standing under such
laws. Horizon Organic Dairy, Inc., Horizon Organic Dairy, Maryland Farm, Inc.
and Horizon Organic Dairy, Idaho Farm, Inc., the Subsidiaries, are duly
organized and qualified to do business as foreign corporations in any foreign
jurisdiction in which it does business and in which the failure to qualify would
have a materially adverse effect on the Company (the Company and the
Subsidiaries are hereinafter referred to collectively as the "Companies").
3.
<PAGE>
3.4 Capitalization. Effective as of the Closing, the authorized capital
stock of the Company shall consist of 30,000,000 shares of Common Stock, and
5,000,000 shares of Preferred Stock, $.001 par value per share. As of the
Closing, and assuming (i) the closing of the IPO, (ii) no exercise of the
underwriters' over-allotment offering in such IPO and (iii) no exercise of any
options or warrants after May 31, 1998, the number of shares of Common Stock
issued and outstanding will be 8,056,341, and no shares of Preferred Stock will
be issued or outstanding. The outstanding shares have been duly authorized and
validly issued, and are fully paid and non-assessable. Except as disclosed in
the Company Disclosure Letter, there are no options, warrants or other rights to
purchase any of the Company's authorized and unissued capital stock and,
further, there are no preemptive rights or rights of first refusal with respect
to the Company's capital stock or agreements which, through anti-dilution
protection or otherwise, obligate the Company to issue its capital stock.
3.5 Authorization. All corporate action on the part of the Company, its
directors and stockholders necessary for the authorization, execution, delivery
and performance of this Agreement by the Company, the authorization, sale,
issuance and delivery of the Shares and the performance of all of the Company's
obligations hereunder has been taken or will be taken prior to the Closing.
This Agreement, when executed and delivered by the Company, shall constitute a
valid and binding obligation of the Company, enforceable in accordance with its
terms, except as subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies. The Shares, when
issued in compliance with the provisions of this Agreement, will be validly
issued, will be fully paid and nonassessable and will be free of any liens or
encumbrances; provided, however that the Shares may be subject to restrictions
on transfer under the state and/or federal securities laws and the restrictions
in the Stockholder Agreement attached hereto as Exhibit A (the "Stockholder
Agreement").
3.6 Financial Statements. The Company has attached to the Disclosure
Letter its audited balance sheets and statements of operations as of and for the
fiscal years ended December 31, 1997, 1996 and 1995, and its unaudited balance
sheet and statement of operations as of March 31, 1998 (collectively the
"Financial Statements"). The Financial Statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") on a
consistent basis throughout the periods indicated, except for customary year-end
adjustments to the unaudited financial statements, and the Financial Statements
fairly present the Company's financial condition and operating results as of
their respective dates, and for the periods indicated.
3.7 No Material Adverse Change. Since March 31, 1998:
(a) The Companies have not entered into any material transaction
which was not in the ordinary course of its business except as contemplated by
this Agreement.
4.
<PAGE>
(b) There has been no material change in the condition (financial or
otherwise), business, property, assets or liabilities of the Companies other
than changes in the ordinary course of its business.
(c) There has been no damage to, destruction of or loss of physical
property (whether or not covered by insurance) materially adversely affecting
the business or operations of the Companies.
(d) There has been no resignation or termination of employment of any
officer or key employee of the Company, and the Company does not know of the
impending resignation or termination of employment of any officer or employee of
the Company, that would have a materially adverse effect on the business of the
Companies.
(e) There have been no loans made by the Companies to employees,
officers or directors, other than salary advances (not exceeding $10,000
outstanding in the aggregate at any one time), travel advances, office advances
and sales commission advances made in the ordinary course of business.
3.8 Title to Properties and Assets; Liens, Etc. The Companies have good
and marketable title to its properties (both real and personal) and assets, and
has good title to all its leasehold interests, in each case subject to no
mortgage, pledge, lien, lease, conditional sale agreement, security interest,
encumbrance or charge, other than (i) the lien of current taxes not yet due and
payable, (ii) possible minor liens and encumbrances which do not in any case
materially detract from the value of the property subject thereto or materially
impair the operations of the Companies, and which have not arisen otherwise than
in the ordinary course of business, and (iii) liens and encumbrances reflected
in the Financial Statements.
3.9 Material Liabilities. Except as described in the Financial
Statements, the Company does not have any material obligations or liabilities
(whether accrued, absolute or contingent) other than (i) obligations or
liabilities incurred in the ordinary course of business since March 31, 1998,
and (ii) obligations or liabilities not required to be described in the
Financial Statements (including the notes thereto) under GAAP.
3.10 Patents and Other Intangible Assets.
(a) The Company (i) owns or has the right to use, free and clear of
all liens, claims and restrictions, all patents, trademarks, service marks,
trade names, copyrights, licenses and rights with respect to the foregoing, used
in the conduct of its business as now conducted or as proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any person under or with respect to any of the foregoing, and (ii) is
not obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner of, licensor of, or other claimant to,
any patent, trademark, trade name, copyright or other intangible asset, with
respect to the use thereof or in connection with the conduct of its
5.
<PAGE>
business or otherwise. All patents, registered trademarks and registered
copyrights (or applications therefor) owned by the Company are listed in the
Company Disclosure Letter.
(b) To the best of its knowledge, the Company owns and has the
unrestricted right to use all trade secrets required for or incident to the
development, processing and sale of all products sold by the Company, free and
clear of any rights, liens or claims of others, including without limitation,
former employers of all employees of the Company.
3.11 Material Contracts and Commitments. All material contracts,
agreements and instruments to which the Company is a party are valid, binding
and in full force and effect in all material respects, and are valid, binding
and enforceable by the Company in accordance with their respective terms,
subject to the laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and rules of law governing specific performance,
injunctive relief or other equitable remedies. Each such material contract,
agreement and instrument has been listed in the Company Disclosure Letter.
3.12 Compliance with Other Instruments, None Burdensome, Etc. The
Companies are not in violation of any material term or provision of any material
mortgage, indebtedness, indenture, contract, agreement, instrument, judgment or
decree, and, to the best of its knowledge, is not in violation of any order,
statute, rule or regulation applicable to the Companies, the violation of which
would have a material adverse effect on the Companies or their operations. The
execution, delivery and performance of and compliance with this Agreement, and
the issuance of the Shares have not resulted and will not result in any
violation of, or conflict with, or constitute a default under, any of the terms
of any corporate restriction or of any indenture, mortgage, deed of trust,
pledge, bank loan or credit agreement, corporate charter, bylaw or any
instrument, document or agreement by which the Companies or their properties may
be bound or affected, or result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Companies.
3.13 Litigation, Etc. There are no actions, suits, proceedings or
investigations pending or, to the best of its knowledge, threatened against the
Companies or their properties before any court or governmental agency which,
either individually or in the aggregate, might result in any material adverse
change in the business or financial condition of the Companies or any of their
properties or assets, or in any material impairment of the right or ability of
the Companies to carry on their business as now conducted or as proposed to be
conducted, or in any material liability on the part of the Companies, or which
question the validity of this Agreement or any action taken or to be taken in
connection herewith.
3.14 Employees. To the best of the Companies' knowledge, after reasonable
investigation, no employee of the Companies is in violation of any term of any
employment contract, patent disclosure agreement or any other contract or
agreement relating to the relationship of any such employee with the Companies
or any other party because of the nature
6.
<PAGE>
of the business conducted or to be conducted by the Companies. The Companies do
not have any collective bargaining agreements covering any of its employees.
3.15 Insurance. The Company has fire and casualty insurance policies,
with extended coverage, which, to the best of its knowledge, is sufficient in
amount to allow it to replace any of its properties which might be damaged or
destroyed. The Company also has insurance sufficient in amount to replace any
income lost due to the interruption of its operations as a result of riot, fire,
flood or other act of God.
3.16 Governmental Consent, Etc. No consent, approval or authorization of
or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of this Agreement, or the offer, sale or issuance of the Shares, except
for the qualification (or taking such action as may be necessary to secure an
exemption from qualification, if available) of the offer and sale of the Shares
under applicable Blue Sky laws, which filings and qualifications, if required,
will be accomplished in a timely manner prior to or promptly upon the completion
of the Closing.
3.17 Company Transactions with its Officers, Directors or Stockholders.
The Companies are not indebted, either directly or indirectly, to any of its
officers, directors or stockholders or to their respective spouses or children,
in any amount whatsoever, other than for payment of salary for services rendered
and reasonable expenses. None of the Company's officers, directors or
stockholders or any members of their immediate families is indebted to the
Company, nor do any officers, directors or, to the best of the knowledge of the
Company, stockholders have any direct or indirect ownership interests in any
firm or corporation which controls, is controlled by or under common control
with the Company or which competes with the Company, or with which the Company
has a material supplier or customer relationship, except with respect to any
aggregate interest in less than five percent (5%) of the stock of any
corporation whose stock is publicly traded. No officer, director or stockholder
or any member of their immediate families is, directly or indirectly, interested
in any material contract with the Company. The Companies are not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.
3.18 Taxes Paid. The Company has timely filed, or has obtained extensions
with respect to, all tax returns that are required to have been filed by it with
appropriate federal, state, county and local governmental agencies or
instrumentalities. The Company has paid or established reserves for all income,
franchise, payroll and other taxes due as reflected on those returns. There is
no pending dispute with any taxing authority relating to any of the Company's
returns. The Company has no knowledge of any proposed material liability for
any tax to be imposed upon its properties or assets for which there is not an
adequate reserve reflected in the Financial Statements. No federal or state
income or sales tax returns of the Company have been audited.
7.
<PAGE>
3.19 Offering. Subject to the accuracy of the Purchaser's representations
in Section 4 hereof, the offer, sale and issuance of the Shares to be issued in
conformity with the terms of this Agreement constitute transactions exempt from
the registration requirements of Section 5 of the Securities Act and applicable
Blue Sky laws.
3.20 Brokers and Finders. The Company has not incurred, and will not
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.21 Disclosure. No representation or warranty of the Company contained in
this Agreement and any exhibit attached hereto, or any written statement or
certificate furnished or to be furnished to the Purchaser pursuant hereto or in
connection with the transactions contemplated hereby (when read together)
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made.
3.22 Environmental Laws. The Companies are in compliance in all material
respects with all applicable Environmental Laws (as defined below), which
compliance includes the possession by the Companies of all permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof. The Companies have not
received any notice or other communication that alleges that the Companies are
not in compliance with any Environmental Law. To the best of their knowledge,
the Companies have not disposed of, emitted, discharged, handled, stored,
transported, used or released any Materials of Environmental Concern (as defined
below) so as to give rise to any material liability or material corrective or
remedial obligation under any Environmental Laws. "Environmental Law" means any
federal, state or local law relating to pollution or protection of human health
or the environment, including any law or regulation relating to emissions,
discharges, releases or threatened release of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern. "Materials of Environmental Concern" include chemicals,
pollutants, contaminants, wastes, toxic substances, petroleum and petroleum
products and any other substance that is regulated by any Environmental Law.
3.23 Further Assurances. The Company agrees and covenants that at any time
and from time to time it will promptly execute and deliver to the Purchaser such
further instruments and documents and take such further action as the Purchaser
may reasonably require in order to carry out the full intent and purpose of this
Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company with respect to
the purchase of the Shares as follows:
8.
<PAGE>
4.1 Experience. It is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests.
4.2 Ability to Bear Economic Risk. The Purchaser acknowledges that
investment in the Shares involves a high degree of risk, and represents that it
is able, without materially impairing its financial condition, to hold the
Shares for an indefinite period of time and to suffer a complete loss of its
investment.
4.3 Investment. It is acquiring the Shares for investment for its own
account, not as a nominee or agent, and not with the view to, or for resale in
connection with, any distribution thereof. It understands that the Shares have
not been, and will not be when issued, sold or transferred, registered under the
Securities Act by reason of a specific exemption from the registration
provisions of the Securities Act, the availability of which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the Purchaser's representations as expressed herein. Purchaser was not formed
solely for the purpose of acquiring the Shares.
4.4 Rule 144. It acknowledges that the Shares must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from such registration is available. It acknowledges and understands that the
provisions of Rule 144 promulgated under the Securities Act which permit limited
resale of shares purchased in a private placement subject to the satisfaction of
certain conditions, including, among other things, the existence of a public
market for the Shares, the availability of certain current public information
about the Company, the resale occurring not less than one year after a party has
purchased and paid for the security to be sold, the sale being effected through
a "broker's transaction" or in transactions directly with a "market maker" and
the number of shares being sold during any three-month period not exceeding
specified limitations, and it agrees to comply fully with such provisions as in
effect from time to time.
4.5 No Public Market. It understands that no public market now exists for
any securities issued by the Company nor will one be created prior to the
Closing.
4.6 Access to Data. It has had an opportunity to discuss the Company's
business, management and financial affairs with the Company's management and the
opportunity to review the Company's business plan. The Purchaser acknowledges
that it has received all the information it has requested from the Company and
it considers necessary or appropriate for deciding whether to acquire the
Shares. The Purchaser represents that it has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of the Shares and to obtain any additional
information necessary to verify the accuracy of the information given the
Purchaser.
4.7 Authorization. All action (corporate or partnership, as appropriate)
on the part of the Purchaser necessary for the authorization, execution,
delivery and performance of this Agreement by Purchaser and the performance of
all of the Purchaser's obligations hereunder has
9.
<PAGE>
been taken or will be taken prior to the Closing. This Agreement when executed
and delivered by the Purchaser will constitute a valid and legally binding
obligation of the Purchaser, enforceable in accordance with its terms, and
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies.
