<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1998
REGISTRATION NO. 333-51465
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
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 BROBECK, PHLEGER & HARRISON LLP
2595 CANYON BOULEVARD, SUITE 250 TWO EMBARCADERO PLACE, 2200 GENG ROAD
BOULDER, COLORADO 80302-6737 PALO ALTO, CALIFORNIA 94303
(303) 546-4000 (650) 424-0160
----------------
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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 8, 1998
PROSPECTUS
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.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 6.
--------
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 $750,000.
(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.
<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 Fixed 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.
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 to be outstanding after the
offering.................................. 8,056,341 shares(1)
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."
Proposed 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(2)(3)....................... 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(4)................................ $ (.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(5)
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(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 404 $ 811 $13,272
Working capital............................... 2,935 2,520 14,981
Total assets.................................. 32,737 34,501 46,963
Long-term debt................................ 17,960 18,970 4,969
Total stockholders' equity.................... 8,886 8,796 35,462
</TABLE>
4
<PAGE>
- --------------------
(1) 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.
(2) 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.
(3) 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.
(4) Net income (loss) per share is computed using the weighted average number
of common shares (basic) and common and common equivalent shares (diluted)
outstanding during the period. See Note 2 to the Company's Consolidated
Financial Statements.
(5) 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 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 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.
5
<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
6
<PAGE>
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,
7
<PAGE>
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
8
<PAGE>
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".
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.
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".
9
<PAGE>
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 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.
10
<PAGE>
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 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,
11
<PAGE>
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 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
12
<PAGE>
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 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, 8,056,341 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
13
<PAGE>
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 4,565,126 shares that
are subject to lock-up agreements (the "Lock-Up Agreements") with Hambrecht &
Quist LLC, and an aggregate of 491,215 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
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,
directors, executive officers and principal stockholders of the Company, and
certain of their affiliates, will beneficially own approximately 46% 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 will
therefore incur immediate and substantial dilution of $5.87 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
14
<PAGE>
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.
15
<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 are estimated to be $27.2 million ($31.3
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, (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".
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<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 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, 8,056,341 shares issued and outstanding, as
adjusted(2)............................................ 5 8
Additional paid-in capital(3)........................... 11,859 38,425
Accumulated deficit(4).................................. (2,486) (2,971)
Treasury stock(3)....................................... (582) --
------- -------
Total stockholders' equity............................ 8,796 35,462
------- -------
Total capitalization................................. $27,766 $40,431
======= =======
</TABLE>
- ---------------------
(1) Reflects repayment of Line of Credit with U.S. Bancorp, unsecured
subordinated promissory notes and senior promissory subordinated 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".
17
<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, the pro forma
net tangible book value of the Company at March 31, 1998 would have been
approximately $33,295,000, or $4.13 per share. This represents 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 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......... 2.82
-----
Pro forma net tangible book value per share after the offer-
ing(1)..................................................... 4.13
------
Dilution per share to new investors......................... $ 5.87
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the differences between existing stockholders 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 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 62.8% $11,283,000 27.3% $ 2.23
New investors............. 3,000,000 37.2 30,000,000 72.7 10.00
--------- ----- ----------- -----
Total................... 8,056,341 100.0% $41,283,000 100.0%
========= ===== =========== =====
</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.
18
<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>
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>
19
<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.
(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.
20
<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
21
<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
22
<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 15 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, 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 $6.5 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
General and
administrative
expenses............. 8.7 6.7 8.1 6.5 5.8
----- ----- ----- --------- ---------
</TABLE>
23
<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>
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
24
<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.
25
<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.
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<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, $165,000, and $627,000
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
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<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
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<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, together with
cash generated from operations and funds available under the Line of Credit,
will be sufficient to satisfy its cash requirements through fiscal 1999.
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
29
<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.
30
<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 74%, 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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<PAGE>
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.
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.
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.
32
<PAGE>
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 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.
33
<PAGE>
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.
34
<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 74%, 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.
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
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
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<PAGE>
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.
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".
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
41
<PAGE>
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 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
42
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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 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
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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.
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
44
<PAGE>
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".
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.
45
<PAGE>
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 August 1976 until August 1993, Mr Feinblum served as
the Vice Chairman of Celestial Seasonings, Inc., a large herbal tea company
("Celestial"). From October 1979 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
46
<PAGE>
"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.
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.
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.
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.
BOARD OF DIRECTORS
The Company currently has eight authorized directors. In April 1998, the
Company's Board of Directors (the "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: 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; 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
47
<PAGE>
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.
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.
48
<PAGE>
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.
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.
49
<PAGE>
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 $100,000 for services
rendered to the Company during fiscal 1997 (collectively, the "Named Executive
Officers"):
50
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
---------------- ------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($)(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:
51
<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
52
<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.
53
<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
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<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
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<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
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<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.
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<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) 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
BENEFICIAL OWNER(1) PRIOR TO OFFERING(2) OFFERING OFFERING
------------------- -------------------- ---------- ----------
<S> <C> <C> <C>
Thomas D. McCloskey, Jr.(3).. 972,516 19.1% 12.0%
Marcus B. Peperzak(4)........ 604,498 11.8 7.5
Boulder Ventures II, L.P.(5). 559,496 11.1 6.9
1634 Walnut Street,
Suite 301
Boulder, CO 80302
Paul B. Repetto(6)........... 435,000 8.6 5.4
Mark A. Retzloff(7).......... 385,282 7.6 4.8
Barnet M. Feinblum(8)........ 316,843 6.1 3.9
Leonard A. Lauder............ 293,517 5.8 3.6
767 Fifth Avenue
New York, NY 10153
J. Thomas Clark(9)........... 170,333 3.4 2.1
Clark R. Mandigo II(10)...... 85,966 1.7 1.1
Richard L. Robinson(11)...... 49,824 * *
All executive officers and
directors as a group (10
persons)(12)................ 3,027,262 56.4 36.2
</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 8,056,341 shares of
Common Stock outstanding after completion of the offering, 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.
(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) Includes 20,000 shares subject to stock options.
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<PAGE>
(7) 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.
(8) 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.
(9) Includes 17,000 shares subject to stock options.
(10) Includes an aggregate of 23,236 shares held in trust for his three
children and 2,000 shares subject to stock options.
(11) Includes 2,000 shares subject to stock options.
(12) 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 through 11 above.
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<PAGE>
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.
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
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<PAGE>
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 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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<PAGE>
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, the Company will have outstanding an
aggregate of 8,056,341 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 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) 435,214 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) 4,565,126 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 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 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.
62
<PAGE>
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".
63
<PAGE>
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 4,565,126 shares of Common Stock after this
offering, 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
64
<PAGE>
Stock or securities exchangeable for or convertible into shares of 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 $10.0 million to the
Company pursuant to the Term Loan and Line of Credit, respectively, all of
which will be repaid with a portion of the proceeds of 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.
65
<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.
R 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.
