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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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Commission File No. 000-24337
HORIZON ORGANIC HOLDING CORPORATION
(a Delaware Corporation)
I.R.S. Employer Identification Number 84-1405007
6311 Horizon Lane
Longmont, Colorado 80503
(303) 530-2711
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
The approximate aggregate market value of the Common Stock held by
nonaffiliates of the registrant, based upon the last sales price of the
Common Stock reported on the National Association of Securities Dealers
Automated Quotation National Market System was $ 93,768,809.75 as of March 1,
2000.
As of March 1, 2000, the registrant had outstanding 9,742,214 shares of its
common stock, $.001 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE:
Information required by Part III (Items 10, 11, 12 and 13) is incorporated by
reference to portions of the registrant's definitive proxy statement for the
2000 Annual Meeting of Stockholders which will be filed with the Securities
and Exchange Commission within 120 days after the close of the 1999 year.
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HORIZON ORGANIC HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1999
TABLE OF CONTENTS
PART I
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Page
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Item 1 Business.........................................................................................3
Item 2 Properties......................................................................................22
Item 3 Legal Proceedings...............................................................................22
Item 4 Submission of Matters to a Vote of Security Holders.............................................22
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.........................23
Item 6 Selected Consolidated Financial Data..........................................................24
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operation..................................................................................25
Item 8 Consolidated Financial Statements and Supplementary Data......................................30
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................................................31
PART III
Item 10 Directors and Executive Officers of the Registrant.............................................31
Item 11 Executive Compensation.........................................................................31
Item 12 Security Ownership of Certain Beneficial Owners and Management.................................31
Item 13 Certain Relationships and Related Transactions.................................................31
PART IV
Item 14 Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K...................32
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PART I
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION
UNDER THE HEADING "RISK FACTORS."
ITEM 1. BUSINESS
GENERAL
Horizon Organic Holding Corporation ("Horizon," "Horizon Organic" or
the "Company") produces, processes and markets the leading brand of certified
organic fluid milk and a full-line of refrigerated certified organic dairy
products. Horizon has become the first dairy to offer in the United States
nationwide distribution of organic fluid milk by establishing a national
network of organic farm milk producers and processors and by building a
nationwide customer base. From its position as the market leader in organic
fluid milk sales, Horizon has leveraged its brand to create a full line of
refrigerated organic dairy products including a juice line.
Horizon was founded in Boulder, Colorado in 1991 and introduced its
first products, organic nonfat yogurts, in 1992. The Company introduced
organic fluid milk in 1993, and since that time it has developed and
introduced a number of new organic dairy products, including cottage cheese,
hard cheese, butter and sour cream and more recently, organic citrus juices.
Since 1995, the Company has focused its efforts on expanding and integrating
a nationwide production, processing and distribution system.
From 1992 to 1994, the Company contracted for the supply of organic
fluid milk with Coulee Region Organic Produce Pool, a Wisconsin agricultural
cooperative ("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 Dairy Corporation ("Aurora") for a dairy farm in Idaho
("Sunrise"). These facilities became the Company's Idaho Dairy (the "Idaho
Dairy") in fiscal 1997. Aurora is controlled by Marc Peperzak, a member of
the Company's Board of Directors. In fiscal 1997, in order to develop an
organic farm milk supply for products sold in the Eastern United States, the
Company began developing its second organic dairy farm in Maryland (the
"Maryland Dairy"). Shipments of organic farm milk from the Maryland Dairy
began in the first quarter of 1998. Horizon sources the remainder of its
organic farm milk supply through supply arrangements with independent dairy
cooperatives and farmers throughout the United States.
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.
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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, juice, 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, in 1998 Horizon acquired the Juniper Valley
Farms brand which included new product categories such as organic orange
juice. The Company currently licenses its brand to Glenwood Foods, L.L.C. and
NuCal Foods, Inc. for use in connection with the sale of organic eggs. In
addition, in 1999, the Company entered into its first international trademark
licensing agreement with Takanashi Milk Products, Ltd. The three-year
agreement includes provisions for the two companies to co-brand organic dairy
products for the Japanese market. Horizon will consider other licensing and
co-branding arrangements where the Company's organic dairy products can be
used as ingredients in other organic products.
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 in the United States nationwide.
Horizon has improved the efficiency of its supply chain by adding
geographically-dispersed organic farm milk producers and 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
acquisition of the Juniper Valley Farms brand and The Organic Cow brand, the
Company acquired a significant network of farm milk producers located in the
East Coast. 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.
ENTER NEW DISTRIBUTION CHANNELS. Horizon believes that there is an
opportunity for growing the organic dairy market by entering additional
distribution channels such as food service, food ingredients and
international markets. In that regard, in 1998 Horizon 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. In 1999, that
agreement was renegotiated as a trademark licensing agreement.
Also, in 1999, the Company acquired Rachel's Dairy Ltd, a UK
corporation. Rachel's is a processor of organic yogurts and creams. The
Company intends for Rachel's to help provide the platform for introducing the
Horizon Organic label in the UK and ultimately into continental Europe.
SUBSEQUENT EVENT - CALIFORNIA LAND PURCHASE. On March 2, 2000, the
Company purchased a dairy farm consisting of 607 acres in Wilton, California.
The Company believes this farm positions the Company to develop, at the
appropriate time, another organic milk supply closer to its contracted
processors. The price paid was approximately $1.4 million and is net of
conservation easements sold to The Nature Conservancy. One of these
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easements provides for 110 acres to be set aside in perpetuity for a giant
garter snake preserve while utilizing the area for dairy wastewater
treatment. The second easement requires that 473 acres be used for
agriculture in perpetuity, provided that 60 acres be set aside for permanent
agricultural facilities including agricultural residences. The land is
considered to be immediately organically certifiable and the environmental
permits have already been granted to the Company. The farm will be operated
as Horizon Organic Dairy, California Farm, Inc. which is a C-corporation
newly created by the Company.
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 in
the United States as organic, feed must be grown on land that has been free
of synthetic fertilizers, pesticides and herbicides for at least three years.
Furthermore, Horizon'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 discussion of Europe
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. After much input from the public, the proposed regulations
were modified and issued again in March 2000. 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 Organic Trade Association anticipates that the final regulations will be
implemented in 2001.
Horizon's fluid milk and dairy products are certified organic
primarily 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. The
Company selected Quality Assurance International to certify its organic
products because the Company believes Quality Assurance International is one
of the leading accredited third-party certification groups in the United
States. See "Risk Factors--Risk of Loss of Organic Certification."
PRODUCTS
Approximately 68% of Horizon's total net sales in fiscal 1999 were
from sales of organic fluid milk products. The Company's next largest product
line was its organic yogurt, which comprised approximately 8% of its total
net sales
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and its organic butter products which comprised approximately 7% of its total
net sales for the same period. International sales comprised approximately 5%
of its total net sales while the Company's juice line accounted for
approximately 4.7% of its net sales. The Company believes that introducing
organic fluid milk as its initial product enabled 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, juice, cheese and butter. Although
the Company anticipates that its product mix will change over time as it
introduces other organic dairy products in accordance with this business
strategy, the Company does not believe that the product mix will change
materially in the near term.
ORGANIC FLUID MILK PRODUCTS. Horizon currently markets 22 SKUs of
fluid milk under the Horizon brand. The May 1999 acquisition of The Organic
Cow brand of organic products contributed significantly to the fluid milk
product offerings including Ultra Pasteurized. Horizon currently markets 8
SKUs of fluid milk under The Organic Cow brand.