4.8 Compliance with Other Instruments. The execution, delivery and
performance of and compliance with this Agreement, and the issuance of the
Shares have not resulted and will not result in any violation of, or conflict
with, or constitute a default under, any of the terms of any corporate or
partnership restriction or of any indenture, mortgage, deed of trust, pledge,
bank loan or credit agreement, corporate charter, bylaw or any instrument,
document or agreement by which the Purchaser or its properties may be bound or
affected, or result in the creation of any mortgage, pledge, lien, encumbrance
or charge upon any of the properties or assets of the Purchaser.
4.9 Governmental Consent, Etc. No consent, approval or authorization of
or designation, declaration or filing with any governmental authority on the
part of the Purchaser is required in connection with the valid execution and
delivery of this Agreement, or the offer, sale or issuance of the Shares, except
for the qualification (or taking such action as may be necessary to secure an
exemption from qualification, if available) of the offer and sale of the Shares
under applicable Blue Sky laws, which filings and qualifications, if required,
will be accomplished in a timely manner prior to or promptly upon the completion
of the Closing.
4.10 Further Limitations on Disposition. Without in any way limiting the
representations set forth above, the Purchaser further agrees not to make any
disposition of all or any portion of the Shares unless and until:
(a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) The Purchaser shall have notified the Company of the proposed
disposition and shall have furnished the Company with a reasonably detailed
statement of the circumstances surrounding the proposed disposition and, if
reasonably requested by the Company, the Purchaser shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration under the Securities Act or any
applicable state securities laws.
4.11 Accredited Investor; Qualified Institutional Buyer. The Purchaser is
an "accredited investor" as such term is defined in Rule 501 under the
Securities Act or a "qualified institutional buyer" as such term is defined in
Rule 144A under the Securities Act.
4.12 Further Assurances. The Purchaser agrees and covenants that at any
time and from time to time it will promptly execute and deliver to the Company
such further instruments
10.
<PAGE>
and documents and take such further action as the Company may reasonably require
in order to carry out the full intent and purpose of this Agreement.
5. CONDITIONS TO CLOSING OF COMPANY
The Company's obligation to sell and issue the Shares at the Closing Date
is, at the option of the Company, subject to the fulfillment as of the Closing
Date of the following conditions:
5.1 Representations. The representations and warranties made by Purchaser
in Section 4 hereof shall be true and correct when made, and shall be true and
correct in all material respects as of the Closing Date.
5.2 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Purchaser on or prior to the Closing Date shall
have been performed or complied with in all material respects.
5.3 Legal Matters. All material matters of a legal nature which pertain
to this Agreement, and the transactions contemplated hereby, shall have been
reasonably approved by counsel to the Company.
5.4 Stockholder Agreement. The parties shall have entered into the
Stockholder Agreement.
5.5 Processing and Distribution Agreements. The Company shall have
entered into Processing and Distribution Agreements with the following
affiliates of the Purchaser: Model Dairy and Garelick Farms.
5.6 Lock-Up Agreement. Purchaser shall have entered into a Lock-Up
Agreement in the form attached hereto as Exhibit C.
5.7 Closing of IPO. The Company shall have closed the IPO.
5.8 Major Stockholder Agreement. Suiza and the certain stockholders of
the Company shall have entered into the Major Stockholder Agreement attached
hereto as Exhibit D (the "Major Stockholder Agreement").
5.9 Board and Stockholder Approval. The Board of Directors shall have
ratified the Stock Purchase Agreement and the Stockholder Agreement and the
Company shall have obtained stockholder approval of an Amendment to the
Certificate of Incorporation to increase the authorized capital stock of the
Company.
11.
<PAGE>
6. CONDITION TO CLOSING OF PURCHASER.
The Purchaser's obligation to purchase the Shares at the Closing is subject
to the fulfillment as of the Closing Date of the following conditions:
6.1 Representations. The representations and warranties made by the
Company in Section 3 hereof shall be true and correct when made, and shall be
true and correct in all material respects as of the Closing Date.
6.2 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with in all material respects.
6.3 Legal Matters. All material matters of a legal nature which pertain
to this Agreement, and the transactions contemplated hereby, shall have been
reasonably approved by counsel to the Purchaser. Purchaser shall have received
from Cooley Godward llp, counsel to the Company, an opinion letter substantially
in the form attached hereto as Exhibit B addressed to them, dated as of the date
of the Closing.
6.4 Stockholder Agreement. The parties shall have entered into the
Stockholder Agreement.
6.5 Closing of IPO. The Company shall have closed the IPO with an IPO
price to the public of at least $9.00 per share.
6.6 Major Stockholder Agreement. Suiza and the certain stockholders of
the Company shall have entered into the Major Stockholder Agreement.
7. MISCELLANEOUS
7.1 Governing Law. This Agreement shall be governed and construed in all
respects by the laws of the State of Delaware, as applied to agreements among
Delaware residents, made and to be performed entirely within the State of
Delaware.
7.2 Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the Purchaser and the
closing of the transactions contemplated hereby. All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.
7.3 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors
12.
<PAGE>
and administrators of the parties hereto, provided, however, that the right and
obligation of the Purchaser to purchase the Shares shall not be assignable
without the consent of the Company.
7.4 Entire Agreement; Amendment. This Agreement and the other documents
delivered pursuant hereto at the Closing constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
7.5 Notices, Etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to the Purchaser, at the Purchaser's address set forth on the
signature page hereto, or at such other address as the Purchaser shall have
furnished to the Company in writing, or (b) if to the Company, one copy to its
address set forth on the signature page of this Agreement and addressed to the
attention of the President, or at such other address as the Company shall have
furnished to the Purchaser. Notices may also be sent by telecopier, with a
confirmation copy by certified or registered mail.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid, or
upon electronic confirmation of receipt if sent by telecopier.
7.6 Delays or Omissions. Except as expressly provided herein, no delay or
omission to exercise any right, power or remedy accruing to any holder of any
Shares, upon any breach or default of the Company under this Agreement, shall
impair any such right, power or remedy of such holder nor shall it be construed
to be a waiver of any such breach or default, or an acquiescence therein, or
waiver of or acquiescence in any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any holder of any
breach or default under this Agreement, or any waiver on the part of any holder
of any provisions or conditions of this Agreement, must be in writing and be
executed by the party to be bound thereby, and shall be effective only to the
extent specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any holder, shall be cumulative and
not alternative.
7.7 Counterparts. This Agreement may be executed in counterparts, each of
which shall be enforceable against the party actually executing such
counterpart(s), and all of which together shall constitute one instrument.
13.
<PAGE>
7.8 Severability. In the event that any provisions of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provisions; provided, that no such severability shall be effective
if it materially changes the economic benefit of this Agreement to any party.
7.9 Title and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not considered in construing or
interpreting this Agreement.
7.10 Arbitration. Except as provided below, any and all disputes arising
under or related to this Agreement which cannot be resolved through negotiations
between the parties shall, at the election of either party, be submitted to
binding arbitration. If the parties fail to reach a settlement of their dispute
within fifteen (15) days after the earliest date upon which one of the parties
notified the other(s) of its desire to attempt to resolve the dispute, the
dispute shall, at the election of either party, be promptly submitted to
arbitration. A single arbitrator shall be selected by mutual agreement of the
parties. If the parties are unable to agree on the selection of a single
arbitrator, then each party shall select an arbitrator and the two selected
arbitrators shall together select a third mutually agreeable arbitrator. The
decision of the arbitrator(s) shall be final, nonappealable and binding upon the
parties, and it may be entered in any court of competent jurisdiction. The
arbitration shall take place in Denver or Boulder, Colorado, as the arbitrator
shall determine. The arbitrator(s) shall be bound by the laws of the State of
Delaware applicable to the issues involved in the arbitration and all rules
relating to the admissibility of evidence, including, without limitation, all
relevant privileges and the attorney work product doctrine. All discovery shall
be completed in accordance with the time limitations prescribed in the Colorado
Rules of Civil Procedure, unless otherwise agreed by the parties or ordered by
the arbitrators on the basis of strict necessity adequately demonstrated by the
party requesting an extension of time. The arbitrator(s) shall have the power
to grant equitable relief where applicable under Delaware law, and shall be
entitled to make an award of punitive damages when applicable under Delaware
law. The arbitrator(s) shall issue a written opinion setting forth their
decision and the reasons therefor within thirty (30) days after the arbitration
proceeding is concluded. The obligation of the parties to submit any dispute
arising under or related to this Agreement to arbitration as provided in this
Section shall survive the expiration or earlier termination of this Agreement.
Notwithstanding the foregoing, either party may seek and obtain an injunction or
other appropriate relief from a court to preserve or protect trademarks,
tradenames, copyrights, patents, trade secrets or other intellectual property or
proprietary information or to preserve the status quo with respect to any matter
pending conclusion of the arbitration proceeding, but no such application to a
court shall in any way be permitted to stay or otherwise impede the progress of
the arbitration proceeding. In the event of any arbitration or litigation being
filed or instituted between the parties concerning this Agreement, the
prevailing party will be entitled to receive from the other party or parties its
reasonable attorneys' fees, witness fees, costs and expenses, court costs and
other reasonable expenses (including administration and the arbitrator's fees),
whether or not such controversy, claim or action is prosecuted to judgment or
other form of relief.
14.
<PAGE>
7.11 Best of Knowledge; Knowledge. Information shall be deemed to be known
to the "best of knowledge" or to the "knowledge" of a party if that information
was actually known or reasonably should have been known by an executive officer
of such party.
In the event of any arbitration or litigation being filed or instituted
between the parties concerning this Agreement, the prevailing party will be
entitled to receive from the other party or parties its reasonable attorneys'
fees, witness fees, costs and expenses, court costs and other reasonable
expenses (including administration and the arbitrator's fees), whether or not
such controversy, claim or action is prosecuted to judgment or other form of
relief.
7.12 Further Assurances and Cooperation. From and after the Effective
Date, the parties agree to use their best efforts to satisfy the Closing
Conditions set forth in Sections 5 and 6 above.
IN WITNESS WHEREOF, the parties have executed this Stock Purchase Agreement
as of the date first written above.
COMPANY:
HORIZON ORGANIC HOLDING CORPORATION
By: /s/ Barnet M. Feinblum
-----------------------------------------
President and Chief Executive Officer
Address: 6311 Horizon Lane
Longmont, Colorado 80503
PURCHASER:
SUIZA FOODS CORPORATION
By: /s/ Tracy L. Noll
------------------------------
Name: Tracy L. Noll
----------------------------
Title: Executive Vice President
---------------------------
Address: 3811 Turtle Creek Boulevard
Suite 1300
Dallas, Texas 75219
15.
<PAGE>
EXHIBITS
Exhibit A: Stockholder Agreement
Exhibit B: Opinion of Cooley Godward LLP
Exhibit C: Lock-Up Agreement
Exhibit D: Major Stockholder Agreement
<PAGE>
EXHIBIT B TO STOCK PURCHASE AGMT.
[LETTERHEAD OF COOLEY GODWARD LLP APPEARS HERE]
June , 1998
Suiza Foods Corporation
3811 Turtle Creek Boulevard
Suite 1300
Dallas, TX 75219
We have acted as counsel for Horizon Organic Holding Corporation, a Delaware
corporation (the "Company"), in connection with the issuance and sale of up to
1,100,000 shares of the Company's Common Stock (the "Shares"), to you under the
Stock Purchase Agreement dated as of June 5, 1998 (the "Agreement"). We are
rendering this opinion pursuant to Section 6.3 of the Agreement. Except as
otherwise defined herein, capitalized terms used but not defined herein have the
respective meanings given to them in the Agreement.
In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Agreement by the various parties and originals or copies
certified to our satisfaction, of such records, documents, certificates,
opinions, memoranda and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinion expressed below. Where we render
an opinion "to the best of our knowledge" or concerning an item "known to us" or
our opinion otherwise refers to our knowledge, it is based solely upon (i) an
inquiry of attorneys within this firm who perform legal services for the
Company, (ii) receipt of a certificate executed by an officer of the Company
covering such matters, and (iii) such other investigation, if any, that we
specifically set forth herein.
In rendering this opinion, we have assumed: the genuineness and authenticity of
all signatures on original documents; the authenticity of all documents
submitted to us as originals; the conformity to originals of all documents
submitted to us as copies; the accuracy, completeness and authenticity of
certificates of public officials; and the due authorization, execution and
delivery of all documents (except the due authorization, execution and delivery
by the Company of the Agreement and the Stockholder Agreement dated as of June
5, 1998 and the Major Stockholder Agreement dated as of June __, 1998 (the
Stockholder Agreement and the Major Stockholder Agreement, collectively, the
"Rights Agreements")) (the Agreement and the Rights Agreements are collectively
referred to herein as the "Agreements"), where authorization, execution and
delivery are prerequisites to the effectiveness of such documents. We have also
assumed: that all individuals executing and delivering documents had the legal
capacity to so execute and deliver; that you have received all documents you
were to receive under the Agreement; that the Agreements are an obligation
binding upon you; if you are a corporation or other entity, that you have filed
any required Colorado income tax returns and have paid any required Colorado
franchise or income taxes; and that there are no extrinsic agreements or
understandings among
<PAGE>
Cooley Godward LLP
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Suiza Foods Corporation
June , 1998
Page Two
the parties to the Agreements that would modify or interpret the terms of the
Agreements or the respective rights or obligations of the parties thereunder.