66
<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 and 26.825 percent owned investee company as of
December 31, 1995 and December 28, 1996, respectively. The Company's
investment in Sunrise at December 28, 1996 was $863,000 and its equity in
losses of Sunrise was $44,000 and $77,000 for the year ended December 31, 1995
and the 52 weeks ended December 28, 1996, respectively. 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, 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.
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 IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS 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 SOLICI-
TATION 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 CIRCUMSTANCES, 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............................................................. 6
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 31
Management............................................................... 46
Certain Transactions..................................................... 54
Principal Stockholders................................................... 58
Description of Capital Stock............................................. 60
Shares Eligible for Future Sale.......................................... 62
Underwriting............................................................. 64
Legal Matters............................................................ 66
Experts.................................................................. 66
Additional Information................................................... 66
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 ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS 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....................... 5,000.00
Blue sky qualification fee and expenses...................... 5,000.00
Printing and engraving expenses.............................. 125,000.00
Legal fees and expenses...................................... 275,000.00
Accounting fees and expenses................................. 200,000.00
Transfer agent and registrar fees............................ 10,000.00
Miscellaneous................................................ 114,509.00
-----------
Total.................................................... $750,000.00
===========
</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.
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 (10) 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.
3.2+ 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 & 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
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.
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.
II-4
<PAGE>
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. 1
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 8th day of
May, 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. 1 to Registration Statement No. 333-51465 has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Chairman of the
/s/ Marcus B. Peperzak* Board of Directors May 8, 1998
- -------------------------------------
MARCUS B. PEPERZAK
President, Chief
/s/ Barnet M. Feinblum Executive Officer, May 8, 1998
- ------------------------------------- Director (Principal
BARNET M. FEINBLUM Executive Officer)
Vice President,
/s/ Don J. Gaidano* Finance & May 8, 1998
- ------------------------------------- Administration,
DON J. GAIDANO Chief Financial
Officer, and
Treasurer
(Principal
Financial and
Accounting Officer)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Paul B. Repetto* Vice President,
- ------------------------------------- Marketing, Director May 8, 1998
PAUL B. REPETTO
/s/ Mark A. Retzloff* Vice President,
- ------------------------------------- Sales, Director May 8, 1998
MARK A. RETZLOFF
/s/ Thomas D. McCloskey, Jr.* Director May 8, 1998
- -------------------------------------
THOMAS D. MCCLOSKEY, JR.
/s/ J. Thomas Clark* Director May 8, 1998
- -------------------------------------
J. THOMAS CLARK
/s/ Clark R. Mandigo II* Director May 8, 1998
- -------------------------------------
CLARK R. MANDIGO II
/s/ Richard L. Robinson* Director May 8, 1998
- -------------------------------------
RICHARD L. ROBINSON
</TABLE>
*By: /s/ Barnet M. Feinblum
---------------------------
Barnet M. Feinblum
Attorney-In-Fact
II-7
<PAGE>
EXHIBIT 1.1
HORIZON ORGANIC HOLDING CORPORATION
3,000,000 Shares/1/
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_____ __, 1998
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
HANIFEN, IMHOFF INC.
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Horizon Organic Holding Corporation, a Delaware corporation (herein called
the "Company"), proposes to issue and sell 3,000,000 shares of its authorized
but unissued Common Stock, $.001 par value (herein called the "Common Stock" and
said 3,000,000 shares of Common Stock being herein called the "Underwritten
Stock"). The Company proposes to grant to the Underwriters (as hereinafter
defined) an option to purchase up to 450,000 additional shares of Common Stock
(herein called the "Option Stock" and with the Underwritten Stock herein
collectively called the "Stock"). The Common Stock is more fully described in
the Registration Statement and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the "Underwriters", which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each
of the other Underwriters to enter into this Agreement on its behalf and to act
for it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the "Commission") a registration statement on
Form S-1 (No. 333-51465), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
"Securities Act"), of the Stock. Copies of such registration statement and of
each amendment thereto, if any, including the related preliminary prospectus
(meeting the requirements of Rule 430A of the rules and regulations of the
Commission) heretofore filed by the Company with the Commission have been
delivered to you.
The term "Registration Statement" as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the "Effective
Date"), shall also mean (from and after the effectiveness of such amendment)
such registration statement as so amended (including any Rule 462(b)
registration statement). The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Stock first filed with the Commission
pursuant to Rule
________________________________________________________________________________
/1/ Plus an option to purchase from the Company up to 450,000 additional shares
to cover over-allotments.
<PAGE>
424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term "Preliminary Prospectus"
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and each of its subsidiaries listed in
Exhibit 21.1 to the Registration Statement (collectively, the
"Subsidiaries") has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and the Prospectus and as being conducted, and is duly qualified
as a foreign corporation and in good standing in all jurisdictions in which
the character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary except where the failure to
be so qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company or
the Subsidiaries.
(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company or the Subsidiaries, whether or not
arising from transactions in the ordinary course of business, other than as
set forth in the Registration Statement and the Prospectus, and since such
dates, except in the ordinary course of business, neither the Company nor
any of the Subsidiaries has entered into any material transaction not
referred to in the Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder (the "Rules and Regulations");
on the Effective Date, the Registration Statement did not contain any
untrue statement of a material fact and did not omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date, the
Prospectus did not and, on the Closing Date and any later date on which
Option Stock is to be purchased, will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (iii) shall apply to
statements in, or omissions from, the Registration Statement or the
Prospectus made in reliance upon and in conformity with information herein
or otherwise furnished in writing to the Company by or on behalf of the
Underwriters for use in the Registration Statement or the Prospectus.
(iv) The Stock is duly and validly authorized, will be, when issued
and sold to the Underwriters as provided herein, duly and validly issued,
fully paid and nonassessable and conforms to the description thereof in the
Prospectus. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required. The Company has an
authorized and outstanding capital stock as set forth under the heading
Capitalization in the Prospectus; all of the issued and outstanding
securities of the Company have been duly authorized and validly issued, are
fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or
purchase securities, and conform to the description thereof contained in
the Prospectus. All issued and outstanding shares of capital stock of each
Subsidiary of the Company have been
2.
<PAGE>
duly authorized and validly issued and are fully paid and nonassessable and
have been issued in compliance with all federal and state securities laws.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, neither the Company nor any Subsidiary has outstanding any
options to purchase, or any preemptive rights or other rights to subscribe
for or to purchase, any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The
description of the Company's Equity Incentive Plan and Employee Stock
Purchase Plan, set forth in the Prospectus under the caption "Stock Option
Plans" accurately and fairly presents the information required to be shown
with respect to stock option plans, arrangements and rights. Except as
described in the Registration Statement or Prospectus, no registration
rights (other than those which have been waived), voting agreements,
preemptive rights of, or rights of refusal in favor of, stockholders exist
with respect to the Stock, or the issue and sale thereof, and, there are no
preemptive rights or registration rights that have not been waived, or
rights of first refusal which exist with respect to the Stock.
(v) The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than the Subsidiaries.
(vi) The Company has filed a registration statement pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended, to
register the Stock, and prior to the closing date, the Stock to be issued
and sold by the Company will be authorized for listing on the Nasdaq
National Market upon official notice of issuance.