The Horizon brand organic fluid milk products are made by processing
organic farm milk sourced from either the Company-owned dairy farms or other
strategically located organic farm milk producers. The Company's processors
use standard dairy industry homogenization and pasteurization methods. See
"--Production and Processing."
The Horizon brand organic fluid milk products have distinct product
packaging consistent with the Company's trade dress theme. See "--Marketing."
The Company's sales and distribution strategy for its organic fluid milk
products includes a network of natural foods distributors, dairy distributors
and direct sales to supermarket chains. See "--Sales and Distribution."
OTHER ORGANIC DAIRY AND NON-DAIRY PRODUCTS. Horizon currently
markets 43 SKUs of other (non-fluid milk) organic dairy products such as
cheese, yogurt, butter, sour cream, and cottage cheese. In addition, Horizon
offers 6 SKUs of organic citrus juices.
INTERNATIONAL. In April 1999, the Company acquired all the assets
and liabilities of Rachel's Dairy Ltd, a United Kingdom company, for $2.4
million in cash plus acquisition costs of $.4 million. Rachel's is a
processor of organic yogurts and creams. Rachel's currently produces and
sells 16 SKU's of yogurts and creams to the UK market under the Rachel's name
as well as private label offerings.
CITRUS JUICES. In September 1998, Horizon introduced a line of
chilled, not-from-concentrate, pasteurized, certified organic juices. The
Company currently sells 6 SKUs, including orange juice with pulp, orange
juice without pulp and ruby red grapefruit juice. Horizon sources its organic
oranges and ruby red grapefruits from premium growers in Florida and
California and then associates with top juice processors and packers in the
two states. During production, the juices, which are not from concentrate and
contain no added sugar or water, are flash pasteurized. Both orange juices
contain a blend of Valencia and other orange varieties that deliver an
exceptionally sweet rich taste.
The Horizon brand dairy products each carry the Horizon
brightly-colored flying cow and earth logo and bright colors as well as,
except for certain yogurt flavors, the red, yellow and blue colors which are
part of the Company's trade dress theme. The Horizon organic citrus juice
products also carry the Horizon brightly-colored flying cow and earth logo
and bright colors which are part of the Company's trade dress theme. The
Organic Cow products are packed in their distinctive northeast package while
the Rachel's products are packaged primarily in distinctive black "pots". See
"--Marketing." The Company's sales and distribution strategy for its products
involves a network of natural foods distributors, dairy distributors and
direct sales to supermarket chains. Because of their relatively long shelf
life, the Company's non-fluid milk products are typically stored at public
warehouses located in San Francisco and Chicago and at a warehouse located
outside of New York City. See "--Sales and Distribution."
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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 and other dairy products carry the Company's
distinctive, brightly-colored flying cow and earth logo or other distinctive
trade dress. In addition, all of the Company's organic fluid milk products
and certain of the Company's other organic dairy products are packaged using
the bright red, yellow and blue colors which are part of the Company's trade
dress theme. In addition, the Company uses its packaging to carry educational
information about the value of organic products. For example, the Company's
half gallon fluid milk product packaging 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.
Horizon also engages in other traditional consumer and trade
marketing activities, including public relations activities, a consumer
oriented web page - www.horizonorganic.com, consumer coupons, product
sampling and trade promotions. Horizon 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.
and NuCal Foods, Inc. for use in connection with the sale of organic eggs. In
addition, in 1999 the Company entered into its first international trademark
licensing agreement with Takanashi Milk Products, Ltd. The three-year
agreement includes provisions for the two companies to co-brand organic dairy
products for the Japanese market. Horizon will consider other licensing and
co-branding arrangements where the Company's organic dairy products can be
used as ingredients in other organic products. In the UK the Company plans to
leverage the well known Rachel's brand in order to introduce selected Horizon
Organic brand products. In addition to the Rachel's brand, a key element of
selling in the UK is providing private label offerings to key accounts.
SALES AND DISTRIBUTION
Horizon's sales and distribution strategy is focused on building the
Horizon brand in the United States nationwide in conventional supermarkets
while maintaining its leading position in natural foods stores. Horizon's
sales and distribution strategy is similar for both its organic fluid milk
products and its other organic dairy products. Horizon currently offers 79
SKUs of premium-priced organic products under the Horizon and The Organic Cow
brands and 16 SKUs of Rachel's brand in the UK. Horizon estimates that it is
currently selling its organic products in over 10,000 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. The UK sales are either
direct shipped to the larger customers or through dairy distributors.
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 conducts
national marketing programs with the two largest natural foods retailers,
Whole Foods Markets and Wild Oats Markets.
Horizon's distributors generally deliver the Company's products
directly to retail stores. Horizon's retail supermarket chain customers
typically take delivery of Horizon's products at the customer's distribution
warehouse. In fiscal 1999, the Company's largest account was United Natural
Foods, a national distributor which is comprised of
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five regional distributors who have independent purchasing arrangements with
the Company. For such period, these five regional distributors accounted for
approximately 18% of the Company's sales.
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.
The Company's principal competitors in the market for organic fluid
milk vary by region and include Organic Valley/CROPP Cooperatives (which is
marketed by CROPP, a dairy cooperative located in Wisconsin which supplies
the Company with organic fluid milk), Alta Dena Certified Dairy (a regional
organic dairy located in Southern California) and Straus Family Creamery (a
regional organic dairy located in Northern California). Certain of these
competitors also sell other organic dairy products in competition with
Horizon 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), Echo Springs (a regional organic and
conventional dairy located in Oregon) and Brown Cow West, Inc. (a regional
organic and conventional dairy located in Northern California). The Company's
principal competitor for organic citrus juices is Pavich Farms (a national
producer and distributor of organic produce and juice located in Terra Bella,
CA). In addition, Horizon expects increased competition from new and existing
competitors in its market and there can be no assurance that the Company will
be able to compete effectively in the future.
In the UK, the largest competitor to Rachel's is Yeo Valley which
produces conventional and organic yogurts and has the leading market share of
organic yogurt.
PRODUCTION AND PROCESSING
Horizon has established an extensive, vertically-integrated
production, processing and distribution system, which includes two
Company-owned organic dairy farms, relationships with strategically-located
organic farm milk producers, a Company-owned farm milk separator and a
network of geographically-dispersed dairy 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 nine
fluid milk processors.
ORGANIC MILK SUPPLY. The Company uses its organic farm milk supply
in the production of all of its organic dairy products, including its organic
fluid milk products as well as its other organic dairy products. See
"--Products." 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
encompasses over 3,800 acres, including almost 2,000 acres of certified
organic cropland, and has approximately 5,000 certified organic milking cows.
The Company uses a farm milk separator at its Idaho Dairy to capture excess
butterfat, or "cream", which is then used to make value-added organic dairy
products such as butter and cream cheese. The separator also enables the
Company to inventory for later sale the organic premium of the organic farm
milk in products such as cheese and non-fat dry milk powder.
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In 1997, Horizon 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 farmland 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 12 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."
On March 2, 2000, the Company purchased a dairy farm consisting of
607 acres in Wilton, California. The Company believes this farm positions the
Company to develop, at the appropriate time, another organic milk supply
closer to its contracted processors. The land is considered to be immediately
organically certifiable and the environmental permits have already been
granted to the Company.
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 factors
because there are relatively few qualified suppliers and because
approximately half of the Company's current milk supply is purchased from
suppliers other than 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. The Company's other organic dairy products have
longer shelf lives and therefore do not have the same timing requirements as
the Company's organic fluid milk products, however processors must be located
within a reasonable distance from the Company's sources of organic farm milk.