Our opinion is expressed only with respect to the federal laws of the United
States of America, the laws of the State of Colorado and the General Corporation
Law of the State of Delaware. We express no opinion as to whether the laws of
any particular jurisdiction apply, and no opinion to the extent that the laws of
any jurisdiction other than those identified above are applicable to the subject
matter hereof. We are not rendering any opinion as to compliance with any
antifraud law, rule or regulation relating to securities, or to the sale or
issuance thereof.
With regard to our opinion in paragraph 4 below, we have examined and relied
upon a certificate executed by an officer of the Company, to the effect that the
consideration for all outstanding shares of capital stock of the Company was
received by the Company in accordance with the provisions of the applicable
Board of Directors resolutions and any plan or agreement relating to the
issuance of such shares, and we have undertaken no independent verification with
respect thereto.
With regard to our opinion in paragraph 6 below with respect to material
defaults under any material agreement known to us, we have relied solely upon
(i) inquiries of officers of the Company, (ii) a list supplied to us by the
Company of material agreements to which the Company is a party, or by which it
is bound, which is the same as that set forth in the Company Disclosure Letter
to the Agreement, and (iii) an examination of the items on the aforementioned
list; we have made no further investigation.
On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:
1. The Company has been duly incorporated and is a validly existing corporation
in good standing under the laws of the State of Delaware.
2. The Company has the requisite corporate power to own or lease its property
and assets and to conduct its business as it is currently being conducted,
is qualified as a foreign corporation to do business in Colorado and, to the
best of our knowledge, is not required to qualify as a foreign corporation
to do business in any other jurisdiction in the United States where the
failure to so qualify would have a material adverse effect on the Company,
its assets, financial condition or operations.
3. The Subsidiaries are duly organized and existing under, and by virtue of,
the laws of the State of Colorado and are in good standing under such laws.
The Subsidiaries are duly organized and qualified to do business as foreign
corporations in any foreign jurisdiction in which it does business and in
which the failure to qualify would have a materially adverse effect on the
Company.
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Cooley Godward LLP
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Suiza Foods Corporation
June , 1998
Page Three
4. The Agreements have been duly and validly authorized, executed and delivered
by the Company and constitute valid and binding agreements of the Company
enforceable against the Company in accordance with their terms, except as
rights to indemnity under Section 10.8 of the Stockholder Agreement may be
limited by applicable laws and except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium
or other similar laws affecting creditors' rights, and subject to general
equity principles and to limitations on availability of equitable relief,
including specific performance.
5. The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, $0.001 par value, 8,056,341 shares of which are issued and
outstanding, and 5,000,000 shares of Preferred Stock, $0.001 par value, none
of which are issued and outstanding. The outstanding shares of Common Stock
have been duly authorized and validly issued and are fully paid and
nonassessable. The Shares have been duly authorized, and upon issuance and
delivery against payment therefor in accordance with the terms of the
Agreement, the Shares will be validly issued, outstanding, fully paid and
nonassessable. To the best of our knowledge, there are no options, warrants,
conversion privileges, preemptive rights or other rights presently
outstanding to purchase any of the authorized but unissued capital stock of
the Company, other than the rights created under the Agreements, and except
as set forth on the Company Disclosure Letter to the Agreement.
6. The execution and delivery of the Agreements by the Company and the issuance
of the Shares pursuant thereto do not violate any provision of the Company's
Amended and Restated Certificate of Incorporation or Amended and Restated
Bylaws, and do not constitute a material default under the provisions of any
material agreement as set forth in the Company Disclosure Letter, except as
set forth in the Company Disclosure Letter, and do not violate or contravene
(a) any governmental statute, rule or regulation applicable to the Company
or (b) any order, writ, judgment, injunction, decree, determination or award
which has been entered against the Company and of which we are aware, the
violation or contravention of which would materially and adversely affect
the Company, its assets, financial condition or operations.
7. To the best of our knowledge, there is no action, proceeding or
investigation pending or overtly threatened against the Company before any
court or administrative agency that questions the validity of the Agreements
or might result, either individually or in the aggregate, in any material
adverse change in the assets, financial condition, or operations of the
Company.
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Cooley Godward LLP
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Suiza Foods Corporation
June , 1998
Page Four
This opinion is intended solely for your benefit and is not to be made available
to or be relied upon by any other person, firm, or entity without our prior
written consent.
Very truly yours,
COOLEY GODWARD LLP
DRAFT
By:
---------------------------
James C.T. Linfield
<PAGE>
EXHIBIT C TO STOCK PURCHASE AGMT.
_______ __, 1998
Hambrecht & Quist LLC
Piper Jaffray Inc.
Hanifen, Imhoff Inc.
As Representatives of the
Several Underwriters
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, California 94104
Ladies and Gentlemen:
The undersigned has entered into an agreement to purchase shares of Horizon
Organic Holding Corporation (the "Company") and wishes to facilitate the public
offering (the "Offering") of Common Stock of the Company ("Common Stock")
pursuant to a Registration Statement on Form S-1 (the "Registration Statement")
to be transmitted for filing with the Securities and Exchange Commission on or
about April 29, 1998.
In consideration of the foregoing, and in order to induce you to act as
underwriters in the Offering, the undersigned hereby irrevocably agrees that it
will not, directly or indirectly, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise dispose
of any shares of Common Stock or any securities convertible into or exchangeable
or exercisable for or any other rights to purchase or acquire Common Stock,
without the prior written consent of Hambrecht & Quist LLC acting alone or of
each of the Representatives of the Underwriters acting jointly, for a period of
180 days from the effective date of the Registration Statement.
Notwithstanding the foregoing, if the undersigned is an individual, he or she
may transfer any shares of Common Stock or securities convertible into or
exchangeable or exercisable for the Company's Common Stock either during his or
her lifetime or on death by will or intestacy to his or her immediate family or
to a trust the beneficiaries of which are exclusively the undersigned and/or a
member or members of his or her immediate family; provided, however, that prior
to any such transfer each transferee shall execute an agreement, satisfactory to
Hambrecht & Quist LLC, pursuant to which each transferee shall agree to receive
and hold such shares of Common Stock, or securities convertible into or
exchangeable or exercisable for the Common Stock, subject to the provisions
hereof, and there shall be no further transfer except in accordance with the
provisions hereof. For the purposes of this paragraph, "immediate family" shall
mean spouse, lineal descendant, father, mother, brother or sister of the
transferor.
The undersigned hereby waives any rights of the undersigned to sell shares of
Common Stock or any other security issued by the Company pursuant to the
Registration Statement, and acknowledges and agrees that for a period of 180
days from the effective date of the Registration
<PAGE>
Hambrecht & Quist
Piper Jaffray Inc.
Hanifen, Imhoff Inc.
Page 2
Statement the undersigned has no right to require the Company to register under
the Securities Act of 1933 such Common Stock or other securities issued by the
Company and beneficially owned by the undersigned.
The undersigned understands that the agreements of the undersigned are
irrevocable and shall be binding upon the undersigned's heirs, legal
representatives, successors and assigns. The undersigned agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent
against the transfer of Common Stock or other securities of the Company held by
the undersigned except in compliance with this agreement.
Very truly yours,
Dated:
------------------ ------------------------------------
Signature
------------------------------------
Printed Name and Title
2.
<PAGE>
EXHIBIT D TO STOCK PURCHASE AGMT.
MAJOR STOCKHOLDER AGREEMENT
This Major Stockholder Agreement (the "Agreement") is made as of the _____
day of June, 1998 ("Effective Date") by and among Suiza Foods Corporation, a
Delaware corporation ("Suiza"), and the investors on Exhibit A attached hereto
---------
(collectively the "Major Stockholder").
RECITALS
WHEREAS, Suiza and Horizon Organic Holding Corporation, a Delaware
corporation ("Horizon") are entering into a Stock Purchase Agreement of even
date herewith (the "Purchase Agreement") pursuant to which, among other things,
Suiza is purchasing up to 1,100,000 shares of Horizon's Common Stock;
WHEREAS, as a condition to closing the Purchase Agreement, Suiza desires
that the Major Stockholders enter into this Agreement; and
WHEREAS, as significant investors in Horizon, the Major Stockholders
believe that he or she is in the best interest of Horizon to enter into the
Purchase Agreement and he or she is expected that the Major Stockholders will
personally benefit from the investment of Suiza in Horizon.
NOW, THEREFORE, as inducement to Suiza to proceed with the Closing (as
defined in the Purchase Agreement) and in consideration of such Closing and of
the mutual covenants and agreements contained herein and in the Purchase
Agreement and for other good and valuable consideration hereby acknowledged,
intending to be legally bound, the parties hereto do hereby agree as follows:
1. Right of First Negotiation. Each Major Stockholder hereby grants Suiza a
right of first negotiation to acquire any of its shares of Horizon Common
Stock (the "Shares") which he or she holds as of the date of this Agreement,
or which he or she acquires upon exercise of options or warrants outstanding
as of the date of this Agreement, and which he or she intends to sell in
private resale. In such event, the Major Stockholder will notify Suiza and
Suiza will have ten (10) days from the receipt of such notice to notify the
Major Stockholder that Suiza desires to acquire the Shares. If Suiza does
not so elect, or if Suiza does not respond within such ten (10) day period,
or if the Major Stockholder and Suiza do not enter into a definitive
agreement for such acquisition within ten (10) days after the Major
Stockholder's receipt of Suiza's election, then the Major Stockholder shall
be free to negotiate with any third party for the sale of the Shares and to
sell the Shares to any third party. This Right of First Negotiation will not
apply to (i) transfers by a Major Stockholder to family members or
affiliates, or any registered transaction or any transaction which is exempt
from registration, such as a sale pursuant to Rule 144 of the Securities Act
of 1933, as amended (the "Securities Act").
2. Voting Agreement. For so long as Suiza is entitled to have a representative
on the Board of Directors pursuant to the terms of the Stockholders
Agreement between Horizon and Suiza effective June 5, 1998 (the "Stockholder
Agreement"), each Major Stockholder hereby agrees to take such action as may
be required so that all of its Shares are voted for Suiza's
1.
<PAGE>
designee representative on the Board of Directors of Horizon at such time as
the Suiza representative on the Board of Directors of Horizon is being
considered for election. In that regard, the Major Stockholder shall be
present, in person or by proxy, at all duly held meetings of stockholders of
Horizon so that all of its Shares may be counted for the purposes of
determining the presence of a quorum at such meetings. The Major Stockholder
shall not subject any of its Shares to any arrangement or agreement with
respect to the voting of such shares which is inconsistent with the
foregoing obligations.
3. Sale of Shares to Suiza Competitors. In the event that a Stockholder
competitor offers to buy Shares from a Major Stockholder, the Major
Stockholder will notify Suiza of the material terms of such offer within ten
(10) days of the receipt of such offer (the "Notice"). Suiza shall have ten
(10) days from the receipt of such notice to notify the Major Stockholder
that Suiza desires to buy such Shares on such terms. If Suiza does not so
elect, or if Suiza does not respond within such ten (10) day period, or if
the Major Stockholder and Suiza do not enter into a definitive agreement for
such acquisition within ten (10) days after the receipt of Suiza's election,
then the Major Stockholder shall be free to negotiate with such Stockholder
Competitor for the sale of the Shares on terms no less favorable to the
Major Stockholder than those set forth in the Notice. This Section 3 shall
not apply to any offer by a Stockholder Competitor to purchase Stock from
the Major Stockholder in connection with a Sale of Horizon. "Stockholder
Competitor" means a processor and/or distributor of fluid milk with fluid
milk sales in excess of Two Hundred Million Dollars ($200,000,000) in the
most recent fiscal year. Stockholder Competitors shall not include any
stockholders or members of the Board of Directors of the Company as of the
Effective Date, or any of their affiliates. "Sale" means the sale of all or
substantially all assets of Horizon, or the merger or consolidation or sale
or exchange of outstanding Shares as a result of which the holders of
Horizon's Shares immediately prior to such transaction own less than 50% of
the surviving corporation immediately following such transaction. This
Section 3 shall not apply to any sale of Shares in connection with which the
Major Stockholder has complied with the provisions of Section 1 above.
4. Termination. This Agreement shall terminate with respect to a Major
Stockholder when such Major Stockholder no longer has beneficial ownership
of one percent (1%) of the Fully Diluted Shares of Horizon. This Agreement
shall terminate with respect to Suiza when Suiza no longer has beneficial
ownership of five percent (5%) of the Fully Diluted Shares of Horizon. The
"Fully Diluted Shares" means the number of shares of Common Stock or other
equity securities of Horizon outstanding assuming the conversion of all
securities convertible into Common Stock or any other equity security of
Horizon, the exercise of all options, warrants and rights to acquire Common
Stock or any other equity security of Horizon, whether or not vested, and
all restricted stock of Horizon, in each case previously issued by Horizon
and not terminated, canceled or held in treasury by the Horizon, whether or
not treated as outstanding by Horizon.
5. Notices. All notices, requests, demands and other communications which are
required or permitted to be given under this Agreement shall be in writing
and shall be deemed to have been duly given if delivered by hand, by
facsimile transmission (receipt confirmed by telephone) or by overnight
registered or certified mail, return receipt requested, postage prepaid
addressed to Suiza and to the Major Stockholder at the addresses set forth
on the signature pages attached hereto or to such other address as a party
shall have specified in
2.
<PAGE>
writing to the other party. Any notice given by personal delivery, facsimile
transmission or overnight mail shall be deemed to have been delivered on the
date of the receipt of such delivery or transmission at the address set
forth above (or such other address designated pursuant hereto); and any
notice given by registered or certified mail shall be deemed to have been
delivered on the fourth (4th) business day following the date on which he or
she was deposited in the United States postal system. Notice in writing may
be given by a method other than as described above and such notice shall be
deemed delivered on the date actually received.