(vii) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; the
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a material breach or violation of
any of the terms and provisions of, or constitute a default under, (i) any
bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, license, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which its properties
may be bound, (ii) the Certificate of Incorporation or Bylaws of the
Company or any of the Subsidiaries, or (iii) any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction
over the Company or any of the Subsidiaries or any of their properties. No
consent, approval, authorization or order of or qualification with any
court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company, the Subsidiaries or over any of their
properties is required for the execution and delivery of this Agreement and
the consummation by the Company of the transactions herein contemplated,
except such as may be required under the Act or under state or other
securities or Blue Sky laws, all of which requirements have been satisfied
in all material respects.
(viii) Neither the Company nor any of the Subsidiaries have sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with their respective
businesses from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since the date of the Prospectus, there has not been any
material change in the capital stock or long-term debt of the Company or
any of the Subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company or any of the Subsidiaries, otherwise
than as set forth or contemplated in the Prospectus.
(ix) The audited consolidated financial statements of the Company,
together with the related notes and supporting schedules, and the unaudited
consolidated financial statements, filed as part of the Registration
Statement or included in the Prospectus, fairly present the financial
condition and results of
3.
<PAGE>
operations of the Company and the Subsidiaries at the dates and for the
periods indicated, in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods involved.
The unaudited financial statements (including related notes) filed as part
of the Registration Statement or included in the Prospectus include all
adjustments, consisting of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods (except for the footnotes). The
selected summary financial and statistical data included in the
Registration Statement present fairly the information shown therein and
have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules
are required to be included in the Registration Statement.
(x) KPMG Peat Marwick LLP, who has audited the consolidated balance
sheets of the Company as of December 31, 1996 and 1997 and the related
consolidated statements of operations, stockholder's equity and cash flows,
together with the related schedules and notes for each of the three (3)
years in the period ended December 31, 1997, whose report appears in the
Registration Statement and in the Prospectus and who have delivered the
Original Letter referred to in Section 9(f) hereof, are independent public
accountants as required by and within the meaning of the Securities Act and
the Rules and Regulations.
(xi) All real property and buildings held under lease by the Company
and the Subsidiaries are held by them under valid, subsisting and, to the
best of the Company's knowledge, enforceable leases, with such exceptions
as are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company or the Subsidiaries.
(xii) The Company and the Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is reasonably adequate
for the conduct of their businesses and the value of their properties.
Neither the Company nor any of the Subsidiaries have been refused any
insurance coverage sought or applied for; and the Company has not been
informed by its insurers that it will not be able to renew its or the
Subsidiaries' existing insurance coverage as and when such coverage
expires.
(xiii) The Company and the Subsidiaries own or possess adequate rights
to use all inventions, trade secrets, know-how, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, approvals and government authorizations described in the
Registration Statement and Prospectus as being owned by them or useful in
the conduct of their businesses as now conducted or proposed to be
conducted as described in the Registration Statement and Prospectus; the
expiration of any trade secrets, trademarks, service marks, trade names or
copyrights would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company or the Subsidiaries (a "Material Adverse Effect");
neither the Company nor any of the Subsidiaries has received any notice of,
and has no knowledge of, any infringement of or conflict with asserted
rights of the Company or any of the Subsidiaries by others with respect to
any inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and neither the Company nor any of the Subsidiaries
has received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others with respect to any inventions,
trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a Material Adverse
Effect.
(xiv) Except as described in the Prospectus, there are no legal,
governmental or administrative proceedings pending to which the Company or
any of the Subsidiaries is a party or of which any property or assets of
the Company or any of the Subsidiaries is the subject which, if determined
adversely to the Company or any of the Subsidiaries, may have a Material
Adverse Effect, and no such proceedings are threatened or contemplated by
governmental authorities or by others.
(xv) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have
not been described in the Prospectus or filed as exhibits to the
Registration Statement.
(xvi) There are no outstanding loans, advances (except normal
advances for business expenses in
4.
<PAGE>
the ordinary course of business) or guarantees of indebtedness by the
Company or any of the Subsidiaries to or for the benefit of any of the
officers or directors of the Company or any of the members of the families
of any of them, required to be disclosed in the Registration Statement and
the Prospectus that are not described therein. No relationship, direct or
indirect, exists between or among the Company or any of the Subsidiaries on
the one hand, and the directors, officers, stockholders, collaboration
partners, joint venturers, licensees, licensors, consultants, customers or
suppliers of the Company or any of the Subsidiaries on the other hand,
which is required to be described in the Prospectus which is not so
described.
(xvii) No labor disturbance by the employees of the Company or any of
the Subsidiaries exists or, to the knowledge of the Company, is imminent.
No collective bargaining agreement exists with any of the Company's or any
of the Subsidiaries' employees and, to the best of the Company's knowledge,
no such agreement is imminent.
(xviii) The Company and each of the Subsidiaries has filed all
federal, state and local income and franchise tax returns required to be
filed through the date hereof and has paid all taxes due thereon, and no
tax deficiency has been determined adversely to the Company or any of the
Subsidiaries which will have (nor does the Company have any knowledge of
any tax deficiency which, if determined adversely to the Company or any of
the Subsidiaries, might have) a Material Adverse Effect. All tax
liabilities are adequately provided for on the books of the Company.
Neither the Company nor any of the Subsidiaries is currently subject to any
audit by any tax authorities and no such audit has been threatened by any
such authorities.
(xix) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, neither the Company nor any of the
Subsidiaries has (i) issued or granted or obligated itself to issue or
grant any securities, other than option grants and exercises and stock
purchases pursuant to the Company's Equity Incentive Plan or Employee Stock
Purchase Plan in the ordinary course of business and consistent with past
practice or pursuant to the exercise of warrants in the ordinary course of
business, (ii) entered into any transaction with an aggregate value of over
$100,000 not in the ordinary course of business or (iii) declared or paid
any dividend on its capital stock.
(xx) Neither the Company nor any of the Subsidiaries has been
advised that either it or any of the Subsidiaries is not conducting
business in material compliance with all applicable laws, rules and
regulations of the jurisdictions in which they are conducting business,
including, without limitation, all applicable local, state and federal laws
and regulations relating to the manufacture, production and sales of dairy
products or the breeding, keeping, housing and disposal of livestock; and
nor has the Company been advised that the conduct of the business of the
Company, as described in the Prospectus, will cause the Company or any of
the Subsidiaries, to be in violation of any such requirements, except where
failure to be so in compliance would not have a Material Adverse Effect.
(xxi) Neither the Company nor any of the Subsidiaries (i) is in
violation of its Certificate of Incorporation or Bylaws, or (ii) is in
default in any material respect, and no event has occurred which, with
notice or lapse of time or both, would constitute such a default, in the
due performance or observance of any term, covenant or condition contained
in any license agreement, purchase order, manufacturing or supply
agreement, collaboration agreement, material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which it is a
party or by which it is bound or to which any of its properties or assets
is subject, other than as would not cause a Material Adverse Effect (and,
to its knowledge, no other party to any such agreement is in default
thereof and no event has occurred which, with notice, lapse of time or
both, would constitute such a default).