To address processing logistics, Horizon 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. See "--Products."
Horizon has a national network of 22 dairy processors (9 fluid milk
processors and 13 non-fluid milk dairy product processors) which process the
Company's organic farm milk into refrigerated organic fluid milk and other
organic dairy products. In addition, it has four processors which produce
organic citrus juices. The Company also uses three refrigerated warehouses
where it inventories organic dairy products. The costs associated with
processing arrangements are included in the cost of sales. These costs
include the cost of processing as well as payments which Horizon makes to
processors which are then paid into the Federal Milk Market Order System. The
Company's product sales mix affects its overall gross margin since processing
costs vary by product. Although the Company has long-term processing
agreements with Worcester Creameries Corp. ("Worcester") and one of its
affiliates, and processing and distribution agreements with certain Suiza
subsidiaries, it does not have long-term agreements with its other processors.
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TRANSPORTATION. Transportation costs represent a significant portion
of the Company's cost 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.
INTELLECTUAL PROPERTY RIGHTS
The Company's logo and product packaging are integral to the success
of the Company, and the Company intends to take action to protect against
imitation of its logo and packages and to protect its trademarks and
copyrights as necessary. The Company currently has five registered trademarks
with the United States Patent and Trademark Office. The Company's United
States trademark registrations can be renewed perpetually provided that the
Company files an affidavit with the United States Patent and Trademark Office
between the fifth and sixth year anniversary of the trademark registration
date which states that the Company has been using the registered trademark on
a continual basis in interstate commerce; and further provided that the
Company files a renewal notice at the end of each ten year anniversary of the
trademark registration date. The Company's five United States trademark
registrations were obtained between 1994 and 1996 and will be able to be
renewed beginning 2004. There can be no assurance that other third parties
will not infringe or misappropriate the Company's trademarks, trade dress and
other proprietary rights. In addition, the Company has two registered
trademarks in the United Kingdom relating to marks used by Rachel's in the
United Kingdom. Similarly, the Company can perpetually renew the United
Kingdom trademark registrations, provided the Company complies with all
applicable rules and regulations.
In addition, the Company has developed substantial trade secrets and
know-how regarding the operation of organic dairy farms and caring for
livestock without the use of antibiotics or other drugs. Horizon also has
proprietary product formulations and processes and has built up proprietary
sources of organic ingredients. However, there can be no assurances that some
or all of the trade secrets and other know-how that Horizon considers
proprietary could be developed, could otherwise become known by others or
could be deemed to be public domain.
GOVERNMENT REGULATION
UNITED STATES DAIRY SUPPORT PROGRAM AND FEDERAL MILK MARKETING ORDER
PROGRAM. The 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, like it does in New England, its business, financial conditions and
results of operations may be materially adversely affected. For 1999 and
1998, the Company paid over $1,400,000 and $750,000, respectively, for
pooling, compact and administrative assessment charges.
As a result of a USDA audit in 1999, it was determined that the
Company was liable for the milk producer promotion fees. These fees, which
were retroactive to 1996 amounted to $329,000, of which $126,000 related to
1999.
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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 and its business, financial condition and
results of operations may be materially adversely affected.
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 phased out price supports at the end
of 1999 and replaced them with a loan program under which loans for specified
products will be available at the reduced 1999 support price.
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
2001. 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.
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
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waste management limitations. CAFOs with more than 1,000 Animal Units (AUs)
or those with more than 300 AUs discharging directly into the waters of the
United States are required to obtain a National Pollution Discharge
Elimination System (NPDES) permit. CAFOs are required to limit discharge of
animal waste through lined wastewater retention structures (i.e., lagoons)
and are subject to site investigation for analysis of compliance. Horizon
management believes that those of its farms which qualify as CAFOs are
presently in compliance with CAFO regulations. These regulations have not had
a material impact on the Company's level of capital expenditures, earnings or
competitive position, but, because of the evolving nature of such
regulations, management is unable to predict the impact such regulations may
have on the Company's business in the foreseeable future.
OTHER ENVIRONMENTAL REGULATIONS. The Company is subject to certain
federal, state and local environmental regulations. These laws include, but
are not limited to, the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended; the Resource Conservation and Recovery
Act, as amended; the Federal Water Pollution Control Act; and their state and
local counterparts and equivalents.
The Company maintains aboveground or underground petroleum storage
tanks at two of its facilities. These tanks are periodically inspected to
determine compliance with applicable regulations. The Company may be required
to make expenditures from time to time in order to remain in compliance with
such regulations.
PUBLIC HEALTH REGULATIONS. Horizon is extensively regulated under
federal, state and local laws. Regulation at the federal, state and local
levels is subject to change. As a manufacturer and distributor of food
products, the Company is subject to the Federal Food, Drug and Cosmetic Act
and regulations promulgated thereunder by the Food and Drug Administration
(FDA). This comprehensive regulatory scheme governs manufacturing (including
composition and ingredients), labeling, packaging and food safety. The FDA
regulates manufacturing practices, including quality assurance programs, for
foods through its current good manufacturing practices and regulations. In
addition, the FDA specifies the standards of identity for certain foods,
including many of the products sold by the Company, prescribes the format and
content of certain nutrition information required to appear on food product
labels and approves and regulates claims of health benefits of food products.
In addition, the FDA enforces the Public Health Services Act and
regulations issued thereunder, which authorize regulatory activity necessary
to prevent the introduction, transmission or spread of communicable diseases.
These regulations require, for example, pasteurization of milk and milk
products. The Company and its products are also subject to state and local
regulation through such measures as the licensing of dairy manufacturing
facilities, enforcement by state and local health agencies of state standards
for the Company's products, inspection of the Company's facilities and
regulation of the Company's trade practices in connection with the sale of
dairy products.
Each of the Company's processors maintains quality control
laboratories to test milk, other ingredients and finished products, including
Horizon's products. Product quality and freshness are essential to the
successful retail distribution of dairy and refrigerated dairy products. To
monitor product quality at its facilities, the Company maintains quality
control programs to test products during various processing and packaging
stages. Each dairy manufacturing facility has its own staff of technicians
who monitor products to maintain high quality formulations and to protect
against contamination.
EMPLOYEE SAFETY REGULATIONS. The Company is subject to certain
health and safety regulations, including regulations issued pursuant to the
Occupational Safety and Health Act of 1970, as amended (OSHA). These
regulations require the Company to comply with certain manufacturing, health
and safety standards.
Compliance with existing or new regulations may require the Company
to make significant capital expenditures and otherwise to incur higher costs,
either of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company may be subject to additional laws or regulations administered by the
USDA or other federal, state, foreign or local regulatory authorities, the
repeal of laws or
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regulations, or more stringent interpretations of current laws or
regulations, from time to time in the future. The Company cannot predict the
nature of such future laws, regulations, interpretations, or applications,
nor can it predict what effect additional government regulations or
administrative orders, when and if promulgated, would have on its business in
the future. Such laws could, however, require the reconfiguration of
production, processing and transportation methods of the Company's products,
including but not limited to more onerous food safety, labeling, and
packaging requirements; increased compliance regulations for waste
management; increases in transportation costs; higher costs under the Federal
Milk Marketing Order System or similar state or regional programs; and
greater uncertainty in production and sourcing estimates. Any or all such
government actions could have a material adverse effect on the Company's
business, financial condition and results of operations.