6. Entire Agreement. This Agreement, the Stock Purchase Agreement, and the
documents, instruments and agreements to be executed and delivered pursuant
to this Agreement and the Stock Purchase Agreement constitute the entire
agreement among the parties with respect to the subject of the transactions
contemplated hereby and supersedes all prior letters or agreements with
respect thereto.
7. Waiver; Amendment. Any provision hereof may be amended or waived (either
generally or in a particular instance and either retroactively or
prospectively), only by the written consent of (i) as to Suiza, only by
Suiza, (ii) as to a Major Stockholder, by a majority in interest of the
Major Stockholders.
8. Counterparts. This Agreement may be executed in counterparts, each of
which, when so executed and delivered, shall be deemed to be an original and
all of which, taken together, shall constitute one and the same agreement.
9. Governing Law. This Agreement shall be governed by the internal law of the
State of Delaware (without giving effect to the choice of law principles
thereunder), as applicable.
10. Severability. To the extent that any provisions of this Agreement be
invalid or unenforceable, he or she shall be considered deleted therefrom
and the remainder of such provision and of this Agreement shall be
unaffected and shall continue in full force and effect.
3.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Majority Stockholders
Agreement by their duly authorized representatives as of the effective date.
SUIZA FOODS CORPORATION
By:
---------------------------------------
Title:
------------------------------------
Address:
MAJOR STOCKHOLDERS:
By:
---------------------------------------
Title:
------------------------------------
Address:
ACKNOWLEDGED AND AGREED TO BY:
HORIZON ORGANIC HOLDING CORPORATION:
By:
---------------------------------------
Title:
------------------------------------
Address:
4.
<PAGE>
EXHIBIT 10.18
STOCKHOLDER AGREEMENT
BY AND BETWEEN
HORIZON ORGANIC HOLDING CORPORATION
AND
SUIZA FOODS CORPORATION
<PAGE>
ARTICLE I DEFINITIONS; GENERAL...................................... 1
1.1 Definitions.................................................. 1
1.2 General...................................................... 4
ARTICLE II ORGANIC WHITE FLUID MILK PROCESSING....................... 5
2.1 Sale of Organic White Fluid Milk by the Stockholder.......... 5
2.2 Exception.................................................... 5
ARTICLE III RIGHT TO PURCHASE ADDITIONAL SHARES....................... 6
3.1 Right to Purchase Additional Shares.......................... 6
3.2 Closing...................................................... 7
3.3 Exceptions................................................... 7
ARTICLE IV ADDITIONAL COVENANTS OF THE COMPANY....................... 8
4.1 Appointment of Directors..................................... 8
4.2 Certain Limitations.......................................... 9
4.3 Observer Rights.............................................. 9
4.4 Hart-Scott-Rodino Filing..................................... 9
ARTICLE V ADDITIONAL COVENANTS OF THE STOCKHOLDER................... 9
5.1 Standstill................................................... 10
5.2 Voting....................................................... 10
5.3 Solicitation of Proxies...................................... 11
ARTICLE VI TRANSFERS OF STOCK........................................ 11
6.1 General...................................................... 11
6.2 Joinder Agreement; Certain Transfers......................... 11
6.3 Drag-Along Rights............................................ 11
ARTICLE VII STOCK LEGEND.............................................. 13
7.1 Form of Legend............................................... 13
7.2 Removal of Legend............................................ 13
ARTICLE VIII TERMINATION............................................... 14
8.1 Written Agreement............................................ 14
8.2 Time......................................................... 14
ARTICLE IX RIGHT OF FIRST NEGOTIATION; SALE OF STOCK
TO STOCKHOLDER COMPETITOR................................. 14
9.1 Right of First Negotiation................................... 14
9.2 Sale of Stock to Stockholder Competitor...................... 14
<PAGE>
ARTICLE X REGISTRATION RIGHTS....................................... 15
10.1 Definitions.................................................. 15
10.2 Piggyback Registrations...................................... 15
10.3 Form S-3 Registration........................................ 17
10.4 Expenses of Registration..................................... 18
10.5 Obligations of the Company................................... 18
10.6 Termination of Registration Rights........................... 19
10.7 Delay of Registration; Furnishing Information................ 19
10.8 Indemnification.............................................. 20
10.9 Assignment of Registration Rights............................ 22
10.10 Amendment of Registration Rights............................. 22
10.11 Rule 144 Reporting........................................... 22
10.12 Market Stand-Off Agreement................................... 23
10.13 Limitation on Subsequent Registration Rights................. 23
10.14 Selection of Underwriter..................................... 23
ARTICLE XI MISCELLANEOUS............................................. 23
11.1 Notices...................................................... 23
11.2 Entire Agreement............................................. 24
11.3 Waiver; Amendment............................................ 24
11.4 Assignment; Binding Effect................................... 24
11.5 Counterparts................................................. 24
11.6 Interpretation............................................... 24
11.7 No Third Party Beneficiaries................................. 24
11.8 Governing Law................................................ 25
11.9 Form of Payments............................................. 25
11.10 Dispute Resolution........................................... 25
11.11 Cooperation and Assurances; Documents........................ 25
11.12 Specific Performance......................................... 26
11.13 Severability................................................. 26
11.14 Publicity.................................................... 26
2.
<PAGE>
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (this "Agreement"), dated as of June 5,
1998 (the "Effective Date"), is made by and among Horizon Organic Holding
Corporation, a Delaware corporation (the "Company"), and Suiza Foods
Corporation, a Delaware corporation (the "Stockholder").
RECITALS
WHEREAS, the Company and the Stockholder believe it is in their mutual
best interests to establish a relationship pursuant to which the Stockholder
will own an equity interest in the Company and the Company will use
Stockholder's and its Affiliates' (as defined below) processing plants to
facilitate the Company's growth where ever practical;
WHEREAS, in furtherance of these objectives the Company and
Stockholder have entered into the Stock Purchase Agreement, of even date
herewith (the "Stock Purchase Agreement"), pursuant to which the Stockholder is
purchasing up to one million one hundred thousand (1,100,000) shares of Common
Stock of the Company;
WHEREAS, the Company and certain of Stockholder's Affiliates have
entered into Processing and Distribution Agreements pursuant to which the
Company has granted such Affiliates the exclusive right to process organic white
fluid milk for the Company in certain territories and it is their mutual intent
to enter into additional agreements pursuant to which Stockholder and/or
Stockholder's Affiliates will process and/or distribute organic white fluid milk
or other organic dairy products for the Company on an exclusive basis in a
territory (the "Processing and Distribution Agreements"); and
WHEREAS, each party desires to grant certain rights in connection with
the Company Stock (as defined below) from time to time held by the Stockholder
NOW, THEREFORE, in consideration of the representations, warranties,
conditions and covenants hereinafter contained, and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
AGREEMENT
ARTICLE I
DEFINITIONS; GENERAL
1.1 Definitions. As used in this Agreement, the following terms
shall, unless the context otherwise requires, have the respective meanings
therefor set forth below:
"Additional Securities": Any Voting Securities acquired by the
Stockholder pursuant to Section 4.1.
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
1.
<PAGE>
"Approved Transferee": As defined in Section 4.2(b).
"Beneficial Ownership" or "Beneficially Own": As defined in Rule 13d-3
under the Exchange Act.
"Board" or "Board of Directors" means either the board of directors of
the Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors (unless the context specifically requires that such
resolution be adopted by a majority of the Disinterested Directors, in which
case by a majority of such directors) and to be in full force and effect on the
date of such certification, and delivered to the Stockholder.
"Business Day": Any day other than a Saturday, Sunday, or any other
day on which banking institutions in the State of Colorado are authorized or
obligated by law or by executive order to be closed.
"Certificate of Incorporation": The Certificate of Incorporation of
the Company, as amended, in the form attached as Exhibit A hereto.
"Closing Date": As defined in the Stock Purchase Agreement.
"Commission": The United States Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act or the
Exchange Act.
"Common Stock": The Company's Common Stock, par value $.001 per share,
which has the powers, preferences, qualifications, limitations and restrictions
set forth in the Certificate of Incorporation.
"Company": As defined in the introduction to this Agreement.
"Company Notice": As defined in Section 4.1.
"Derivative Securities": Securities of the Company convertible into or
exercisable for Common Stock or any other capital stock of the Company.
"Disinterested Director" means, with respect to any proposed
transaction between the Company and an Affiliate thereof, a member of the Board
of Directors who is not an officer or employee of the Company, would not be a
party to, or have a financial interest in, such transaction and is not an
officer, director or employee of, and does not have a financial interest in,
such Affiliate. For purposes of this definition, no person would be deemed not
to be a Disinterested Director solely because such person holds shares of
capital stock of the Company.
"Employee Securities": Shares of stock, compensatory options or other
rights to acquire Common Stock issued to employees, officers, or directors of
the Company pursuant to employee stock option plans, stock purchase plans,
restricted stock plans or similar arrangements approved by the Company's Board
of Directors after the date hereof.
2.
<PAGE>
"Exchange Act": The Securities Exchange Act of 1934, as amended, or
any successor federal statute, and the rules and regulations of the Commission
thereunder, as all of same shall be in effect at the time.
"Fully Diluted Ownership Percentage": As of the time of determination
thereof, the percentage ownership calculated by dividing (a) the number of
shares of Common Stock or other equity securities of the Company Beneficially
Owned by a person, including any Common Stock or any other equity securities
issuable upon exercise of any options, warrants or rights to acquire Common
Stock or upon conversion of securities convertible into Common Stock, howsoever
and whenever acquired, by (b) the Company's Fully Diluted Shares (including
those Fully Diluted Shares included in subsection (a) above).
"Fully Diluted Shares": The number of shares of Common Stock or other
equity securities of the Company outstanding assuming the conversion of all
securities convertible into Common Stock or any other equity security of the
Company, the exercise of all options, warrants and rights to acquire Common
Stock or any other equity security of the Company, whether or not vested, and
all restricted stock of the Company, in each case previously issued by the
Company and not terminated, canceled or held in treasury by the Company, whether
or not treated as outstanding by the Company.
"Maximum Fully Diluted Ownership Percentage": As defined in Section
3.1.
"Organic White Fluid Milk" means any fresh or ultra high pasteurized
(UHT) fluid whole milk, 2% reduced fat milk, 1% low fat milk, and fat free milk,
as well as half & half and heavy cream which has been certified as organic by
any state agency or private certification organization and which is labeled or
otherwise identified in marketing materials as "organic."
"Person": Any natural person and any domestic or foreign corporation,
general or limited partnership or other entity.
"Preemptive Rights Procedure": The process of complying with Section
4.1 of this Agreement.
"Proposed Issuance": As defined in Section 4.1.
"Requisite Stockholders": means the holders of a majority of the
Company's Voting Securities.
"Sale": means the sale of all or substantially all assets of the
Company, or the merger or consolidation or sale or exchange of outstanding
Securities as a result of which the holders of the Company's Voting Securities
immediately prior to such transaction own less than 50% of the surviving
corporation immediately following such transaction.
"Securities Act": The Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all of the same shall be in effect at the time.
3.
<PAGE>
"Stock": All Common Stock which may from time to time be held by the
Stockholder, together with all Additional Securities.
"Stockholder": As defined in the Introduction, and any other person
that becomes a party to this Agreement.
"Stockholder Competitor": means a processor and/or distributor of
fluid milk with fluid milk sales in excess of Two Hundred Million Dollars
($200,000,000) in its most recent fiscal year. Stockholder Competitors shall not
include any stockholders or members of the Board of Directors of the Company as
of the Effective Date, or any of their Affiliates.
"Stockholder Directors": As defined in Section 5.1.
"Stockholder Notice": As defined in Section 4.1.
"Subsidiary" of any person means (i) a corporation more than fifty
percent (50%) of the outstanding voting stock of which is owned, directly or
indirectly, by such person or by one or more other Subsidiaries of such person
or by such person and one or more Subsidiaries thereof or (ii) any other person
(other than a corporation) in which such person, or one or more other
Subsidiaries of such person or such person and one or more other Subsidiaries
thereof, directly or indirectly, has at least a majority ownership and power to
direct the policies, management and affairs thereof.
"Voting Ownership Percentage": The percentage obtained by dividing the
aggregate number of votes in the election of directors to which the Voting
Securities Beneficially Owned by a person are entitled by the aggregate number
of votes in the election of directors to which all Voting Securities outstanding
are entitled as such percentage exists from time to time provided, that Voting
Securities issuable upon exercise or conversion of options, warrants or other
securities or rights shall not be included for this purpose; provided, further,
that restricted stock of the Company which is not treated by the Company as
outstanding shall not be included for this purpose; and provided, further, that,
for purposes of this definition, the Common Stock shall be deemed to be Voting
Securities and to have one vote per share in the election of directors.
"Voting Securities": any securities that are entitled to vote
generally in the election of directors of the Company.
1.2 General. For purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires:
(a) The terms defined in this Agreement have the meanings
assigned to them in this Agreement and include the plural as well as the
singular, and the use of any gender herein shall be deemed to include the other
gender.
(b) The captions used in this Agreement are inserted for
convenience only and are in no way intended to describe, interpret, define or
limit the scope or content of this Agreement or any provision hereof.
4.
<PAGE>
(c) The words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
provision.
(d) The term "include" or "including" shall mean without
limitation by reason of enumeration.