(xxii) Except as set forth in the Registration Statement and
Prospectus, (i) the Company and the Subsidiaries is in compliance with all
rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business, and (ii)
neither the Company nor any of the Subsidiaries has received notice from
any governmental authority of an asserted claim under Environmental Laws,
which claim is required to be disclosed in the Registration Statement and
the Prospectus. To the knowledge of the Company, there has been no
storage, disposal, generation, manufacture, refinement, transportation,
handling or treatment of toxic
5.
<PAGE>
wastes, medical wastes, hazardous wastes or hazardous substances by the
Company or any of the Subsidiaries (or, to the knowledge of the Company,
any of their respective predecessors in interest) at, upon or from any of
the property now or previously owned or leased by the Company or any of the
Subsidiaries in violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would require
remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or remedial
action which would not have, or could not be reasonably likely to have,
singularly or in the aggregate with all such violations and remedial
actions, a Material Adverse Effect.
(xxiii) Neither the company nor any Subsidiary is an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940 and the rules and regulations
thereunder (the "1940 Act").
(xxiv) Neither the Company nor any of the Subsidiaries has at any
time during the last three (3) years (i) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any foreign,
federal or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(xxv) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Stock
to facilitate the sale or resale of the Stock.
(xxvi) The Company has not distributed and will not distribute prior
to the later of (i) the Closing Date, or any date on which Option Stock is
to be purchased, as the case may be, and (ii) completion of the
distribution of the Stock, any offering material in connection with the
offering and sale of the Stock other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any,
permitted by the Act.
(xxvii) The Company and each of the Subsidiaries makes and keeps
accurate books and records and maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) its
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization, and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxviii) The Company has not had any disagreements, during its two
most recent fiscal years or any subsequent interim period, with an
independent accountant who was previously engaged as the principal
accountant to audit the Company's financial statements and on whom the
principal accountant expressed reliance in its report (either of whom
resigned, indicated that it declined to stand for re-election after the
completion of the current audit, or was dismissed), on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement(s) would require disclosure
in the Registration Statement.
(xxix) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of
Cuba or with any person or affiliate located in Cuba.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
3,000,000 shares of the Underwritten Stock to the several Underwriters, and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $___ per share. The
obligation of
6.
<PAGE>
each Underwriter to the Company shall be to purchase from the Company that
number of shares of the Underwritten Stock which represents the same proportion
of the total number of shares of the Underwritten Stock to be sold by the
Company pursuant to this Agreement as the number of shares of the Underwritten
Stock set forth opposite the name of such Underwriter in Schedule I hereto
represents of the total number of shares of the Underwritten Stock to be
purchased by all Underwriters pursuant to this Agreement, as adjusted by you in
such manner as you deem advisable to avoid fractional shares. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of each
Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of the shares of the Stock which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any non-
defaulting Underwriter and without any liability on the part of any non-
defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
grants an option to the several Underwriters to purchase, severally and not
jointly, up to 450,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may
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determine.
(b) The information set forth in the last paragraph on the front cover
page and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Cooley Godward LLP, 2595 Canyon Boulevard, Boulder, Colorado, at 7:00
a.m., San Francisco time, on the fourth business day after the date of this
Agreement, or at such time on such other day, not later than seven full business
days after such fourth business day, as shall be agreed upon in writing by the
Company and you. The date and hour of such delivery and payment (which may be
postponed as provided in Section 3(b) hereof) are herein called the "Closing
Date".
(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Cooley Godward LLP, 2595 Canyon
Boulevard, Boulder, Colorado, at 7:00 a.m., San Francisco time, on the third
business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order by one or more certified or official bank check or checks
or by electronic wire transfer in same day funds. Such payment shall be made
upon delivery of certificates for the Stock to you for the respective accounts
of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day prior to
the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York
time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check or electronic wire
transfer shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A and (ii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of (i)
the request by the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose.
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The Company will make every reasonable effort to prevent the issuance of such a
stop order and, if such an order shall at any time be issued, to obtain the
withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
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(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the National
Association of Securities Dealers, Inc. ("NASD") of the Registration Statement,
any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (c) of this Section 6 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v)
the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters,
which shall not be greater than $5,000) paid by or for the account of the
Underwriters or their counsel in qualifying the Stock under state securities or
blue sky laws and in the review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are intended
to relieve the Underwriters from the payment of the expenses and costs which the
Company hereby agrees to pay and shall not affect any agreement which the
Company may make, or may have made, for the sharing of any such expenses and
costs.
(l) The Company hereby agrees that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not, for a
period of 180 days following the commencement of the public offering of the
Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to
sell, transfer the economic right of ownership in, make any short sale, pledge,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences or ownership of Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Stock to be sold to the
Underwriters pursuant to this Agreement, (B) shares of Common Stock issued by
the Company upon the exercise of options granted under the Equity Incentive Plan
or Employee Stock Purchase Plan of the Company (the "Option Plans") or upon the
exercise of warrants outstanding as of the date hereof, all as described in
footnote 2 to the table under the caption "Capitalization" in the Preliminary
Prospectus, and (C) options to purchase Common Stock granted under the Company's
stock option plans.
(m) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(n) The Company will in the future conduct its affairs, in such a manner
to ensure that the Company will not be an "investment company" within the
meaning of the 1940 Act, and the rules and regulations thereunder.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (herein called
the "Exchange Act"), or the common law or otherwise, and the Company agrees to
reimburse each such Underwriter and controlling person for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of,
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or other proceeding which may be brought against, the respective indemnified
parties, in each case arising out of or based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (including the Prospectus as part thereof and any Rule 462(b)
registration statement) or any post-effective amendment thereto (including any
Rule 462(b) registration statement), or 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 (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that (1) the indemnity agreements of
the Company contained in this paragraph (a) shall not apply to any such losses,
claims, damages, liabilities or expenses if such statement or omission was made
in reliance upon and in conformity with information furnished as herein stated
or otherwise furnished in writing to the Company by or on behalf of any
Underwriter for use in any Preliminary Prospectus or the Registration Statement
or the Prospectus or any such amendment thereof or supplement thereto and (2)
the indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, or the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or 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 (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock. The liability of each Underwriter
under the indemnity, and under the reimbursement and contribution provisions of
this Section 7 shall be limited to an amount equal to the underwriting discount
applicable to the Stock purchased by such Underwriter.
(c) Each party indemnified under the provision of paragraphs (a) and (b)
of this Section 7 agrees that, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of, or proceeding against, it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such paragraphs, it
will
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promptly give written notice (herein called the Notice) of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable
or insufficient to hold harmless an indemnified party under paragraph (a) or (b)
of this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Stock
received by the Company and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend
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or defending against any action or claim which is the subject of this paragraph
(d). Notwithstanding the provisions of this paragraph (d), no Underwriter shall
be required to contribute any amount in excess of the underwriting discount
applicable to the Stock purchased by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this paragraph (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
7A. INDEMNIFICATION OF QUALIFIED INDEPENDENT UNDERWRITER.