ACQUISITIONS
RACHEL'S DAIRY, LTD. In April 1999, the Company acquired all the
assets and liabilities of Rachel's Dairy, Ltd., a United Kingdom company, for
$2.4 million in cash plus acquisition costs of $0.4 million. The excess of
cost over the fair value of acquired net assets of $2.5 million is being
amortized on a straight-line basis over 15 years.
THE ORGANIC COW. In April 1999, the Company acquired certain
intangible assets including The Organic Cow brand name for $10.9 million. The
acquisition was financed with a cash payment of $2.4 million and a $8.5
million promissory note payable to the seller, bearing interest at 5.3%, and
payable in annual installments over 4 years. The intangible asset of $10.9
million, plus acquisition costs of $0.3 million, are being amortized on a
straight-line basis over 15 years.
CALIFORNIA FARM PURCHASE. On March 2, 2000, the Company purchased a
dairy farm consisting of 607 acres in Wilton, California. The Company
believes this farm positions the Company to develop, at the appropriate
time, another organic milk supply closer to its contracted processors. The
price paid (approximately $1.4 million) is net of conservation easements sold
to The Nature Conservancy.
STRATEGIC RELATIONSHIPS
In 1998, Horizon entered into agreements with Suiza, a leading
manufacturer and distributor of fresh milk and related dairy products. The
Company's relationship with Suiza provides it with opportunities to enhance
the Company's market penetration in a number of key markets nationally. The
Company's arrangement with Suiza includes processing and distribution
agreements with certain of Suiza's subsidiaries. Horizon's relationship with
Suiza includes five-year processing and distribution agreements with two of
Suiza's subsidiaries: Model Dairy, a fluid milk processor located in Reno,
Nevada, which currently processes organic fluid milk for Horizon; and
Garelick Farms, a fluid milk processor and distributor with several locations
in the Northeastern United States. The processing and distribution agreements
generally provide that both Model Dairy and Garelick Farms will distribute
all SKUs of Horizon's organic fluid milk products which are available for
sale in their respective territories. The Company also moved the processing
of its organic chocolate milk and organic cottage cheese to two Suiza owned
facilities in California.
EMPLOYEES
As of December 31, 1999, the Company had 173 full-time employees and
two part-time employees domestically and 55 full-time employees in the UK.
Management believes that the Company's relations with its
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employees are good.
RISK FACTORS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND
ELSEWHERE IN THIS REPORT.
RISKS RELATED TO ORGANIC FARM MILK COST AND SUPPLY. Approximately
half of the Company's current 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 perishable and have a
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 approximately half of the Company's
organic farm milk requirements. The cost of organic feed represents a
material portion of the Company's cost of production. Although the Company
produces a significant portion of its organic feed requirements at the Idaho
Dairy, the Company currently purchases the majority of its organic feed
requirements from third party organic farms and expects to continue to do so
in the future. As with most agricultural products, the cost and supply of the
organic feed used by the Company can be affected by a number of factors
beyond the Company's control, including various adverse weather conditions,
various plant diseases, pests and other acts of nature. In addition, because
of the three-year lead time required to convert conventional farms to
organic, alternative sources of supply may not be immediately available. To
be certified as organic, feed must be grown on land that has been free of
synthetic fertilizers, pesticides and herbicides for at least three years.
The inability of the Company to procure sufficient quantities of organic feed
on acceptable terms would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Production and Processing."
RISKS ASSOCIATED WITH CONVENTIONAL DAIRY PRICES. In order to augment
its internal supply of organic farm milk, the Company contracts with various
organic farmers and cooperatives throughout the United States. The prices
which the Company pays some of its third party producers are based on a fixed
mark-up from the price for conventional farm milk. All production contracts
require that the Company purchase minimum quantities of organic farm milk. If
the Company cannot use the minimum amount as organic fluid milk or other
organic products, the Company sells the organic milk as conventional milk and
records the difference between the Company's purchase price and the
conventional price in cost of sales. Changes in the price of conventional
farm milk directly affect the Company's cost of organic farm milk. To the
extent that conventional prices increase or decrease due to external factors,
e.g., availability, regulation, the Company's results of operations may be
materially impacted.
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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 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. The 1997 proposed regulations were then made subject to
public comment. Those regulations were not implemented. In March of 2000, the
federal government issued a second draft of the proposed national regulations
to standardize organic certification requirements as part of the Organic
Foods Production Act. Horizon is currently reviewing the second draft of
proposed regulations. There can be no assurance as to what organic food
production standards may eventually be implemented by federal government
regulation. Such regulations may allow certification based on standards lower
than Horizon's. Horizon incurs significant costs to produce organic products
that adhere to its own 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. In order to adhere to its
philosophy and maintain its rigorous standards, the Company may make
operational decisions that are inconsistent with maximizing short-term
profits, which may result in a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--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," and "--Production
and Processing."
RISKS ASSOCIATED WITH CHANGES IN CONSUMER PREFERENCES. The market
for organic food products, including the Company's products, is subject to
changing consumer trends, demands and preferences. Trends within the organic
and natural foods industry are constantly evolving, and the failure of the
Company to anticipate, identify or react to changes in these trends could
lead to, among other things, reduced demand and price reductions, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's success depends, in part, on its
ability to anticipate the tastes and dietary habits of consumers and to offer
products that appeal to their preferences on a timely and affordable basis.
The Company believes that its growth to date has been due, in large part, to
increased awareness as to food safety issues and a growing consumer
preference for a healthy lifestyle. All of the Company's current and planned
future products are organic. The Company's business, financial condition and
results of operations would be materially adversely affected if consumer
interest in organic foods were to decline.
RISKS 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
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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, 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.
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 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."
RISKS RELATED TO THE COMPANY'S RELATIONSHIP WITH SUIZA FOODS
CORPORATION. Horizon's relationship with Suiza includes five-year processing
and distribution agreements with Model Dairy and Garelick Farms. Horizon and
Suiza intend to enter into additional agreements pursuant to which Suiza and
its affiliates will process and/or distribute Horizon organic fluid milk and
other Horizon organic dairy products from some of Suiza's 46 dairy processing
facilities located across the United States and Puerto Rico. There can be no
assurance that Horizon will be able to enter into such additional processing
and distribution agreements with Suiza and its subsidiaries on favorable
terms, if at all. The processing and distribution agreements also will
require that the organic fluid milk processors distribute all SKUs of the
Company's organic fluid milk which are available in their respective
territories. However, there can be no assurance that Suiza or its
subsidiaries who undertake the distribution of Horizon products will be
successful in increasing market penetration and sales of Horizon products in
their territories. In addition, the Company is unable to predict what effect,
if any, its relationship with Suiza will have on relationships with
processors and distributors, some of whom may be
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affiliated with Suiza's competitors.
Pursuant to the Stockholder Agreement with the Company and the Major
Stockholder Agreement with certain of the Company's principal stockholders,
Suiza has certain preemptive rights, registration rights, board of directors
representation rights, rights of first negotiation to acquire the Company and
rights of first refusal on certain transfers. Such provisions could interfere
with the Company's ability to raise additional capital or enter into business
combinations or strategic alliances with other business entities. The
Stockholder Agreement contains a variety of provisions designed to delay,
deter or prevent a hostile takeover of the Company by Suiza arising out of
Suiza's stock ownership position, including standstill provisions and
transfer restrictions. These negotiated provisions are, however, subject to
various exceptions and time limitations, and there can be no assurance that
these provisions would prevent Suiza from participating in a takeover attempt
of the Company, or facilitating a third-party takeover attempt at some time
in the future.