(e) Each reference to an "Article" of this Agreement shall
include all Sections of such Article. Similarly, each reference to a "Section"
shall include all subsections of such Section.
ARTICLE II
ORGANIC WHITE FLUID MILK PROCESSING
2.1 Sale of Organic White Fluid Milk by the Stockholder. Except as
provided in Section 2.2 below, the Stockholder hereby agrees that neither it,
nor any of its Affiliates, will introduce any Organic White Fluid Milk products
for sale under the Stockholder's brands for an initial period of five (5) years
from the Effective Date (the "Exclusivity Period") so long as Stockholder or any
of its Affiliates is processing and/or distributing Organic White Fluid Milk
products for sale under any Processing and Distribution Agreement. The
Exclusivity Period will be automatically renewed for additional one (1) year
periods, so long as Stockholder or any of its Affiliates is processing and/or
distributing Organic White Fluid Milk products for sale under any Processing and
Distribution Agreement, unless and until terminated by written notice by one
party to the other six (6) months before expiration of an Exclusivity Period.
2.2 Exception. The Company and Stockholder hereby agree that the
Stockholder or its Affiliates may acquire businesses which, as an incidental
portion of their business, produce and/or sell Organic White Fluid Milk in
territories which are covered by a Processing and Distribution Agreement. In
such event, Stockholder agrees, on behalf of itself and its Affiliates, to
either (a) transition any Organic White Fluid Milk business which it acquires to
the Company's brand within twelve (12) months of the closing of the acquisition
of such a business or (b) divest itself of the Organic White Fluid Milk business
within twelve (12) months of the closing of the acquisition. If the Stockholder
elects to divest the business as provided in subsection (b) above, then
Stockholder, or its Affiliate, as applicable, shall offer the Company the right
of first negotiation to acquire such Organic White Fluid Milk business. In such
event, Stockholder will notify the Company and the Company will have ten (10)
days from the receipt of such notice to notify the Stockholder that the Company
desires to acquire such Organic White Fluid Milk business. If the Company does
not so elect, or if the Company does not respond within such ten (10) day
period, or if the Company and Stockholder do not enter into a definitive
agreement for such acquisition within forty-five (45) days after the
Stockholder's receipt of the Company's election, then the Stockholder will be
free to negotiate with any third party for the sale of the Organic White Fluid
Milk business.
5.
<PAGE>
ARTICLE III
RIGHT TO PURCHASE ADDITIONAL SHARES
3.1 Right to Purchase Additional Shares.
(a) So long as Stockholder's Fully Diluted Ownership Percentage
is at least five percent (5%), in the event of any proposed public or private
sale for cash of shares of Common Stock or any other capital stock of the
Company or any other security convertible into or exercisable for Common Stock
or any other capital stock of the Company (other than pursuant to the exceptions
or limitations in Section 3.4 below) ("Proposed Issuance"), the Stockholder
shall have the right to purchase from the Company in whole or in part for cash
(or, if the parties hereto shall in their discretion at such time agree, for
property or other consideration), at the same price sold in the Proposed
Issuance, a number of shares of Common Stock or any other capital stock of the
Company equal to its Maximum Fully Diluted Ownership Percentage immediately
prior to the Proposed Issuance times the number of shares issued in the Proposed
Issuance. The "Maximum Fully Diluted Ownership Percentage" shall be calculated
using the lesser of (i) the Fully Diluted Ownership Percentage calculated at the
time of the Proposed Issuance and (ii) the Fully Diluted Ownership Percentage
calculated at the closing of the sale of Common Stock to Stockholder pursuant to
the Stock Purchase Agreement.
(b) If the securities being issued are options or warrants and a
purchase price consisting of cash or other consideration is to be paid for the
issuance of such options or warrants, then upon exercise of the right under
Section 3.1(a) the Stockholder shall pay such purchase price. Any such option or
warrant shall be subject to the same terms and restrictions as the option or
warrant constituting the Proposed Issuance.
(c) The Company shall send written notice of the Proposed
Issuance (the "Company Notice") to the Stockholder not less than twenty (20)
days prior to closing of the Proposed Issuance (ten (10) days if the Proposed
Issuance consists of shares of capital stock or Derivative Securities registered
under the Securities Act for sale to the public, or to be sold to qualified
institutional buyers for cash pursuant to Rule 144A). The Company Notice shall
set forth all material terms of the Proposed Issuance, including, without
limitation, the manner of sale, the number (which may be a range) and type of
securities to be issued, a minimum and maximum number of securities that the
Stockholder is entitled to purchase hereunder, the per share sale price or the
amount and type of other consideration to be received by the Company (which may
be a range) and the Stockholder's Fully Diluted Ownership Percentage.
(d) The Stockholder may exercise its rights hereunder by sending
irrevocable written notice (the "Stockholder Notice") to the Company within
twenty (20) days after receipt of the Company Notice (ten (10) days if the
Proposed Issuance consists of shares of capital stock or Derivative Securities
registered under the Securities Act for sale to the public, or to be sold to
qualified institutional buyers for cash pursuant to Rule 144A). The Stockholder
Notice shall specify either the number of securities which the Stockholder
wishes to purchase or the Fully Diluted Ownership Percentage which the
Stockholder wishes to have immediately after the Proposed Issuance (which shall
in no event exceed the Fully Diluted Ownership Percentage existing immediately
prior to the Proposed Issuance). The Stockholder Notice may specify a
6.
<PAGE>
maximum aggregate dollar value (in which event the Company shall, subject to the
Fully Diluted Ownership Percentage limitation, sell to the Stockholder the
maximum number of securities up to such value).
(e) The Company shall, not less than five (5) days before the
proposed closing pursuant to Section 3.2, send written notice to the Stockholder
specifying the number of securities and the aggregate purchase price of such
securities.
(f) If a Proposed Issuance consists of a public offering for
cash, and if the managing underwriters for such offering advise the Company in
writing that the fifteen (15) day notice and ten (10) day notice periods
referenced in paragraphs 2.2(c) and (d), respectively, are not consistent with
the proposed offering schedule, such periods may be reduced to the extent
necessary to be consistent with such proposed offering schedule (but not below
ten (10) days and five (5) days, respectively). The Company will use reasonable
efforts to inform Stockholder of material developments with respect to such
offering.
(g) If any terms of the Proposed Issuance are revised or amended
in any material respect after delivery of the Company Notice, such Proposed
Issuance, as so revised or amended, shall constitute a new Proposed Issuance
subject to the terms of this Section 3.1; provided, that the required notice
period in respect of such revised terms under paragraph 2.2(c) shall be twenty
(20) days and under paragraph 2.2(d) shall be ten (10) days.
3.2 Closing. The purchase and sale of any securities pursuant to
this Section 3 shall take place on the date of the closing of the Proposed
Issuance or, if it is not possible to close on such date because of the need to
secure approval for, or to file, any amendments to the Certificate of
Incorporation, comply with any waiting periods imposed on such purchase and sale
by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or secure necessary
regulatory approvals, then as soon as reasonably practicable following the
closing of the Proposed Issuance, or at such other time as the Company and the
Stockholder may agree. The Closing shall occur at a time and place specified by
the Company in a notice provided to the Stockholder at least five (5) days prior
to the closing. In connection with such closing, the Company and the Stockholder
shall provide such customary closing certificates and opinions as the
Stockholder or the Company, as appropriate, shall reasonably request. The
Company and the Stockholder will use their best efforts to comply with all
Federal and state laws and regulations and stock exchange or Nasdaq National
Market listing requirements applicable to any purchase and sale of shares of
Voting Securities under Section 3.1. The issuance of such shares by the Company
shall be subject to compliance with applicable laws and regulations and
requirements of the Nasdaq National Market or applicable stock exchange, and
there shall not then be in effect any order enjoining or restraining such
exercise or issuance.
3.3 Exceptions. Proposed Issuances shall not include:
(a) the grant or issuance of Employee Securities, or the
issuance of Common Stock upon exercise or conversion thereof;
(b) any issuances of shares of Common Stock upon conversion of
Derivative Securities outstanding as of the date hereof;
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(c) any issuances of Common Stock upon exercise or conversion of
Derivative Securities which previously comprised a Proposed Issuance which was
effected in compliance with Section 3.1 hereof to Stockholder hereunder;
(d) any issuances of Voting Securities that would result
(assuming exercise or conversion of any Derivative Securities so issued) in a
less than one percent (1%) increase in the voting power of Voting Securities
outstanding in any calendar year;
(e) any issuances of Voting Securities in connection with any
merger, acquisition or strategic alliance; or
(f) any issuances of Voting Securities, Derivative Securities or
Common Stock upon conversion of Derivative Securities to banks or equipment
lessors in connection with any loan agreement up to an aggregate of a three
percent (3%) increase in the voting power of Voting Securities outstanding in
any calendar year.
ARTICLE IV
ADDITIONAL COVENANTS OF THE COMPANY
4.1 Appointment of Directors.
(a) The Company hereby agrees that the Stockholder shall be
entitled, from and after the date hereof, to designate one member of the Board
of Directors of the Company (such director being referred to herein as the
"Stockholder Director"). Notwithstanding the foregoing, if at any time the
Stockholder's Voting Ownership Percentage is less than five percent (5%), the
Stockholder thereafter shall not be entitled to designate any Stockholder
Director. The Stockholder Director shall be entitled to the same
indemnification, compensation and other benefits provided to all other non-
employee members of the Board of Directors of the Company.
(b) In accordance with the foregoing, the Company hereby agrees
that the Company's Board of Directors will take all action necessary such that
upon the fifth (5th) business day following the Closing, the Company's Board
shall be increased in size, if necessary, and the person designated by the
Stockholder shall be elected to the Company's Board as a Class I Director
effective upon such date. Following the Closing, the Company shall cause (i) the
person designated by the Stockholder as a director to be included (consistent
with applicable law and the Certificate of Incorporation) in the group of
nominees who are recommended for election as Class I Directors by the management
of the Company and included in the Company's proxy statement pursuant to the
Exchange Act at each meeting of stockholders of the Company when Class I
Directors are to be elected, and (ii) at a special meeting of the Board of
Directors held as soon as practicable after the creation of any vacancy as a
result of the death, resignation or removal of the Stockholder Director, the
appointment of such person or persons as are designated by the Stockholder to
fill any such vacancy (unless such vacancy is the result of a resignation,
removal or similar action taken in order to comply with Section 4.1(a)). The
Company shall not be in violation of this Section 4.1 to the extent that the
failure to include any required Stockholder Director on the Company's Board of
Directors is attributable to the failure of the Stockholder to designate a
Stockholder Director or to the unwillingness or inability
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of such designee to serve. For all purposes of this Agreement, the Company shall
be in compliance with this Section 4.1(b) if it uses reasonable efforts to cause
the Stockholder Director to be elected to the Company's Board of Directors in
accordance with this Section 4.1.
4.2 Certain Limitations. The individual designated as a Stockholder
Director in accordance with the provisions of Section 4.1 shall, prior to
commencing any activities as member of the Company's Board of Directors, enter
into a confidentiality agreement, in substantially the same form as is entered
into by the other directors. The Company may request that the Stockholder
Director excuse himself or herself from deliberations or discussions of the
Board of Directors of the Company involving relationships between the Company
and the Stockholder or its Affiliates, or where, in the good faith determination
of a majority of the Board of Directors of the Company, such deliberations or
discussions are deemed to concern confidential or sensitive business or trade
information. Unless otherwise prohibited by law, the Stockholder Director may
vote on all matters submitted to the Board of Directors. Upon a similar
determination, the Company may refrain from sending or providing to the
Stockholder Director information of the type specified in the preceding sentence
disseminated to the Board of Directors.
4.3 Observer Rights. In the event that Stockholder is entitled to
designate a Stockholder Director as provided in Section 4.1(a) above, but
Stockholder elects not to designate a Stockholder Director or the Stockholder's
designee is either unwilling or unable to serve, then the Stockholder shall be
entitled to designate a representative to attend the meetings of the Board of
Directors as an observer. The individual designated as an observer in accordance
with the provisions of this Section 4.3 shall, prior to commencing any
activities as an observer, enter into a confidentiality agreement, in
substantially the same form as is entered into by the Company's Directors. The
Company may request that the observer excuse himself or herself from
deliberations or discussions of the Board of Directors of the Company involving
relationships between the Company and the Stockholder or its Affiliates, or
where, in the good faith determination of a majority of the Board of Directors
of the Company, such deliberations or discussions are deemed to concern
confidential or sensitive business or trade information or where necessary to
preserve the Company's attorney-client privilege.
4.4 Hart-Scott-Rodino Filing. The Company agrees to cooperate with
the Stockholder in connection with Stockholder's compliance with the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 in connection with Stockholder's
acquisition of additional Stock on the open public market or otherwise;
provided, however, that Stockholder shall be responsible for any application
fees in connection with such a filing.
ARTICLE V
ADDITIONAL COVENANTS OF THE STOCKHOLDER
The Stockholder covenants and agrees with the Company that until the
eighteen (18) month anniversary of the termination of the Exclusivity Period set
forth in Article II of this Agreement:
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5.1 Standstill.
(a) Except as specifically contemplated by this Agreement or
pursuant to its exercise of the rights set forth in Article III or Section 9.2
below, the Stockholder will not, and will cause each Affiliate of the
Stockholder not to, purchase, acquire or own, or offer or agree to purchase,
acquire or Beneficially Own, directly or indirectly, any Voting Securities (or
enter into any arrangements or understandings with any third party to do any of
the foregoing), if after such acquisition the Stockholder's Voting Ownership
Percentage would exceed twenty-five percent (25%).