(a) The Company agrees to indemnify and hold harmless Hambrecht &
Quist LLC, in its capacity as Qualified Independent Underwriter ("QIU"), against
any losses, claims, damages or liabilities, joint or several, to which the QIU
may become subject, under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon 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 (ii) any claim, action, suit or proceeding relating
to or arising out of the initial offering and sale of the Shares by the
Underwriters as contemplated by the Prospectus, and will reimburse the QIU for
any legal or other expenses reasonably incurred by the QIU in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(b) Promptly after receipt by the QIU under subsection (a) above of
notice of the commencement of any action, the QIU shall, if a claim in respect
thereof is to be made against the Company under such subsection, notify the
Company in writing of the commencement thereof; but the omission so to notify
the Company shall not relieve the Company from any liability that the Company
may have to the QIU otherwise than under such subsection. In case any such
action shall be brought against the QIU and the QIU shall notify the Company of
the commencement thereof, the Company shall be entitled to participate therein
and, to the extent that the Company shall wish, to assume the defense thereof,
with counsel satisfactory to the QIU (who shall not in the case of clause (i) of
Section 7A(a), except with the consent of the QIU, be counsel to the Company),
and, after notice from the Company to the QIU of its election so to assume the
defense thereof, the Company shall not be liable to the QIU under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by the QIU, in connection with the defense
thereof other than reasonable costs of investigation. The Company shall not,
without the written consent of the QIU, effect the settlement or compromise of,
or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the QIU is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the QIU from all liability arising out of
such action or claim and (ii) does not include a statement as to or an admission
of fault, culpability or a failure to act by or on behalf of the QIU.
(c) If the indemnification provided for in this Section 7A is
unavailable to or insufficient to hold harmless Hambrecht & Quist LLC, in its
capacity as QIU, under subsection (a) above in respect of any losses,
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claims, damages or liabilities (or actions in respect thereof) referred to
therein, then the Company shall contribute to the amount paid or payable by the
QIU as a result of such losses, claims, damages or liabilities (or actions in
respect thereof) (i) in the case of subsection (a)(i), in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the QIU on the other from the offering of the Shares and (ii) in the
case of subsection (a)(ii), the Company shall contribute the entire amount by
which such indemnification is unavailable or insufficient, it being understood
and agreed that as between the Company on the one hand and the QIU on the other,
the Company is the sole beneficiary of the initial offering and sale of the
Shares contemplated by the Prospectus. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law or if the
QIU failed to give the notice required under subsection (b) above, then the
Company shall contribute to such amount paid or payable by the QIU in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and the QIU on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the QIU on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company, as set forth in the table on the cover page
of the Prospectus, bear to the fee payable to the QIU pursuant to Section 3
hereof. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the QIU on the other and the parties
relative intent, knowledge, access to information and opportunity to correct to
prevent such statement or omission. The Company and the QIU agree that it would
not be just and equitable if contribution pursuant to subsection (c)(i) were
determined by pro rata allocation or any other method of allocation that does
not take account of the equitable considerations referred to above in this
subsection (c). The amount paid or payable by the QIU as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (c) shall be deemed to include any legal or other expenses
reasonably incurred by the QIU in connection with investigating, or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) The obligations of the Company under this Section 7A shall be in
addition to any liability that the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls the QIU
within the meaning of the Securities Act.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States would, in the Underwriters' reasonable judgment,
make the offering or delivery of the Stock impracticable, (iii) suspension of
trading in securities generally or a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, or The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all of its obligations to be performed
14.
<PAGE>
hereunder at or prior to the Closing Date or any later date on which Option
Stock is to be purchased, as the case may be, and to the following further
conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and
the validity and form of the certificates representing the Stock, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by Brobeck, Phleger & Harrison LLP, counsel for the Underwriters.
(c) You shall have received from Cooley Godward LLP, counsel for the
Company, and from Ober, Kaler, Grimst & Shriver, regulatory counsel for the
Company, opinions, addressed to the Underwriters and dated the Closing Date,
covering the matters set forth in Annex A and Annex B hereto, respectively, and
if Option Stock is purchased at any date after the Closing Date, additional
opinions from each such counsel, addressed to the Underwriters and dated such
later date, confirming that the statements expressed as of the Closing Date in
such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of the Subsidiaries have entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of the Subsidiaries have any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of the Subsidiaries is a party or of which property
of the Company or any of the Subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date or
any later date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for securities in
general or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make a
public offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date on
which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, in their capacities as such, stating that the
respective signers of said certificate have carefully examined the Registration
Statement in the form in which it originally became effective and the Prospectus
contained therein and any supplements or amendments thereto, and that the
statements included in clauses (i) through (vii) of paragraph (d) of this
Section 9 are true and correct.
(f) You shall have received from KPMG Peat Marwick LLP and Eide Helmeke
PLLP, a letter or letters, addressed to the Underwriters and dated the Closing
Date and any later date on which Option Stock is purchased, confirming that they
are independent public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published rules and regulations
thereunder and based upon the procedures described in their letter delivered to
you concurrently with the execution of this Agreement (herein called the
"Original Letter"),
15.
<PAGE>
which shall include a review of the Company's consolidated unaudited financial
statements for the three months ended March 31, 1998, in accordance with the
procedures specified by the American Institute of Certified Public Accountants
for a review of interim financial information as described in SAS No. 71, but
carried out to a date not more than three business days prior to the Closing
Date or such later date on which Option Stock is purchased (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date, as the case may
be, and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to reflect any
changes in the facts described in the Original Letter since the date of the
Original Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any change, or
any development involving a prospective change, in or affecting the business or
properties of the Company or any of the Subsidiaries which, in your sole
judgment, makes it impractical or inadvisable to proceed with the public
offering of the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(g) You shall have received from KPMG Peat Marwick LLP a letter stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's financial statements as at December 31, 1997, did not disclose
any weakness in internal controls that they considered to be material
weaknesses.
(h) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or other
evidence satisfactory to you, of the qualification referred to in paragraph (f)
of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of more than 1% of the outstanding
Common Stock agreements (except [list names], who in the aggregate own
___________ shares of Common Stock), in form reasonably satisfactory to
Hambrecht & Quist LLC, stating that without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 180 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all out-
of-pocket expenses (including reasonable fees and disbursements of counsel) that
shall have been incurred by them in connection with the transactions
contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
16.
<PAGE>
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement, the Company agrees to reimburse
on a quarterly basis the Underwriters for all reasonable legal and other
expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 7 hereof, the several parties (in addition to the
Company, the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 6311 Horizon Lane, Longmont,
Colorado 80503, Attention: President. All notices given by telegraph shall be
promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraphs
(l) and (m) of Section 6 hereof shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
17.
<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company
and the several Underwriters in accordance with its terms.