POSSIBILITY OF ADVERSE EFFECTS RESULTING FROM UNITED STATES DAIRY
SUPPORT PROGRAM AND FEDERAL MILK MARKETING ORDER PROGRAM. The federal
government regulates minimum farm milk pricing through federal market orders
and price support programs, and state governments can regulate farm milk
pricing by establishing their own market order programs or by forming
compacts that establish minimum prices for 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 1999 and 1998, the Company paid over $1,400,000 and $750,000,
respectively, for pooling, compact and administrative assessment charges. See
"Business--Government Regulation--United States Dairy Support Program and
Federal Milk Marketing Order Program."
The USDA is currently considering several proposed regulations in an
attempt to reform the federal milk marketing order system. 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 "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."
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RISKS ASSOCIATED WITH DEPENDENCE ON KEY PERSONNEL. The Company's
future prospects depend to a significant extent upon the continued service of
Thomas D. McCloskey, Jr., its Chairman, Marcus Peperzak, its Vice Chairman,
Charles F. Marcy, its Chief Executive Officer, and Mark Retzloff, its Senior
Vice President of Corporate Development. The loss of any of the key
executives could have a material adverse effect on the Company's business,
financial condition or results of operations. Furthermore, the Company's
continued growth depends on its ability to identify, recruit and retain key
management personnel. The competition for such employees is intense, and
there can be no assurance the Company will be successful in such efforts. The
Company is also dependent on its ability to continue to attract, retain and
motivate its sourcing, production, distribution, sales, marketing and other
personnel, of which there can be no assurance. In addition, the Company
recently named Charles F. Marcy as its Chief Executive Officer. There can be
no assurance that there will be no problems with the integration of Mr. Marcy
into the Company business and transfer of control to Mr. Marcy. If such
problems arise there is no assurance that such will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
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. There can be no assurance as to the final
federal regulations under the Organic Foods Production Act. There is the
possibility that such regulations would permit competitors to sell milk and
other dairy products labeled as "organic," which would not satisfy Horizon's
own organic standards. Competitors that produce "organic" products to less
rigorous standards may have lower production costs than Horizon and thus be
able to undercut Horizon's prices.
The Company's principal competitors in the market for organic fluid
milk vary by region and include Organic Valley/CROPP Cooperatives (which is
marketed by CROPP, a dairy cooperative located in Wisconsin which supplies
the Company with organic fluid milk), Alta Dena Certified Dairy (a regional
dairy located in Southern California) and Straus Family Creamery (a regional
organic dairy located in Northern California). Certain of these competitors
also sell other organic dairy products in competition with Horizon 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), Echo
Springs (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). The Company's principal competitor for
organic citrus juices is Pavich Farms (a national producer and distributor of
organic produce and juice located in Terra Bella, CA). In the UK, the largest
competitor to Rachel's is Yeo Valley which produces conventional and organic
yogurts and has the leading market share of organic yogurt. 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. The Company
recently 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 did not operate a
dairy prior to the 1997 acquisition of the Idaho Dairy; however, it had
previously owned organic cows and had held a substantial equity interest in a
dairy farm since 1995. The Company estimates that it has incurred costs of
approximately $1.9 million related to converting the Idaho Dairy and the
Maryland Dairy to organic. Although the Company has begun to generate
operating income at the Idaho Dairy, 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 milk 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
18
<PAGE>
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 creation of new organic facilities will be
completed on schedule and within budget. Any significant delay or cost
overrun in the construction or acquisition of new or expanded organic dairy
facilities could have a material adverse effect on the Company's business,
financial condition and results of operations.
Expansion of dairy operations may be limited or slowed by state and
local regulations. For example, the Company's Maryland Dairy is currently
milking its permitted capacity of 556 cows per day although its milking
capacity is 1,000 cows per day. The Company's ability to operate the Maryland
Dairy profitably depends, in part, on its ability to secure operating permits
for additional cows. The Company is in the process of applying for additional
permits. 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--Production and
Processing."
In addition, the Company recently acquired the California Farm.
Plans for production at this facility have not been completed. If and when
the Company begins production at this facility, it may encounter similar
problems that have affected the Idaho Dairy and the Maryland Dairy in the
past or that these two dairies may encounter in the future. Such problems
could include environmental costs associated with starting production,
capital expenditures to begin production, obtaining required permits, and
operating at a profitable level. There can be no assurance that starting
production at this facility will be profitable, without cost overruns, or
accepted by the state and federal authorities. Any problems with starting
production at this facility could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH PERISHABLE PRODUCTS. Although the Company's
products are pasteurized, they are perishable and contain certain naturally
occurring microorganisms. As a result, the Company's dairy products must be
transported in a timely and efficient manner within a precise temperature
range and the Company is always subject to risk of spoilage or contamination
of its dairy products. In addition, food producers, such as the Company, may
be subject to claims for damages if contaminated food causes injury to
consumers. See "--Product Liability Risks" and "--Risk of Adverse Publicity."
The Company is able to hold farm milk or fluid milk finished goods
inventory for only a limited period of time and must sell its products in a
timely manner or risk having to write the inventory off as outdated.
Therefore, the Company's results of operations are highly dependent on its
ability to accurately forecast its near term sales in order to adjust
processing accordingly. For example, the Company must make an estimate of the
approximate mix of fat free, reduced fat and 2% milk, cheese, butter and
other products to process from each lot of farm milk. Forecasting product
demand has been difficult, and the Company expects it to be an ongoing
challenge. Failure to accurately forecast product demand could result in the
Company either being unable to meet higher than anticipated demand or
producing excess inventory that cannot be sold at a profit or at all. In
addition, many retail customers expect to be able to return any products that
are not sold by their expiration date. There can be no assurance that excess
production or product returns will not have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Production and Processing."
PRODUCT LIABILITY RISKS. The Company has from time to time received
complaints from consumers regarding ill effects allegedly caused by its
products. While such claims have not resulted in any material liability to
date, there can be no assurance that future claims will not be made or that
any such claim will not result in adverse publicity for the Company or
monetary damages, either of which could materially and adversely 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
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<PAGE>
insurance. There can be no assurance that this insurance will be adequate to
protect the Company against product liability claims, or that such insurance
will continue to be available to the Company on reasonable terms. A product
recall or a product liability judgment against the Company (regardless of
whether it is covered by insurance) could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Production and Processing."
RISK OF ADVERSE PUBLICITY. The Company is highly dependent upon
consumers' perception of the safety, quality, and possible dietary benefits
of its products. As a result, substantial negative publicity concerning
organic products, one or more of the Company's products, or other organic
foods similar to the Company's products could lead to a loss of consumer
confidence in the Company's products, removal of the Company's products from
retailers' shelves and reduced sales and prices of the Company's products.
Any of these events could have a material adverse effect on the Company's
business, financial condition or results of operations.
RISK OF LOSS OF ORGANIC CERTIFICATION. Horizon relies on its organic
certification to differentiate its products. The Company has built its brand
image on the basis that its organic products are high quality, healthy,
environmentally responsible and animal-friendly. In order to claim that its
fluid milk and other dairy products are organic, Horizon must be able to
demonstrate that all of the farm milk, processing and transportation steps
involved in the production of the finished goods are certified organic. The
organic status of the Company's products is currently certified by Quality
Assurance International, Oregon Tilth Certified Organic, Organic Growers and
Buyers Association and the Organic Crop Improvement Association. Organic
certification typically includes inspections of farm fields and operations,
processing and distribution facilities; detailed record keeping and periodic
testing of soil and water; and review of the organic producer's comprehensive
"organic plan" which details farm practices, documents product inputs and
discusses all procedures. These procedures are designed to ensure that all
producers, processors and transporters are meeting the applicable organic
food standards. Since Horizon 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
"--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
20
<PAGE>
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Sales and Distribution"
and "--Production and Processing."