(b) Section 5.1(a) shall cease to have any further force or
effect if the Board of Directors of the Company, without prior written consent
from the Stockholder, takes any action (including without limitation the
approval of a transaction pursuant to Section 203 of the General Corporation Law
of Delaware) to facilitate or approve any merger, consolidation, business
combination or other transaction (or series of transactions) in which the
holders of Voting Securities immediately prior to such transaction (or
transactions) would collectively hold less than fifty percent (50%) of the
voting power of the securities that are entitled to vote generally in the
election of directors of the surviving parent corporation giving effect to all
Voting Securities outstanding immediately after such transaction (or
transactions) (a "Change of Control Transaction"), provided that no such Change
of Control Transaction shall close until the date which is not less than thirty
(30) days after the later of (A) the date the Board of Directors of the Company
takes any action to facilitate or approve the Change of Control Transaction, or
(B) the date Stockholder is notified of such action, in each case, such that
Stockholder is released from the obligations of Section 5.1(a) for a period of
not less than thirty (30) days prior to the closing or effectiveness of a Change
of Control Transaction.
5.2 Voting. So long as Stockholder's Fully Diluted Ownership
Percentage is at least five percent (5%), the Stockholder will take such action
as may be required so that all shares of Voting Securities owned by the
Stockholder are voted (i) for management's nominees to the Board of Directors of
the Company, if such nominees are consistent with the provisions of Section 5.1
hereof; (ii) to approve any amendments to the Company's equity incentive plans
for employees and directors approved by the Board, including any amendments
which increase the number of shares reserved for issuance under such plans;
provided that Stockholder shall not be required to vote in favor of any increase
in the number of shares under any such plan if, after giving effect to such
Amendment, the aggregate number of shares reserved for future issuance under the
Company's equity incentive plans for employees and directors exceeds fifteen
percent (15%) of the Company's Fully Diluted Shares as of the date of the
meeting approving the plan; and (iii) to approve any amendments to the Company's
Certificate of Incorporation to increase the Company's authorized capital stock.
So long as the Stockholder holds more than five percent (5%) of the outstanding
shares of Voting Securities, the Stockholder shall be present, in person or by
proxy, at all duly held meetings of stockholders of the Company so that all
shares of Voting Securities held by the Stockholder may be counted for the
purposes of determining the presence of a quorum at such meetings. The
Stockholder shall not subject any Stock to any arrangement or agreement with
respect to the voting of such shares which is inconsistent with the foregoing
obligations. The obligations under this Section 5.2 will not apply and during
the continuance of any of the events described in paragraphs (A) or (B) of
Section 5.3(b)(iii).
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5.3 Solicitation of Proxies. Without the prior written consent of
the Company, the Stockholder shall not (a) solicit proxies with respect to any
Voting Securities, or (b) become a "participant" in any "election contest" as
such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act, in
either case in connection with the election of directors of the Company;
provided, however, that (i) Stockholder shall not be deemed to be a
"participant" by reason of the membership of its Stockholder Directors or its
designees on the Board of Directors of the Company, (ii) the announcement by
Stockholder of the manner in which it intends to vote its Company Shares shall
not, alone, be deemed to be a "solicitation" of proxies and (iii) the
restrictions in this Section 5.3 shall not apply in connection with and during
the continuance of any of the following:
(A) an attempt by another person to acquire control of the
Company of the Company's business through a tender offer, merger,
recapitalization, proxy contest, consent solicitation, asset
acquisition or other transaction, whether or not such transaction is
proposed, endorsed or approved by the Company's Board of Directors, it
being understood that for purposes of this subsection, an acquisition
of, or the commencement of a fully-financed tender offer or exchange
offer to acquire, at least fifty percent (50%) of either the then
outstanding Voting Securities or the Fully-Diluted Shares shall be
deemed to be an attempt to acquire control of the Company; or
(B) an actual solicitation of proxies or consents by or on
behalf of a person other than Stockholder or the Company.
ARTICLE VI
TRANSFERS OF STOCK
6.1 General. The provisions regarding transfers of Stock contained
in this Article V shall apply to all shares of Stock now owned or hereafter
acquired by Stockholder, including shares of Stock acquired by reason of
original issuance, dividend, distribution, exchange, conversion and acquisition
of outstanding shares of Stock from another Person, and such provisions shall
apply to any shares of Stock obtained by a Stockholder upon the exercise,
exchange or conversion of any option, warrant or other Derivative Security.
6.2 Joinder Agreement; Certain Transfers. Stockholder shall not
transfer any Stock to a Person not already a party to this Agreement unless and
until such Person executes and delivers to the Corporation a joinder agreement
in form and substance reasonably acceptable to the Corporation, pursuant to
which such Person will thereupon become a party to, and be bound by and
obligated to comply with the terms and provisions of, this Agreement, as a
Stockholder hereunder. This restriction on transfer shall not apply to any Stock
transfers by the Stockholder in any registered transaction or any transaction
which is exempt from registration such as a sale pursuant to Rule 144 of the
Securities Act of 1933, as amended.
6.3 Drag-Along Rights.
(a) If at any time the Board shall approve a Sale of the Company
in accordance with the applicable provisions of this Agreement (an "Approved
Sale"), then, subject
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to Section 6.3(b) below: (i) Stockholder shall consent to and raise no
objections against the Approved Sale; (ii) Stockholder shall cause its designees
on the Board to take all necessary corporate action to approve such Approved
Sale; (iii) if the Approved Sale is structured in whole or part as a merger or
consolidation, or a sale of all or substantially all assets, each Stockholder
shall waive any dissenters rights, appraisal rights or similar rights in
connection with such merger, consolidation or asset sale; (iv) if the Approved
Sale is structured in whole or part as a sale of securities, the Stockholder
agree to sell their Stock on the terms and conditions approved by Requisite
Stockholders; and (v) Stockholder shall take all necessary actions, including
the execution of such agreements and such instruments and other actions
reasonably necessary to provide the representations, warranties, indemnities,
covenants, conditions, non-compete agreement, escrow agreements and other
provisions and agreements relating to such Approved Sale, and effectuate the
allocation and distribution of the aggregate consideration upon the Approved
Sale as set forth in Section 6.3(b) below. The obligations set forth in
subsection 6.3(a)(ii) shall not apply if Stockholder's representative on the
Board believes in good faith, based upon advice of legal counsel, that
compliance with such obligation would violate his or her fiduciary obligations
under applicable law In such event, Stockholder's representative on the Board
will be given reasonable time to consult legal counsel.
(b) The obligations of the Stockholder pursuant to this Section
6.3 are subject to the satisfaction of the following conditions:
(i) upon the consummation of the Approved Sale, the
Stockholder shall receive the same proportion of the aggregate consideration
from such Approved Sale that the Stockholder would have received if such
aggregate consideration had been distributed by the Company in complete
liquidation pursuant to the rights and preferences set forth in the Charter as
in effect immediately prior to such Approved Sale (giving effect to applicable
preferences and orders of priority set forth therein);
(ii) all holders of then-currently exercisable,
exchangeable or convertible Derivative Securities will be given an opportunity
to either (A) exercise their rights to acquire the stock underlying such
Derivative Securities prior to the consummation of the Approved Sale (but only
to the extent such Derivative Securities are then vested or exercisable or would
be vested or exercisable pursuant to their respective terms, including as a
result of the Approved Sale), or (B) upon the consummation of the Approved Sale,
receive in exchange for such Derivative Securities consideration equal to the
amount determined by multiplying (1) the amount of consideration per share of
Stock (of the same class as that for which the Derivative Security is then
exercisable) received by the holders of such class of Stock in connection with
the Approved Sale (after taking into account any dilutive effect that would have
resulted had such holder participated in such sale as Stockholder) less the
exercise price per Derivative Security by (2) the number of Derivative
Securities (but only to the extent such Stock Equivalents are then vested or
exercisable, exchangeable or convertible);
(iii) Stockholder shall not be obligated to make any out-
of-pocket expenditure prior to the consummation of the Approved Sale (excluding
modest expenditures for its own postage, copies, etc., and the fees and expenses
of its own counsel retained by it), and Stockholder shall not be obligated to
pay more than its or his pro rata share (based upon the number of shares of
Stock and vested Derivative Securities held by such holder) of reasonable
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expenses incurred in connection with such Approved Sale to the extent such
costs are incurred for the benefit of all Stockholders and are not otherwise
paid by the Company or the acquiring party (costs incurred by or on behalf of a
Stockholder for its or his sole benefit will not be considered costs of the
transaction hereunder), provided that a Stockholder's liability for its pro rata
share of such allocated expenses shall not in any event exceed the total
purchase price received by such Stockholder for its Stock and Derivative
Securities (including the exercise price thereof); and
(iv) (A) in the event that the Stockholder is required to
provide any representations or warranties in connection with the Approved Sale,
the Stockholder shall be required to represent and warrant only as to its title
to its Stock and Derivative Securities, the absence of encumbrances on such
Stock and Derivative Securities and the Stockholder's authority, power and right
to enter into and consummate such purchase or merger agreement without violating
any other agreement or legal requirement), and (B) in the event that Stockholder
is required to provide any indemnities in connection with the Approved Sale,
then Stockholder shall not be liable for more than its pro rata share (based
upon the number of shares of Stock and vested Derivative Securities held by such
holder) of any liability for indemnity and such liability shall not in any event
exceed the total purchase price received by such Stockholder for its Stock plus
Derivative Securities (including the exercise price thereof).
ARTICLE VII
STOCK LEGEND
7.1 Form of Legend.
(a) Each certificate or instrument representing Voting Securities now
or hereafter owned by the Stockholder, or issued to any in connection with a
transfer permitted hereunder, shall be endorsed with the following legend:
The securities represented by this certificate or instrument are subject to
the provisions of a Stockholder Agreement, dated June 5, 1998 (the
"Agreement"), among the Company and parties thereto, and any subsequent
amendments of or supplements to said Agreement. The sale, transfer, pledge
or other disposition and the voting of the securities represented by this
certificate or instrument are subject to certain provisions of said
Agreement. A copy of said Agreement is on file and may be obtained at the
Company's principal executive office.
7.2 Removal of Legend. The legend relating to this Agreement endorsed on
any certificate or instrument pursuant to this Article VI shall be removed, and
the Company will issue a certificate or instrument without such legend to the
holders of the Stock represented by such certificate or instrument, upon the
termination of this Agreement, or upon a transfer made in compliance with this
Agreement (unless the terms of the Agreement applicable to such transfer
expressly provide that the transferee of Stock shall hold the transferred Stock
subject to the provisions of this Agreement).
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ARTICLE VIII
TERMINATION
8.1 Written Agreement. This Agreement may be terminated by the written
agreement of the Company and the Stockholder.
8.2 Time. Except as otherwise specifically provided herein, the
provisions of Articles II, III and IX shall terminate at any time the
Stockholder's Voting Ownership Percentage is less than five percent (5%).
ARTICLE IX
RIGHT OF FIRST NEGOTIATION; SALE OF STOCK TO STOCKHOLDER COMPETITOR
9.1 Right of First Negotiation. The Company hereby grants Stockholder a
right of first negotiation to acquire the Company in the event that the Board of
Directors determines that it is in the best interests of the Company and its
stockholders to engage in a Sale of the Company. In such event, the Company
will notify Stockholder and Stockholder will have ten (10) days from the receipt
of such notice to notify the Company that Stockholder desires to acquire the
Company in a Sale. If Stockholder does not so elect, or if Stockholder does not
respond within such ten (10) day period, or if the Company and Stockholder do
not enter into a definitive agreement for such acquisition within forty-five
(45) days after the Company's receipt of Stockholder's election, then the
Company shall be free to negotiate with any third party for the Sale of the
Company. If, at any time, the Company receives an unsolicited offer from a
third party for the Sale of the Company, the Company will notify Stockholder of
the material terms of such offer within ten (10) days of the receipt of such
offer.
9.2 Sale of Stock to Stockholder Competitor. In the event that a
Stockholder Competitor offers to buy Stock from the Company, the Company will
notify Stockholder of the material terms of such offer within ten (10) days of
the receipt of such offer (the "Notice"). Stockholder shall have ten (10) days
from the receipt of such notice to notify the Company that Stockholder desires
to buy such Stock on such terms. If Stockholder does not so elect, or if
Stockholder does not respond within such ten (10) day period, or if the Company
and Stockholder do not enter into a definitive agreement for such acquisition
within ten (10) days after the Company's receipt of Stockholder's election, then
the Company shall be free to negotiate with such Stockholder Competitor for the
sale of the Stock on terms no less favorable to the Company than those set forth
in the Notice. This Section 9.2 shall not apply to any offer by a Stockholder
Competitor to purchase Stock from the Company in connection with a Sale of the
Company.
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ARTICLE X
REGISTRATION RIGHTS
10.1 Definitions. As used in this Section, the following terms shall have
the following respective meanings:
"Form S-3" means such form under the Securities Act as in effect on
the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"Holder" means any person owning of record Registrable Securities or
any assignee of record of such Registrable Securities in accordance with Section
10.9 hereof.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.
"Registrable Securities" means (a) the Stock; and (b) any Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
above-described securities. Notwithstanding the foregoing, any such securities
shall cease to be Registrable Securities following (i) a transfer of such
securities registered under the Securities Act; (ii) a transfer of such
securities in an open-market transaction under Rule 144; or (iii) a transfer of
less than 500,000 shares of such securities to any person or entity other than
the following persons and entities: a subsidiary, parent corporation, general
partner or limited partner of the transferring Holder (any of the foregoing
persons may be referred to herein as a "Related Transferee").