Very truly yours,
HORIZON ORGANIC HOLDING CORPORATION
By _____________________________________________
Name: _______________________________________
Title: ______________________________________
[SIGNATURE PAGE TO UNDERWRITING AGREEMENT]
<PAGE>
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
HANIFEN, IMHOFF INC.
By: Hambrecht & Quist LLC
By __________________________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
[SIGNATURE PAGE TO UNDERWRITING AGREEMENT]
<PAGE>
SCHEDULE I
UNDERWRITERS
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
- ------------ ---------------
Hambrecht & Quist LLC..........................................
Piper Jaffray Inc..............................................
Hanifen, Imhoff Inc............................................
____________
Total.......................................................
============
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF COOLEY GODWARD LLP
COUNSEL FOR THE COMPANY
(i) Each of the Company and the Subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, and to the best of such counsel's knowledge,
is duly qualified as a foreign corporation and in good standing in each state of
the United States of America in which its ownership or leasing of property
requires such qualification (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and the Subsidiaries, taken as
a whole), and has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement;
all the issued and outstanding capital stock of each of the subsidiaries of the
Company has been duly authorized and validly issued and is fully paid and
nonassessable, and is owned by the Company, to the best of such counsel's
knowledge, free and clear of all liens, encumbrances and security interests, and
to the best of such counsel's knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in such
subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of 5,000,000
shares of Preferred Stock, $.001 par value of which no shares are outstanding,
and 30,000,000 shares of Common Stock, $.001 par value, of which there are
outstanding ___________ shares (including the Underwritten Stock plus the number
of shares of Option Stock issued on the date hereof); proper corporate
proceedings have been taken validly to authorize such authorized capital stock;
all of the outstanding shares of such capital stock assuming payment therefore
in accordance with the terms of this Agreement (including the Underwritten Stock
and the shares of Option Stock issued, if any) have been duly and validly issued
and are fully paid and nonassessable; any Option Stock purchased after the
Closing Date, when issued and delivered to and paid for by the Underwriters as
provided in the Underwriting Agreement, will have been duly and validly issued
and be fully paid and nonassessable; and no registration rights (other than
those which have been waived), voting agreements, preemptive rights of, or
rights of refusal in favor of, stockholders exist with respect to the Stock, or
the issue and sale thereof;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial and statistical data
contained therein, as to which such counsel need express no opinion) comply as
to form in all material respects with the requirements of the Securities Act
(the "Act") and with the rules and regulations of the Commission thereunder (the
"Rules and Regulations");
(v) the information required to be set forth in the Registration
Statement in answer to Item 10 (insofar as it relates to such counsel) and 11(c)
of Form S-1 is to the best of such counsel's knowledge accurately and adequately
set forth therein to the extent required by the Act and the Rules and
Regulations in all material respects or no response is required with respect to
such Items, and the description of the Company's Equity Incentive Plan and
Employee Stock Purchase Plan under the caption "Stock Option Plans" set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to said plans and options to the extent required by the Act
and the Rules and Regulations;
(vi) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required by the Act and the Rules and
Regulations to be described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement, which are not described
and filed as required;
(vii) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
<PAGE>
(viii) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Certificate of Incorporation or Bylaws of
the Company or any of the Subsidiaries or any agreement or instrument filed as
an exhibit to the Registration Statement to which the Company or any of the
Subsidiaries is a party or any applicable law or regulation, or so far as is
known to such counsel, any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality;
(ix) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(x) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters; and
(xi) the Stock issued and sold by the Company has been duly authorized
for listing by the Nasdaq National Market upon official notice of issuance.
Such counsel shall also state that during the course of the preparation of
the Registration Statement, it has participated in conferences with you and with
officers and other representatives of the company, your counsel and the
Company's independent public accountants at which the contents of the
Registration Statement and Prospectus were discussed. While it has not
independently verified and is not passing upon the accuracy, completeness or
fairness of the statements made in the Registration Statement and Prospectus,
except as set forth in paragraph vi above, on the basis of the foregoing, no
facts have come to its attention that have caused it to believe that the
Registration Statement, as of the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus, as of its date or the date hereof, contained or contains an
untrue statement of a material fact or omitted or omits to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that it expresses no comment with
respect to the financial statements and schedules, related notes, other
financial data and statistical data derived therefrom included in the
Registration Statement and Prospectus.
<PAGE>
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF OBER, KALER, GRIMST & SHRIVER
REGULATORY COUNSEL FOR THE COMPANY
Such counsel is familiar with the business of the company and its
subsidiaries, and with the laws, rules and regulations of the U.S. Department of
Agriculture (the "USDA"), and similar state dairy regulations applicable to the
Company and its subsidiaries in their businesses and has read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to such laws, rules and
regulations and:
The information in the Prospectus under the captions "Risk Factors--U.S.
Government Regulations," "Business--Government Regulations," "Prospectus
Summary," and "Business," insofar as they constitute summaries of USDA and state
dairy regulatory provisions, have been reviewed by us and are correct in all
material respects and fairly and correctly present the material information
called for with respect thereto.
The Registration Statement does not, with respect to USDA and state dairy
regulatory matters, at the time it became effective, contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date, or at the Closing Date or Option Closing Date (as
such terms are defined in the Underwriting Agreement), as the case may be,
included or includes an untrue statement of a material fact or omitted or omits
to state a material fact relating to USDA and state dairy regulatory matters
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
<PAGE>
EXHIBIT 10.6
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE,
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT MADE UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), OR PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS
TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
Void after 5:00 p.m., Mountain Daylight
Savings Time March 20, 1999
WARRANT TO PURCHASE COMMON STOCK
HORIZON ORGANIC HOLDING CORPORATION
This is to Certify That, FOR VALUE RECEIVED,
____________________
or registered assigns ("Holder"), is entitled to purchase, subject to the
provisions of this Warrant, from Horizon Organic Holding Corporation, a Delaware
corporation ("Holding Co."), at any time on or after June 30, 1997, and not
later than 5:00 p.m., Denver Time, on March 20, 1999, ____________ shares of
common stock, having a $0.001 par value of the Holding Co. ("Common Stock") at a
purchase price of $5.335 per share. The number of shares of Common Stock to be
received upon the exercise of this Warrant and the price to be paid for a share
of Common Stock may be adjusted from time to time as hereinafter set forth. The
shares of Common Stock deliverable upon such exercise, and as adjusted from time
to time, are hereinafter sometimes referred to as "Warrant Stock" and the
exercise price of a share of Common Stock in effect at any time and as adjusted
from time to time is hereinafter sometimes referred to as the "Exercise Price."
This Warrant is one of a series of warrants identical in form issued by the
Holding Co. to purchase an aggregate of Sixty-Nine Thousand One Hundred Eighteen
(69,118) shares of Common Stock of the Holding Co. and the term "Warrants" as
used herein means all such warrants (including this Warrant).