POSSIBLE ADVERSE EFFECT DUE TO FUTURE CAPITAL REQUIREMENTS. In the
future, the Company may require significant amounts of additional capital to
fund the internal expansion of its operations, the acquisition of other
businesses and its working capital requirements. The exact amount of the
Company's future capital requirements will depend upon many factors,
including the cost, timing and extent of any upgrade or expansion of its
operations, the Company's ability to penetrate new markets, regulatory
changes, the status of competing businesses, the magnitude of potential
acquisitions and the Company's results of operations. Variances in these and
other factors could cause material changes in the Company's actual capital
requirements. The sale of additional equity securities or convertible
securities would result in dilution to existing stockholders, and the
incurrence of additional indebtedness could subject the Company to additional
or more restrictive financial covenants. There can be no assurance that
additional financing will be available on acceptable terms or at all. To the
extent unplanned expenditures arise or the Company's estimates of its capital
requirements prove to be inaccurate, the Company may require such additional
financing sooner than anticipated and in amounts greater than current
expectations. If such funds are not available or are available on terms that
the Company views as unfavorable, the Company may be required to limit or
abandon certain of its expansion strategies. The delay or abandonment of some
or all of the Company's development and expansion plans or the incurrence by
the Company of additional debt could have a material adverse effect on the
business, financial condition and results of operations of the Company and on
the market price of the Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH CUSTOMER CONCENTRATION. In fiscal 1999, the
Company's largest account was United Natural Foods, which accounted for
approximately 18% of the Company's sales. United Natural Foods is a national
distributor comprised of five regional distributors which have independent
purchasing arrangements with the Company. There can be no assurance that
United Natural Foods will not adopt uniform buying practices and that sales
to these accounts will not decrease or that this customer will not choose to
replace the Company's products with those of competitors. The loss of these
accounts or any significant decrease in the volume of products purchased by
these customers or any other large customer would materially and adversely
effect the Company's business, financial condition and results of operations.
Continuity of customer relationships is important, and events that impact the
Company's customers, such as labor disputes, may have an adverse impact on
the Company's business, financial condition and results of operations. See
"Business--Sales and Distribution."
RISKS ASSOCIATED WITH RELIANCE ON INTELLECTUAL PROPERTY RIGHTS. The
Company's product packaging and merchandising designs are integral to the
success of the Company, and the Company intends to take action to protect
against imitation of its products and packages and to protect its trademarks
and copyrights as necessary. The Company currently has five United States
registered trademarks and two United Kingdom registered trademarks. 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 INTERNATIONAL MARKETS. The Company has in
place a trademark licensing agreement with Takanashi Milk Products, Ltd. in
Japan. In addition, the Company has recently acquired Rachel's in the United
Kingdom which provides the Company with a presence in the UK. The Company is
only recently beginning to record international sales. There can be no
assurance that the Company will be successful in attracting consumers in
foreign demographic and geographic markets. There may not be a demand in
foreign countries with respect to the Company's existing products and new
products, if any, that the Company may offer in the future. In addition, the
Company is
21
<PAGE>
subject to the normal risks of conducting business internationally, which
include unexpected changes in regulatory requirements (including changes to
organic certification standards), imposition of government controls,
political and economic instabilities, export license requirements, foreign
exchange risks, tariffs and other barriers, and potentially adverse tax
consequences. In addition, the laws of certain foreign countries may not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. Other risks inherent in the Company's international
business include greater difficulties in accounts receivable collection, the
potential of protective trade activities or laws and the burdens of complying
with a wide variety of foreign laws. There can be no assurance that these
factors will not have a material adverse effect on the Company's future
international sales and, consequently, on the Company's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH EXCHANGE RATES.
The Company may, from time to time, need to exchange currency from
income generated by the Company's foreign subsidiary in the United Kingdom.
Foreign exchange rates are volatile and can change in an unknown and
unpredictable fashion. Should the foreign exchange rates change to levels
different than anticipated by the Company, its business, financial condition
and results of operations may be materially adversely affected.
RISKS ASSOCIATED WITH LICENSING AGREEMENTS WITH OTHER PRODUCERS.
From time to time the Company has and may enter into licensing
agreements with various producers granting them the right to use portions or
all of the Company's distinctive brand name, trademarks including the
brightly-colored flying cow and earth logo, or the red, yellow and blue
colors which are part of the Company's trade dress theme. Once associated
with the Company, actions taken by the licensees can potentially have an
adverse effect on the Company. Customer dissatisfaction or performance
problems with a single licensee could also have an adverse effect on the
reputation of the Company. There can be no assurance that these factors will
not have a material adverse effect on the Company's business and,
consequently, on the Company's business, financial condition and results of
operations.
ITEM 2. PROPERTIES
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. 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 two notes payable with Peoples
Bank of Kent County, Maryland. Horizon also leases a 13,050 square foot
facility in Longmont, Colorado for its corporate headquarters. In March of
2000, the Company purchased the California Farm which consists of 607 acres
in Wilton, California. There are no encumbrances on this property. The
Company believes that its facilities are suitable for the Company's purposes.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may become involved in or subject to
various litigation and legal proceedings incidental to the normal conduct of
the Company's business. The Company is not involved in any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock began trading publicly in the
over-the-counter market through the NASDAQ National Market under the symbol
"HCOW" on July 2, 1998. Prior to that date, there was no public market for
the Common Stock. The closing price of the Company's Common Stock as reported
on the NASDAQ National Market as of March 1, 2000 was $9.62 per share. The
following table sets forth for the periods indicated the high and low closing
sale quotations for the Common Stock as reported on the NASDAQ National
Market. The prices reported do not include retail mark-ups, markdowns or
commissions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998:
Third Quarter $19.93 $12.75
Fourth Quarter $16.25 $10.75
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter $17.50 $13.75
Second Quarter $17.25 $12.00
Third Quarter $14.62 $11.12
Fourth Quarter $11.12 $7.25
</TABLE>
The Company has not declared or paid a cash dividend on its Common
Stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and
will depend upon, among other things, future earnings, operations, capital
requirements and financial condition of the Company. In addition, the
Company's line of credit with U.S. Bancorp prohibit the payment of dividends.
As of March 1, 2000, there were approximately 286 holders of record
of the Company's Common Stock.