"Registrable Securities then outstanding" shall be the number of
shares determined by calculating the total number of shares of the Voting
Securities that are Registrable Securities and either (a) are then issued and
outstanding or (b) are issuable pursuant to then exercisable or convertible
securities.
"Registration Expenses" shall mean all expenses incurred by the
Company in complying with Sections 10.2, and 10.3 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company).
"SEC" or "Commission" means the Securities and Exchange Commission.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale, and any fees or expenses of counsel for the
Holder.
10.2 Piggyback Registrations. Beginning upon the expiration of the Lock-Up
Agreement between the Stockholder and the Representatives of the Company's
underwriters
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dated as of even date herewith, the Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to the filing
of any registration statement under the Securities Act for purposes of its
Initial Offering, and at least fifteen (15) days prior to the filing of any
registration statement under the Securities Act for any other public offering of
securities of the Company (including, but not limited to, registration
statements relating to secondary offerings of securities of the Company, but
excluding registration statements relating to employee benefit plans or with
respect to corporate reorganizations or other transactions under Rule 145 of the
Securities Act) and will afford each such Holder an opportunity to include in
such registration statement all or part of such Registrable Securities held by
such Holder. Each Holder desiring to include in any such registration statement
all or any part of the Registrable Securities held by it shall, within fifteen
(15) days after the above-described notice from the Company (in the case of the
Initial Offering) or ten (10) days after the above described notice (in the case
of any other offering), so notify the Company in writing. Such notice shall
state the intended method of disposition of the Registrable Securities by such
Holder. If a Holder decides not to include all of its Registrable Securities in
any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(a) Underwriting. If the registration statement under which the
Company gives notice under this Section 10.3 is for an underwritten offering,
the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder to be included in a registration pursuant to
this Section 10.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of the Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated, first, to the Company; second, to the Holders on a pro rata
basis based on the total number of Registrable Securities held by the Holders;
and third, to any stockholder of the Company (other than a Holder) on a pro rata
basis. No such reduction shall (i) reduce the securities being offered by the
Company for its own account to be included in the registration and underwriting,
or (ii) reduce the amount of securities of the selling Holders included in the
registration below twenty-five percent (25%) of the total amount of securities
included in such registration, unless such offering is the Initial Offering and
such registration does not include shares of any other selling stockholders, in
which event any or all of the Registrable Securities of the Holders may be
excluded in accordance with the immediately preceding sentence. In no event will
shares of any other selling stockholder be included in such registration which
would reduce the number of shares which may be included by Holders without the
written consent of Holders of not less than fifty percent (50%) of the
Registrable Securities proposed to be sold in the offering.
(b) Right to Terminate Registration. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 10.2 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in
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such registration. The Registration Expenses of such withdrawn registration
shall be borne by the Company in accordance with Section 10.5 hereof.
10.3 Form S-3 Registration. Beginning upon the expiration of the Lock-Up
Agreement between the Stockholder and the Representatives of the Company's
underwriters dated as of even date herewith, in case the Company shall receive
from any Holder or Holders of Registrable Securities a written request or
requests that the Company effect a registration on Form S-3 (or any successor to
Form S-3) or any similar short-form registration statement and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders of Registrable
Securities; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 10.3:
(i) if Form S-3 (or any successor or similar form) is not
available for such offering by the Holders, or
(ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an aggregate
price to the public of less than $500,000, or
(iii) if the Company shall furnish to the Holders a
certificate signed by the Chairman of the Board stating that in the good faith
judgment of the Board of the Company, it would be seriously detrimental to the
Company and its stockholders for such Form S-3 Registration to be effected at
such time, in which event the Company shall have the right to defer the filing
of the Form S-3 registration statement for a period of not more than ninety (90)
days after receipt of the request of the Holder or Holders under this Section
10.3; provided, that such right to delay a request shall be exercised by the
Company not more than once in any twelve (12) month period, or
(iv) if the Company has, within the six (6) month period
preceding the date of such request, already effected two (2) registrations on
Form S-3 for the Holders pursuant to this Section 10.3, or
(v) if the Holders are requesting that the Company file
such a registration in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to service of
process in effecting such registration, qualification or compliance.
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(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All such Registration Expenses incurred in
connection with registrations requested pursuant to this Section 10.3 after the
first two (2) registrations shall be paid by the selling Holders pro rata in
proportion to the number of shares sold by each.
(d) The Company will use its best efforts to qualify for the use of
the Form S-3 registration statement or any successor form as promptly as
reasonably practicable following the closing of the IPO.
10.4 Expenses of Registration. Except as specifically provided herein, all
Registration Expenses incurred in connection with any registration under Section
10.2 or Section 10.3 herein shall be borne by the Company. All Selling Expenses
incurred in connection with any registrations hereunder, shall be borne by the
holders of the securities so registered pro rata on the basis of the number of
shares so registered. The Company shall not, however, be required to pay for
expenses of any registration proceeding begun pursuant to Section 10.3, the
request of which has been subsequently withdrawn by the Initiating Holders
unless (a) the withdrawal is based upon material adverse information concerning
the Company of which the Initiating Holders were not aware at the time of such
request or (b) the Holders of a majority of Registrable Securities agree to
forfeit their right to one requested registration pursuant to Section 10.2 or
Section 10.3, as applicable, in which event such right shall be forfeited by all
Holders). If the Holders are required to pay the Registration Expenses, such
expenses shall be borne by the holders of securities (including Registrable
Securities) requesting such registration in proportion to the number of shares
for which registration was requested.
10.5 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to ninety (90) days or one hundred
eighty (180) days in the case of a registration pursuant to Section 10.3 or, if
earlier, until the Holder or Holders have completed the distribution related
thereto.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use all reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as
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shall be reasonably requested by the Holders, provided that the Company shall
not be required in connection therewith or as a condition thereto to qualify to
do business or to file a general consent to service of process in any such
states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Furnish, at the request of a majority of the Holders
participating in the registration, on the date that such Registrable Securities
are delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and (ii) a letter
dated as of such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and if permitted by
applicable accounting standards, to the Holders requesting registration of
Registrable Securities.
10.6 Termination of Registration Rights. All registration rights granted
under this Section 10 shall expire with respect to a particular Holder if (a)
such Holder (together with its affiliates, partners and former partners) holds
less than 1% of the Company's outstanding Common Stock or (b) all Registrable
Securities held by and issuable to such Holder (and its affiliates, partners and
former partners) may be sold under Rule 144 during any ninety (90) day period.
10.7 Delay of Registration; Furnishing Information.
(a) No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 10.
(b) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 10.2 or 10.3 that the selling
Holders shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them and the intended
19.
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method of disposition of such securities as shall be required to effect the
registration of their Registrable Securities.
(c) The Company shall have no obligation with respect to any
registration requested pursuant to Section 10.3 if the number of shares or the
anticipated aggregate offering price of the Registrable Securities to be
included in the registration does not equal or exceed the number of shares or
the anticipated aggregate offering price required to originally trigger the
Company's obligation to initiate such registration as specified in Section 10.3.
(d) The Company shall have no obligation with respect to any
registration rights granted herein until the expiration of the Lock-Up Agreement
between the Stockholder and the Representatives of the Company's underwriters
dated as of even date herewith.
10.8 Indemnification. In the event any Registrable Securities are included
in a registration statement under Sections 10.2 or 10.3:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers, directors and legal counsel
of each Holder, any underwriter (as defined in the Securities Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation") by the Company: (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law in
connection with the offering covered by such registration statement; and the
Company will reimburse each such Holder, partner, officer, director, legal
counsel, underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided however, that the
indemnity agreement contained in this Section 10.8(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, legal
counsel, underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration qualifications or compliance is being effected, indemnify and hold
harmless the Company, each of its directors, its officers, and legal counsel and
each person, if any, who controls the Company within the
20.
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meaning of the Securities Act, any underwriter and any other Holder selling
securities under such registration statement or any of such other Holder's
partners, directors or officers or any person who controls such Holder, against
any losses, claims, damages or liabilities (joint or several) to which the
Company or any such director, officer, controlling person, underwriter or other
such Holder, or partner, director, officer or controlling person of such other
Holder may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder under an instrument duly executed by such Holder and stated to be
specifically for use in connection with such registration; and each such Holder
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, legal counsel, controlling person, underwriter or
other Holder, or partner, officer, director, legal counsel or controlling person
of such other Holder in connection with investigating or defending any such
loss, claim, damage, liability or action if it is judicially determined that
there was such a Violation; provided, however, that the indemnity agreement
contained in this Section 10.9(b) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder, which consent shall not be
unreasonably withheld; provided further, that in no event shall any indemnity
under this Section 10.9 exceed the proceeds from the offering received by such
Holder.
(c) Promptly after receipt by an indemnified party under this Section
10.8 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 10.8, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 10.8, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
10.8.
(d) If the indemnification provided for in this Section 10.8 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to herein,
the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
21.
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considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, that in no event shall any contribution by a
Holder hereunder exceed the proceeds from the offering received by such Holder.
(e) The obligations of the Company and Holders under this Section
10.8 shall survive completion of any offering of Registrable Securities in a
registration statement and the termination of this agreement. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation.
10.9 Assignment of Registration Rights. The rights to cause the Company to
register Registrable Securities pursuant to this Section 10 may be assigned by a
Holder to a transferee or assignee of Registrable Securities which (a) is a
Related Transferee, or (b) acquires at least five hundred thousand (500,000)
shares of Registrable Securities (as adjusted for stock splits, stock dividends
and combinations); provided, however, that (i) the transferor shall, within ten
(10) days after such transfer, furnish to the Company written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned and (ii) such transferee shall
agree to be subject to all restrictions set forth in this Agreement.
10.10 Amendment of Registration Rights. Any provision of this Section 10
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of at least a majority of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this Section 10.10 shall be binding upon each Holder and the
Company. By acceptance of any benefits under this Section 10, Holders of
Registrable Securities hereby agree to be bound by the provisions hereunder.
10.11 Rule 144 Reporting. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act;
(c) So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request: a written statement by the Company as to its
compliance with
22.
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the reporting requirements of said Rule 144 of the Securities Act, and of the
Exchange Act (at any time after it has become subject to such reporting
requirements); a copy of the most recent annual or quarterly report of the
Company; and such other reports and documents as a Holder may reasonably request
in availing itself of any rule or regulation of the SEC allowing it to sell any
such securities without registration.
10.12 Market Stand-Off Agreement. In connection with a public offering of
the Company's Common Stock, each Holder hereby agrees that such Holder shall not
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by such Holder (other than those included in the
registration) for a period of up to ninety (90) days as may be specified by the
representatives of the underwriters of Common Stock (or other securities) of the
Company and the Company, provided that all executive officers and directors of
the Company, and all stockholders of the Company whose Fully Diluted Ownership
Percentage is at least one percent (1%).
Each Holder agrees to execute and deliver such other agreements as may be
reasonably requested by the Company or the underwriter which are consistent with
the foregoing or which are necessary to give further effect thereto. The
obligations described in this Section 10.12 shall not apply to a registration
relating solely to employee benefit plans on Form S-1 or Form S-8 or similar
forms that may be promulgated in the future, or a registration relating solely
to a Commission Rule 145 transaction on Form S-4 or similar forms that may be
promulgated in the future. The Company may impose stop-transfer instructions
with respect to the shares of Common Stock (or other securities) subject to the
foregoing restriction until the end of said period of time.
10.13 Limitation on Subsequent Registration Rights. After the date of this
Agreement, the Company shall not, without the prior written consent of the
Holders of fifty percent (50%) of the Registrable Securities then outstanding,
enter into any agreement with any holder or prospective holder of any securities
of the Company that would grant such holder registration rights senior to those
granted to the Holders hereunder.
10.14 Selection of Underwriter. The holders of a majority of the shares of
Registrable Securities to be included in a registration pursuant to Section 10.3
will have the right to select one or more underwriters to manage the offering of
such Registrable Securities, subject to the Company's approval, which will not
be unreasonably withheld or delayed.
ARTICLE XI
MISCELLANEOUS
11.1 Notices. All notices, requests, demands and other communications
which are required or permitted to be given under this Agreement shall be in
writing and shall be deemed to have been duly given if delivered by hand, by
facsimile transmission (receipt confirmed by telephone) or by overnight
registered or certified mail, return receipt requested, postage prepaid
addressed to the Company at the address of its principal office and to the
Stockholder at its last known address as shown by the books and records of the
Company, or to such other address as the Stockholder shall have specified in
writing to the other parties. Any notice given by personal
23.
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delivery, facsimile transmission or overnight mail shall be deemed to have been
delivered on the date of the receipt of such delivery or transmission at the
address set forth above (or such other address designated pursuant hereto); and
any notice given by registered or certified mail shall be deemed to have been
delivered on the fourth (4th) Business Day following the date on which it was
deposited in the United States postal system. Notice in writing may be given by
a method other than as described above and such notice shall be deemed delivered
on the date actually received.
11.2 Entire Agreement. This Agreement, the Stock Purchase Agreement, and
the documents, instruments and agreements to be executed and delivered pursuant
to this Agreement and the Stock Purchase Agreement constitute the entire
agreement among the parties with respect to the subject of the transactions
contemplated hereby and supersedes all prior letters or agreements with respect
thereto.
11.3 Waiver; Amendment.
(a) Any provision hereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only by the
written consent of (i) as to the Company, only by the Company, (ii) as to the
Stockholder, only by the Stockholder.