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time or from time to time on or after June 30, 1997, but not later than
5:00 p.m., Denver time, on March 20, 1999, or if March 20, 1999, is a day on
which banking institutions are authorized by law to close, then on the next
succeeding day which shall not be such a day, by presentation and surrender
hereof to the Holding Co. or at the office of its stock transfer agent, if any,
with the Purchase Form annexed hereto duly executed and accompanied by payment
of the Exercise Price for the number of shares specified in such form, together
with all federal and state transfer taxes applicable upon such exercise. If
this Warrant should be exercised in part only, the Holding Co. shall, upon
surrender of this Warrant for cancellation, execute and deliver a new Warrant
evidencing the right of the Holder to purchase
<PAGE>
the balance of the shares purchasable hereunder. Upon receipt by the Holding Co.
of this Warrant at the office or agency of the Holding Co., in proper form for
exercise, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Holding Co. shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Holder.
2. Reservation of Shares. The Holding Co. hereby agrees that at all times
---------------------
there shall be reserved for issuance and/or delivery upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant.
3. Exchange, Assignment or Loss of Warrant. This Warrant is exchangeable,
---------------------------------------
without expense, at the option of the Holder, upon presentation and surrender
hereof to the Holding Co. or at the office of its stock transfer agent, if any,
for other Warrants of different denominations entitling the Holder thereof to
purchase in the aggregate the same number of shares of Common Stock purchasable
hereunder. This Warrant may not be sold, transferred, assigned, or hypothecated
without the consent of the Holding Co., which consent shall not be unreasonably
withheld but may be conditioned upon the Holding Co.'s receipt of a legal
opinion satisfactory to Holding Co. from the Holder's counsel that such sale,
transfer, assignment or hypothecation is exempt from registration under all
applicable federal and state laws. Any such assignment shall be made by
surrender of this Warrant to the Holding Co. or at the office of its stock
transfer agent, if any, with a valid assignment duly executed and funds
sufficient to pay any transfer tax; whereupon the Holding Co. shall, without
charge, execute and deliver a new Warrant in the name of the assignee named in
such instrument of assignment and this Warrant shall promptly be canceled.
Subject to the foregoing condition, this Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
office of the Holding Co. or at the office of its stock transfer agent, if any,
together with a written notice specifying the names and denominations for whole
shares of Common Stock in which new Warrants are to be issued and signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants issued in
substitution for or replacement of this Warrant, or into which this Warrant may
be divided or exchanged. Upon receipt by the Holding Co. of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft, or destruction) of indemnification to
Holding Co. and its transfer agent and registrar (if any) as shall be deemed
advisable by Holding Co., and upon surrender and cancellation of this Warrant,
if mutilated, the Holding Co. will execute and deliver a new Warrant of like
tenor and date. Any such new Warrant executed and delivered shall constitute an
additional contractual obligation on the part of the Holding Co., whether or not
this Warrant so lost, stolen, destroyed, or mutilated shall be at any time
enforceable by anyone.
4. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a shareholder in the Holding Co., either at law or
equity, and the rights of the Holder are limited to those expressed in the
Warrant and are not enforceable against the Holding Co. except to the extent set
forth herein.
-2-
<PAGE>
5. Adjustments.
-----------
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization, combination of
shares of the Holding Co., or other similar event, occurring after the date
hereof, then the Holder exercising this Warrant shall receive for the aggregate
price paid upon such exercise, the aggregate number and class of shares which
such Holder would have received if this Warrant had been exercise immediately
prior to such stock split, stock dividend recapitalization, combination of
shares, or other similar event. If any adjustment under this Section 5(a) would
create a fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be disregarded and the number
of shares subject to this Warrant shall be the next higher number of shares,
rounding all fractions upward. Whenever there shall be an adjustment pursuant
to this Section 5(a), the Holding Co. shall forthwith notify the Holder of this
Warrant of such adjustment, setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment was calculated.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Holding Co., or other similar event,
occurring after the date hereof, as a result of which shares of Common Stock
shall be changed into the same or a different number of shares of the same or
another class or classes of securities of the Holding Co. or another entity, or
the holders of Common Stock are entitled to receive cash or other property, then
the Holder exercising this Warrant shall receive, for the aggregate price paid
upon such exercise, the aggregate number and class of shares, cash or other
property which such Holder would have received if this Warrant had been
exercised immediately prior to such merger, consolidation, exchange of shares,
separation, reorganization or liquidation, or other similar event. If any
adjustment under this Section 5(b) would create a fractional share of Common
Stock, such fractional share shall be disregarded and the number of shares
subject to this Warrant shall be the next higher number of shares, rounding all
fractions upward. Whenever there shall be an adjustment pursuant to this Section
5(b), the Holding Co. shall forthwith notify the Holder of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
6. Transfer to Comply with the Securities Act of 1933.
--------------------------------------------------
(a) This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except in
conformity with the Securities Act of 1933, as amended, and then only against
receipt of an agreement of such person to whom such offer of sale is made to
comply with the provisions of this Section 6 with respect to any resale or other
disposition of such securities.
(b) The Holding Co. may cause the following legend to be set forth on
each Warrant and certificate representing the Warrant Stock or any other
security issued or issuable upon
-3-
<PAGE>
exercise of this Warrant, unless counsel for the Holding Co. is of the opinion
as to any such certificate that such legend is unnecessary:
The securities represented by this certificate may not be offered for
sale, sold or otherwise transferred except pursuant to an effective
registration statement made under the Securities Act of 1933 (the
"Act"), or pursuant to an exemption from registration under the Act,
the availability of which is to be established to the satisfaction of
the Company.
7. Applicable Law. This Warrant shall be governed by, and construed in
--------------
accordance with, the laws of the State of Colorado.
HORIZON ORGANIC HOLDING CORPORATION
By:
-------------------------------
Barnet M. Feinblum, President
Date: May 29, 1997
[SEAL]
Attest:
- -----------------------------------
Don J. Gaidano, Assistant Secretary
-4-
<PAGE>
Exhibit 10.7
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE,
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT MADE UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), OR PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS
TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
Void after 5:00 p.m., Mountain Time
April 8, 2000
WARRANT TO PURCHASE COMMON STOCK
HORIZON ORGANIC HOLDING CORPORATION
This is to Certify That, FOR VALUE RECEIVED,
McCabe, Mintz & Company
------------------------------------
or registered assigns ("Holder"), is entitled to purchase, subject to the
provisions of this Warrant, from Horizon Organic Holding Corporation, a Delaware
corporation (the "Company"), at any time on or after April 8, 1998, and not
later than 5:00 p.m., Mountain Time, on April 8, 2000, 3,500 shares of common
stock of the Company, having a $0.001 par value ("Common Stock") at a purchase
price of $8.00 per share. The number of shares of Common Stock to be received
upon the exercise of this Warrant and the price to be paid for a share of Common
Stock may be adjusted from time to time as hereinafter set forth. The shares of
Common Stock deliverable upon such exercise, and as adjusted from time to time,
are hereinafter sometimes referred to as "Warrant Stock" and the exercise price
of a share of Common Stock in effect at any time and as adjusted from time to
time is hereinafter sometimes referred to as the "Exercise Price."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time or from time to time on or after April 8, 1998, but not later than
5:00 p.m., Mountain time, on April 8, 2000, or if April 8, 2000 is a day on
which banking institutions are authorized by law to close, then on the next
succeeding day which shall not be such a day, by presentation and surrender
hereof to the Company or at the office of its stock transfer agent, if any, with
the Purchase Form annexed hereto duly executed and accompanied by payment of the
Exercise Price for the number of shares specified in such Purchase Form,
together with all federal and state transfer taxes applicable upon such
exercise. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the shares
purchasable hereunder. Upon receipt by the Company of this Warrant at the
office or agency of the Company, in proper form for exercise, the Holder shall
be deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise, notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such shares of Common
Stock shall not then be actually delivered to the Holder.