Since January 1, 1999, the Company has not sold or issued any
unregistered securities.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data below presents consolidated financial
information of the Company. The selected consolidated financial data should
be read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and related notes, included elsewhere herein. The
financial data pertaining to 1999, 1998 and 1997 is derived from the
consolidated financial statements of the Company included herein. The
financial data pertaining to 1996 and 1995 is derived from audited financial
statements of the Company not included elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 28, Dec. 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $ 84,771 $ 49,360 $ 29,565 $ 15,986 $ 7,246
Cost of sales(1) 56,591 32,615 22,639 11,425 5,517
-------- -------- -------- -------- --------
Gross profit 28,180 16,745 6,926 4,561 1,729
Selling expenses 18,399 11,007 5,656 3,270 1,620
General and administrative expenses 7,400 3,338 2,384 1,066 633
-------- -------- -------- -------- --------
Operating income (loss) 2,381 2,400 (1,114) 225 (524)
Other income (expense), net 58 (825) (1,108) (184) (122)
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
income taxes, minority interest and extraordinary item 2,439 1,575 (2,222) 41 (646)
Income tax benefit (expense) (1,037) (675) 513 (14) 30
Minority interest in loss of subsidiary(2) -- -- 687 -- --
-------- -------- -------- -------- --------
Income (loss) from continuing operations 1,402 900 (1,022) 27 (616)
Net income (loss) from discontinued dairy operations, -- -- -- -- 107
net(3)
Extraordinary item, net of income tax(4) -- (414) -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ 1,402 $ 486 $ (1,022) $ 27 $ (509)
======== ======== ======== ======== ========
Net income (loss) per basic share(5) $ .15 $ .07 $ (.23) $ .01 $ (.18)
======== ======== ======== ======== ========
Net income (loss) per diluted share(5) $ .14 $ .06 $ (.23) $ .01 $ (.18)
======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic 9,668 7,339 4,488 3,264 2,791
Diluted 9,992 7,742 4,488 3,283 2,791
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 3,693 $ 14,384 $ 404 $ 600 $ 5
Working capital (deficit) 18,436 28,298 2,935 414 (1,016)
Total assets 84,612 69,356 32,737 5,232 2,414
Long-term debt 11,255 4,923 17,960 -- --
Total stockholders' equity 57,888 55,970 8,886 3,264 798
</TABLE>
(1) Prior to fiscal 1997, the Company recorded its share of the losses of
Sunrise Organic Farms, Inc. ("Sunrise") in other income (expense), net. As
a result of the acquisition of the remainder of Sunrise in May 1997, a loss
of $1.3 million is included in cost of sales for fiscal 1997.
(2) The results of operations of Sunrise have been included in the Company's
consolidated statements of operations from January 1, 1997, with an
offsetting minority interest recorded, covering the period in which Sunrise
was not 100% owned by the Company, of $687,000 during fiscal 1997.
(3) On May 30, 1995, the Company transferred the assets and liabilities of its
dairy operations to Sunrise in exchange
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<PAGE>
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 1995 and 1994. The loss on
the dairy operations in fiscal 1995 of $406,000 was offset by a gain on
disposal of the dairy operations of $513,000 and in 1994 was $533,000.
(4) The extraordinary item relates to the early extinguishment of the senior
subordinated promissory notes and is comprised of the write off of
unaccreted discount of $667,000. The write off was charged to expense and
is classified as an extraordinary item net of tax benefit of $253,000, in
the Company's consolidated statements of operations for the year ended
December 31, 1998.
(5) Net income (loss) per share is computed using the weighted average number
of common shares (basic) and common and common equivalent shares (diluted)
outstanding during the period. See note 2(j) to the Company's consolidated
financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN THIS SECTION, THE SECTION ENTITLED
"BUSINESS-RISK FACTORS" AND OTHER SECTIONS IN THIS REPORT.
OVERVIEW
Horizon Organic produces, processes and markets the leading brand of
certified organic fluid milk and a full line of refrigerated certified
organic dairy products. Horizon Organic has become the first 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 Organic has leveraged its brand to create a full
line of refrigerated organic dairy products.
FORMATION AND STRUCTURE OF THE COMPANY. Horizon Organic 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.
In 1998, the Company successfully launched its line of orange and grapefruit
juices under the Horizon Organic brand. 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 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 Sunrise Organic
Farms, Inc. ("Sunrise") a subsidiary of Aurora Dairy Corporation ("Aurora")
for a dairy farm in Idaho. These facilities became the Company's Idaho dairy
in fiscal 1997. Aurora is controlled by Marc Peperzak, vice chairman of the
Company's board of directors.
To develop an organic farm milk supply for products sold in the
eastern United States, in 1997, the Company began developing the 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,
a leading brand of organic dairy products in the metro New York market. In
April 1999, the Company acquired Rachel's Dairy, Ltd., a United Kingdom
organic dairy producer. In April 1999, the Company acquired The Organic Cow of
Vermont brand name, a leading brand of organic dairy products in the
northeast United States.
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<PAGE>
CUSTOMERS, REVENUE RECOGNITION AND MARKETING. Horizon Organic
products are sold in conventional and natural foods supermarkets, specialty
retailers and natural foods stores. Horizon Organic'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 pickup. Sales to new
customers are at times made on a 90-day guaranteed basis; if the customer is
unable to sell all of the Company's products during the first 90 days after
it becomes a Horizon Organic customer, the Company buys back the excess
inventory. Historically, the Company has experienced a return rate of
approximately 1% of sales under this guarantee. Sales under this provision
are not significant. Horizon Organic engages in a range of consumer and trade
marketing activities and in the future 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 farmland to provide a source of organic feed.
Horizon Organic's animal-care and facility-maintenance costs are
significantly higher than conventional dairies.
The Company began converting the Idaho dairy farm land to organic
status in 1994, but due to the three-year growing requirement to be certified
organic, the feed grown on the farmland 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 it grows, 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. During 1998, the Company's Maryland dairy achieved permitted milking
capacity for 556 head. However, the Company's ability to operate the Maryland
dairy at maximum capacity (1,000 head) will depend, in part, on its ability
to secure operating permits for additional cows. In Maryland, the Company
must obtain a Waste Water Discharge Permit from the Maryland Department of
Environment. The permitting process will require that the Company makes
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.
During March 1999, the Company entered into a Dairy Herd Management
and Supply Agreement with Aurora. The agreement allows for the Company to
provide and maintain an organic dairy herd of approximately 1,150 milking
head at Aurora's Colorado facilities. Horizon Organic is to provide the feed
for the animals while also paying for approximately $270,000 in equipment and
leasehold improvements. Aurora will be responsible for managing the herd and
paying for all operating expenses outside the feed, breeding, cattle costs
and related leasehold/company-purchased equipment depreciation.
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 preproduction costs. The Idaho dairy
and the Maryland dairy sell organic farm milk to Horizon Organic at an
intercompany transfer price which the Company believes approximates fair
value. All intercompany sales have been eliminated in the Company's
consolidated financial statements.
PURCHASE OF ORGANIC MILK FROM THIRD-PARTY PRODUCERS. To augment its
internal supply of organic farm milk, the Company contracts with various
organic farmers and cooperatives throughout the United States. Except for
26
<PAGE>
one contract that extends through December 2002, these contracts are
generally for 12 to 24 months 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 the organic milk as conventional milk and records the difference
between the Company's purchase price and the conventional price in cost of
sales.
PROCESSING. As of December 31, 1999, Horizon Organic has processing
agreements with a national network of 22 dairy processors that process the
Company's organic farm milk into refrigerated organic fluid milk and other
organic dairy products. In addition, it has four processors that produce
organic citrus juice and has two licensing agreements with egg processors.
The Company also uses three refrigerated warehouses where it inventories
organic dairy products. The costs associated with processing arrangements are
included in the cost of sales. These costs include the cost of processing as
well as payments that Horizon Organic makes to processors which are then paid
into the Federal Milk Market Order System. The Company's product sales mix
affects its overall gross margin since processing costs vary by product.
Although the Company has a long-term processing agreements with Worcester
Creameries Corp. ("Worcester") and one of its affiliates and processing and
distribution agreements with certain Suiza Foods Corporation ("Suiza")
subsidiaries, it does not have written agreements with its other processors.