(b) This Agreement may not be amended or modified orally but only in
an instrument in writing duly executed by (i) the Company and (ii) the
Stockholder.
11.4 Assignment; Binding Effect. This Agreement shall not be assignable by
the Stockholder, and no purported assignment by the Stockholder shall be valid,
unless the assignment occurs in connection with a transfer of Stock made in
accordance with this Agreement and unless the transferee executes a counterpart
of this Agreement and then only with respect to the Stock so transferred;
provided, however, that, notwithstanding the foregoing, the Stockholder's rights
and obligations under Article II, III and IV, except as expressly set forth
therein, shall not be assignable by the Stockholder. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of the Company,
the Stockholder and their respective heirs, devisees, legal representatives,
successors, assigns and other transferees.
11.5 Counterparts. This Agreement may be executed in counterparts, each of
which, when so executed and delivered, shall be deemed to be an original and all
of which, taken together, shall constitute one and the same agreement.
11.6 Interpretation. This Agreement shall be construed and interpreted
fairly as to the parties and not in favor or against any party, regardless of
which party prepared this Agreement.
11.7 No Third Party Beneficiaries. This Agreement does not create, and
shall not be deemed to create, a relationship among the parties hereby or any of
them and any third party in the nature of a third party beneficiary or fiduciary
relationship.
24.
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11.8 Governing Law. This Agreement shall be governed by the internal law
of the State of Delaware (without giving effect to the choice of law principles
thereunder), as applicable.
11.9 Form of Payments. Except as otherwise provided herein, all payments
to be made under this Agreement shall be effected in immediately available funds
by wire transfer to the bank account as a party shall by notice designate.
11.10 Dispute Resolution. Except as provided below, any and all disputes
arising under or related to this Agreement which cannot be resolved through
negotiations between the parties shall, at the election of either party, be
submitted to binding arbitration. If the parties fail to reach a settlement of
their dispute within fifteen (15) days after the earliest date upon which one of
the parties notified the other(s) of its desire to attempt to resolve the
dispute, the dispute shall, at the election of either party, be promptly
submitted to arbitration. A single arbitrator shall be selected by mutual
agreement of the parties. If the parties are unable to agree on the selection of
a single arbitrator, then each party shall select an arbitrator and the two
selected arbitrators shall together select a third mutually agreeable
arbitrator. The decision of the arbitrator(s) shall be final, nonappealable and
binding upon the parties, and it may be entered in any court of competent
jurisdiction. The arbitration shall take place in Denver or Boulder, Colorado,
as the arbitrator shall determine. The arbitrator(s) shall be bound by the laws
of the State of Delaware applicable to the issues involved in the arbitration
and all rules relating to the admissibility of evidence, including, without
limitation, all relevant privileges and the attorney work product doctrine. All
discovery shall be completed in accordance with the time limitations prescribed
in the Colorado Rules of Civil Procedure, unless otherwise agreed by the parties
or ordered by the arbitrators on the basis of strict necessity adequately
demonstrated by the party requesting an extension of time. The arbitrator(s)
shall have the power to grant equitable relief where applicable under Delaware
law, and shall be entitled to make an award of punitive damages when applicable
under Delaware law. The arbitrator(s) shall issue a written opinion setting
forth their decision and the reasons therefor within thirty (30) days after the
arbitration proceeding is concluded. The obligation of the parties to submit any
dispute arising under or related to this Agreement to arbitration as provided in
this Section shall survive the expiration or earlier termination of this
Agreement. Notwithstanding the foregoing, either party may seek and obtain an
injunction or other appropriate relief from a court to preserve or protect
trademarks, tradenames, copyrights, patents, trade secrets or other intellectual
property or proprietary information or to preserve the status quo with respect
to any matter pending conclusion of the arbitration proceeding, but no such
application to a court shall in any way be permitted to stay or otherwise impede
the progress of the arbitration proceeding. In the event of any arbitration or
litigation being filed or instituted between the parties concerning this
Agreement, the prevailing party will be entitled to receive from the other party
or parties its reasonable attorneys' fees, witness fees, costs and expenses,
court costs and other reasonable expenses (including administration and the
arbitrator's fees), whether or not such controversy, claim or action is
prosecuted to judgment or other form of relief.
11.11 Cooperation and Assurances; Documents. Each party hereto shall
cooperate, and shall take such further action and shall execute and deliver such
further documents and instruments as may be reasonably requested by any other
party for purposes of carrying out the provisions of this Agreement. All
documents and instruments delivered by or on behalf of a
25.
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Stockholder to the Company shall be in form and content reasonably satisfactory
to the Company and its counsel, and all certificates, documents and instruments
delivered by or on behalf of the Company to a Stockholder shall be in form and
content reasonably satisfactory to such Stockholder and its counsel.
11.12 Specific Performance. The parties hereto acknowledge and agree that
irreparable damage would result if this Agreement is not specifically enforced
and that, therefore, the rights and obligations of the parties under this
Agreement may be enforced by a decree of specific performance issued by a court
of competent jurisdiction, and appropriate injunctive relief may be applied for
and granted in connection therewith. Such remedies shall, however, be cumulative
and not exclusive and shall be in addition to any other remedies which any party
may have under this Agreement or otherwise.
11.13 Severability. To the extent that any provisions of this Agreement be
invalid or unenforceable, it shall be considered deleted therefrom and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect.
11.14 Publicity. No party shall refer to or identify the other party, such
other party's Affiliates, or the respective products or services of any of them,
in advertising, promotional activity, publicity release or other public filing
without the prior consent of the other party.
IN WITNESS WHEREOF, each of the undersigned parties has caused this Agreement
to be duly executed under seal and delivered by such party or one of its duly
authorized officers, all as of the Effective Date.
HORIZON ORGANIC HOLDING CORPORATION
By: /s/ Barnet M. Feinblum
------------------------------------
Name: Barnet M. Feinblum
----------------------------------
Title: President and Chief Executive
Officer
---------------------------------
SUIZA FOODS CORPORATION
By: /s/ Tracy L. Noll
------------------------------------
Name: Tracy L. Noll
----------------------------------
Title: Executive Vice President
---------------------------------
26.
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Exhibit A
CERTIFICATE OF INCORPORATION
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HORIZON ORGANIC HOLDING CORPORATION
A DELAWARE CORPORATION
I.
The undersigned, Barnet M. Feinblum, hereby certifies that:
ONE: He is the duly elected and acting President of Horizon Organic Holding
Corporation.
TWO: The corporation's original Certificate of Incorporation was filed with
the Secretary of State of the State of Delaware on March 20, 1997 under the name
Horizon Organic Holding Corporation.
THREE: This Amended and Restated Certificate of Incorporation restates,
integrates and amends the corporation's Certificate of Incorporation filed on
March 20, 1997, and has been duly adopted in accordance with Sections 242 and
245 of the General Corporation Law of the State of Delaware.
FOUR: The text of the Amended and Restated Certificate of Incorporation of
this corporation is hereby amended and restated to read in its entirety as
follows:
II.
The name of this corporation is HORIZON ORGANIC HOLDING CORPORATION.
III.
The address of the registered office of the corporation in the State of
Delaware is the Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801. The name of its registered agent at such address
is the Corporation Trust Company.
IV.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
A. CLASSES OF STOCK. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue is
thirty-five million (35,000,000), of which thirty million (30,000,000) shares
shall be Common Stock and five million (5,000,000) shares shall be Preferred
Stock. The Common Stock shall have a par value of $.001 per share and the
Preferred Stock shall have a par value of $.001 per share.
A-1
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B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. 1. The management of the business and the conduct of the affairs of
the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of the initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "1933 Act"),
covering the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the Closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the Closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until such director's successor is duly elected and qualified or
until his death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
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3. Subject to the rights of the holders of any series of Preferred
Stock, no director shall be removed without cause. Subject to any limitations
imposed by law, the Board of Directors or any individual director may be removed
from office at any time with cause by the affirmative vote of the holders of a
majority of the voting power of all the then-outstanding shares of voting stock
of the corporation, entitled to vote at an election of directors (the "Voting
Stock").
4. Subject to the rights of the holders of any series of Preferred
Stock and the Stockholders Agreement, any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other causes and
any newly created directorships resulting from any increase in the number of
directors, shall, unless the Board of Directors determines by resolution that
any such vacancies or newly created directorships shall be filled by the
stockholders, except as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office, even though less
than a quorum of the Board of Directors and not by the stockholders. Any
director elected in accordance with the preceding sentence shall hold office for
the remainder of the full term of the director for which the vacancy was created
or occurred and until such director's successor shall have been elected and
qualified.
B. 1. Subject to paragraph (i) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the Voting Stock. The Board of Directors shall
also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be elected by written
ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws and following the closing of the Initial Public Offering no action
shall be taken by the stockholders by written consent.
C. 1. Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption) or (iv) by the holders of the shares entitled to cast
not less that ten percent (10%) of the votes at the meeting, and shall be held
at such place, on such date, and at such time as they or he shall fix; provided,
however, that the following registration of any classes of equity securities of
the corporation pursuant to the provisions of the Securities Exchange Act of
1934, as amended, special meetings of the stockholders may only be called by the
Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized Directors.
2. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
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VI.
A. To the fullest extent permitted by applicable law, this corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to the
corporation, its stockholders, and others.
B. No director of the corporation shall be personally liable to the
corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the General Corporation Law of the State of Delaware
or any amendment thereto or shall be liable by reason that, in addition to any
and all other requirements for such liability, such director (1) shall have
breached the director's duty of loyalty to the corporation or its stockholders,
(2) shall not have acted in good faith, or, in failing to act, shall not have
acted in good faith, (3) shall have acted in manner involving intentional
misconduct or a knowing violation of law or, in failing to act, shall have acted
in a manner involving intentional misconduct or a knowing violation of law, or
(4) shall have derived an improper personal benefit. If the Delaware General
Corporation Law is hereafter amended to authorize the further elimination or
limitation of the liability of a director, the liability of a director of the
corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended.
C. Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the corporation or of a
direct or indirect subsidiary of the corporation, or is or was serving at the
request of the corporation as a director of officer of another entity or
enterprise, or was a director or officer of a foreign or domestic corporation
which was predecessor corporation of the corporation or of another entity or
enterprise at the request of such predecessor corporation, shall be indemnified
and held harmless by the corporation, and the corporation shall advance all
expenses incurred by any such person in defense of any such proceeding prior to
its final determination, to the fullest extent authorized by the General
Corporation Law of the State of Delaware. In any proceeding against the
corporation to enforce these rights, such person shall be presumed to be
entitled to indemnification and the corporation shall have the burden of proving
that such person has not met the standards of conduct for permissible
indemnification set forth in the General Corporation Law of the State of
Delaware. The rights to indemnification and advancement of expenses conferred by
this Article VI shall be presumed to have been relied upon by the directors and
officers of the corporation in serving or continuing to serve the corporation
and shall be enforceable as contact rights. Said rights shall not be exclusive
of any other rights to which those seeking indemnification may otherwise be
entitled. The corporation may, upon written demand presented by a director or
officer of the corporation or of a direct or indirect subsidiary of the
corporation, or by a person serving at the request of the corporation as a
director or officer
A-4
<PAGE>
of another entity or enterprise, enter into contracts to provide such persons
with specified rights to indemnification, which contracts may confer rights and
protections to the maximum extent permitted by the General Corporation Law of
the State of Delaware, as amended and in effect from time to time.
1. If a claim under this Article VI is not paid in full by the
corporation within sixty (60) days after a written claim has been received by
the corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the corporation) that the claimant has
not met the standards of conduct which make it permissible under the General
Corporation Law of the State of Delaware for the corporation to indemnify the
claimant for the amount claimed, but the claimant shall be presumed to be
entitled to indemnification and the corporation shall have the burden of proving
that the claimant has not met the standards of conduct for permissible
indemnification set forth in the General Corporation Law of the Sate of
Delaware.
2. If the General Corporation Law of the State of Delaware is
hereafter amended to permit the corporation to provide broader indemnification
rights than said Law permitted the corporation to provide prior to such
amendment, the indemnification rights conferred by this Article VI shall be
broadened to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as so amended.
D. Any repeal or modification of any of the foregoing provisions of this
Article VII, including without limitation, any contractual rights arising under
or authorized by it, shall not adversely affect any right or protection of a
director, officer, agent or other person existing at the time of, or increase
the liability of any director of the corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification.
VII.
A. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
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IN WITNESS WHEREOF, the undersigned has executed this certificate on
__________ __, 1998.
_______________________________
Barnet M. Feinblum
President
A-6
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
THE BOARD OF DIRECTORS
HORIZON ORGANIC HOLDING CORPORATION:
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
Boulder, Colorado
June 8, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 9, 1997, with respect to the financial statements
of Sunrise Organic Farms, Inc. (f/k/a Aurora Dairy Corporation of Idaho,Inc.)
(Sunrise) as of December 31, 1996 in Amendment No. 3 to the Registration
Statement (Form S-1 No. 333-51465) (the Registration Statement) and the related
prospectus of Horizon Organic Holding Corporation. We also consent to the filing
of our report dated April 9, 1997 with respect to the financial statements of
Sunrise as of December 31, 1995 as an exhibit to the Registration Statement. The
financial statements as of December 31, 1996, and 1995 were audited by Eide
Helmeke PLLP, who merged with Charles Bailly & Company PLLP as of May 1, 1998,
and whose report dated April 9, 1997, expressed an unqualified opinion.
/s/ Eide Bailly LLP
June 8, 1998
Fargo, North Dakota