2. Reservation of Shares. The Company hereby agrees that at all times
---------------------
there shall be reserved for issuance and/or delivery upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant.
<PAGE>
3. Exchange, Assignment or Loss of Warrant. This Warrant is exchangeable,
---------------------------------------
without expense, at the option of the Holder, upon presentation and surrender
hereof to the Company or at the office of its stock transfer agent, if any, for
other Warrants of different denominations entitling the Holder thereof to
purchase in the aggregate the same number of shares of Common Stock purchasable
hereunder. This Warrant may not be sold, transferred, assigned, or hypothecated
without the consent of the Company, which consent shall not be unreasonably
withheld but may be conditioned upon the Company's receipt of a legal opinion
satisfactory to the Company from the Holder's counsel that such sale, transfer,
assignment or hypothecation is exempt from registration under all applicable
federal and state laws. Any such assignment shall be made by surrender of this
Warrant to the Company or at the office of its stock transfer agent, if any,
with a valid assignment duly executed and funds sufficient to pay any transfer
tax; whereupon the Company shall, without charge, execute and deliver a new
Warrant in the name of the assignee named in such instrument of assignment and
this Warrant shall promptly be canceled. Subject to the foregoing condition,
this Warrant may be divided or combined with other Warrants which carry the same
rights upon presentation hereof at the office of the Company or at the office of
its stock transfer agent, if any, together with a written notice specifying the
names and denominations for whole shares of Common Stock in which new Warrants
are to be issued and signed by the Holder hereof. The term "Warrant" as used
herein includes any Warrants issued in substitution for or replacement of this
Warrant, or into which this Warrant may be divided or exchanged. Upon receipt by
the Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft, or destruction) of
indemnification to the Company and its transfer agent and registrar (if any) as
shall be deemed advisable by the Company, and upon surrender and cancellation of
this Warrant, if mutilated, the Company will execute and deliver a new Warrant
of like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at
any time enforceable by anyone.
4. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
5. Adjustments.
-----------
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization, combination of
shares of the Company, or other similar event, occurring after the date hereof,
then the Holder exercising this Warrant shall receive for the aggregate price
paid upon such exercise, the aggregate number and class of shares which such
Holder would have received if this Warrant had been exercised immediately prior
to such stock split, stock dividend recapitalization, combination of shares, or
other similar event. If any adjustment under this Section 5(a) would create a
fractional share of Common Stock or a right to acquire a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares subject to this Warrant shall be the next higher number of shares,
rounding all fractions upward. Whenever there shall be an adjustment pursuant
to this Section 5(a), the Company shall forthwith notify the Holder of this
Warrant of such adjustment, setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment was calculated.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company,
-2-
<PAGE>
or other similar event, occurring after the date hereof, as a result of which
shares of Common Stock shall be changed into the same or a different number of
shares of the same or another class or classes of securities of the Company or
another entity, or the holders of Common Stock are entitled to receive cash or
other property, then the Holder exercising this Warrant shall receive, for the
aggregate price paid upon such exercise, the aggregate number and class of
shares, cash or other property which such Holder would have received if this
Warrant had been exercised immediately prior to such merger, consolidation,
exchange of shares, separation, reorganization or liquidation, or other similar
event. If any adjustment under this Section 5(b) would create a fractional share
of Common Stock, such fractional share shall be disregarded and the number of
shares subject to this Warrant shall be the next higher number of shares,
rounding all fractions upward. Whenever there shall be an adjustment pursuant to
this Section 5(b), the Company shall forthwith notify the Holder of this Warrant
of such adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
6. Transfer to Comply with the Securities Act of 1933.
--------------------------------------------------
(a) This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except in
conformity with the Securities Act of 1933, as amended, and then only against
receipt of an agreement of such person to whom such offer of sale is made to
comply with the provisions of this Section 6 with respect to any resale or other
disposition of such securities.
(b) The Company may cause the following legend to be set forth on
each Warrant and certificate representing the Warrant Stock or any other
security issued or issuable upon exercise of this Warrant, unless counsel for
the Company is of the opinion as to any such certificate that such legend is
unnecessary:
The securities represented by this certificate may not be offered for
sale, sold or otherwise transferred except pursuant to an effective
registration statement made under the Securities Act of 1933 (the
"Act"), or pursuant to an exemption from registration under the Act,
the availability of which is to be established to the satisfaction of
the Company.
7. Applicable Law. This Warrant shall be governed by, and construed in
--------------
accordance with, the laws of the State of Colorado.
HORIZON ORGANIC HOLDING CORPORATION
By:/s/ Barnet M. Feinblum
________________________________
Barnet M. Feinblum, President
Date: April 8, 1998
[SEAL]
-3-
<PAGE>
PURCHASE FORM
Date: ______________, 19___
Horizon Organic Holding Corporation
6311 Horizon Lane
Longmont, Colorado 80503
Ladies and Gentlemen:
The undersigned hereby elects to exercise the warrant issued to it by
Horizon Organic Holding Corporation (the "Company") and dated April 8, 1998,
Warrant No. ________ (the "Warrant") and to purchase thereunder __________
shares of the Common Stock of the Company (the "Shares") at a purchase price of
Eight Dollars ($8.00) per Share, or an aggregate purchase price of
______________________________ ($____________) (the "Purchase Price").
Pursuant to the terms of the Warrant, the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
Very truly yours,
_________________________________
By: _____________________________
Title: __________________________
<PAGE>
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.
KPMG PEAT MARWICK LLP
Boulder, Colorado
May 7, 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) in Amendment No. 1 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 as of December 31, 1995
as an exhibit to the Registration Statement. 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.
/s/ Eide Bailly LLP
May 7, 1998
Fargo, North Dakota
<PAGE>
EXHIBIT 99.1
SUNRISE ORGANIC FARMS, INC.
(F/K/A AURORA DAIRY CORPORATION OF IDAHO, INC.)
WESTMINSTER, COLORADO
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
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, 1995, and the
related statements of operations, stockholders' equity and cash flows for the
year ended 1995. 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, 1995, and
the results of its operations and its cash flows for the year ended 1995, in
conformity with generally accepted accounting principles.
April 9, 1997
Fargo, North Dakota