SALES. Horizon Organic's sales of organic fluid milk products
comprise approximately 68%, 72% and 70% of its total net sales, with $57.5
million, $35.6 million and $20.8 million in sales in fiscal 1999, 1998 and
1997, respectively. The Company's next largest product line, its organic
yogurt products, has been declining as a percentage of total net sales as the
Company has introduced additional organic dairy products. Horizon Organic's
sales of organic yogurt products comprise approximately 8%, 10% and 14% of
its net sales, with $6.4 million, $5.1 million and $4.0 million in sales in
fiscal 1999, 1998 and 1997, respectively. Horizon Organic's sales of organic
butter products comprise approximately 7% of its total net sales, with $6.0
million, $3.3 million and $1.7 million in fiscal 1999, 1998 and 1997,
respectively. International sales, which includes sales of Rachel's products
in the United Kingdom, amounted to $4.4 million, or 5% of sales, in 1999.
There were no international sales in prior years. The remainder of the
Company's total net sales includes sales of its cheeses, cottage cheese,
cream cheese, sour cream and sales of non-dairy products such as organic eggs
and organic citrus juices, as well as royalty and consulting income. Although
the Company anticipates that its product mix will change over time as it
introduces other organic dairy products in accordance with its business
strategy, the Company does not believe that the product mix will change
significantly in the near term.
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 that 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 1999 and 1998, the Company paid
more than $1,400,000 and $750,000, respectively, for pooling, compact and
administrative assessment charges.
As a result of a U.S. Department of Agriculture ("USDA") audit in
1999, it was determined that the Company was liable for the milk producer
promotion fees. These fees, which were retroactive to 1996, amounted to
$329,000, of which $126,000 related to 1999.
27
<PAGE>
ACQUISITION OF JUNIPER VALLEY FARMS BRAND. On April 8, 1998, the
Company completed the acquisition of the Juniper Valley Farms brand of
organic dairy products from Worcester. As a result of the acquisition, the
Company recognized approximately $6.3 million of intangibles, which are being
amortized over 15 years.
ACQUISITION OF RACHEL'S DAIRY LTD. In April 1999, the Company
acquired all the assets and liabilities of Rachel's Dairy, Ltd. ("Rachel's
Dairy"), a United Kingdom company, for $2.4 million in cash plus acquisition
costs of $400,000. The excess cost over the fair value of acquired net assets
of $2.5 million is recognized as an intangible asset and is being amortized
on a straight-line basis over 15 years.
ACQUISITION OF THE ORGANIC COW OF VERMONT BRAND NAME. In April 1999,
the Company acquired certain intangible assets including The Organic Cow of
Vermont brand name for $10.9 million. The acquisition was financed with an
$8.5 million promissory note payable to the seller, bearing interest at 5.3%,
and payable in annual installments over 4 years. The intangible asset of
$10.9 million plus acquisition costs of $0.3 million are being amortized on a
straight-line basis over 15 years.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999, AND DECEMBER 31, 1998
NET SALES. Net sales include product sales, royalties and consulting
revenue, less returns and allowances. Net sales increased 72% to $84.8
million in 1999 from $49.4 million in 1998. This increase was primarily due
to the acquisition of The Organic Cow of Vermont brand in the northeast
United States and Rachel's Dairy in the UK, as well as increased sales of
existing products to existing accounts, continued development of conventional
grocery food channels and the introduction of several new products, including
organic citrus juices.
GROSS PROFIT. Gross profit consists of net sales, less cost of sales
(which includes the cost of raw materials, processing fees, inbound freight,
pooling charges, losses of organic premiums and net operating income, or loss
from farm operations). Gross profit increased 68% to $28.2 million in fiscal
1999 from $16.7 million in fiscal 1998. As a percentage of sales, gross
profit decreased to 33.2% in fiscal 1999 from 33.9% in fiscal 1998. This
decrease is due primarily to an increase in the sale of excess organic milk
at conventional prices, reduced salvage of excess milk capacity due to lower
conventional milk prices in 1999 as compared to 1998, and accrual of producer
promotion fees. This was partially offset by increased income at the Idaho
dairy.
SELLING EXPENSES. Selling expenses include direct selling, marketing
and distribution costs. Selling expenses increased 67% to $18.4 million in
fiscal 1999 from $11.0 million in fiscal 1998. As a percentage of sales,
selling expenses decreased to 21.7% in fiscal 1999 from 22.3% in fiscal 1998,
due to increased sales volumes, offset by increased marketing expenses
including hiring additional marketing personnel as well as increased costs
for expanded distribution.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses include operations and corporate support. These expenses increased
122% to $7.4 million in fiscal 1999 from $3.3 million in fiscal 1998. As a
percentage of sales, general and administrative expenses increased to 8.7% in
fiscal 1999 from 6.8% in fiscal 1998. This increase is due primarily to the
development of corporate infrastructure to support the Company's growth,
costs associated with changes in senior management, hiring of additional
operations personnel, increased costs associated with becoming a public
company and increased amortization of intangible assets associated with the
Company's recent acquisitions.
OTHER INCOME (EXPENSE), NET. Other income (expense), net increased
to income of $58,000 in fiscal 1999 from expense of $825,000 in fiscal 1998.
This increase is primarily attributable to an increase in interest earnings
on invested cash combined with reduced interest expense in 1999 due to early
extinguishment of debt in 1998.
28
<PAGE>
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
NET SALES. Net sales increased 67% to $49.4 million in 1998 from
$29.6 million in 1997. This increase was primarily due to the addition of new
retail accounts, including conventional supermarket chains; increased sales
to existing accounts; the introduction of several new products, including
organic chocolate milk, cottage cheese and orange juice; a price increase;
and sales generated under the Juniper Valley Farms Brand.
GROSS PROFIT. Gross profit increased 142% to $16.7 million in fiscal
1998 from $6.9 million in fiscal 1997. As a percentage of sales, gross profit
increased to 33.9% in fiscal 1998 from 23.4% in fiscal 1997. This increase is
due primarily to the Company reaching capacity and completing organic
conversion at the Company's Idaho dairy, which contributed income versus
losses for the comparable period in 1997. In addition, the Company continues
to experience the benefits from enhancing its national network of processors
and distributors and to record high conventional prices in the last half of
1998.
SELLING EXPENSES. Selling expenses increased 95% to $11.0 million in
fiscal 1998 from $5.7 million in fiscal 1997. As a percentage of sales,
selling expenses increased to 22.3% in fiscal 1998 from 19.1% in fiscal 1997,
primarily due to increased levels of marketing expenses, including hiring
additional marketing personnel as well as increased costs for new
distribution.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 40% to $3.3 million in fiscal 1998 from $2.4 million in
fiscal 1997. This increase is attributable to the hiring of additional
operations personnel, increased costs associated with becoming a public
company and increased amortization of intangible assets offset by the
elimination of preoperating costs associated with the Maryland dairy. As a
percentage of sales, general and administrative expenses decreased to 6.8% in
fiscal 1998 from 8.1% in fiscal 1997, due to increased leverage of general
and administrative expenses over a larger sales base.
OTHER INCOME (EXPENSE), NET. Other income (expense), net decreased
to $825,000 in fiscal 1998 from $1.1 million in fiscal 1997. This decrease is
primarily attributable to higher levels of indebtedness incurred to acquire
the remaining interest in the Idaho dairy, to finance the acquisition and
development of the Company's organic dairy farm in Maryland and to finance
the acquisition of the Juniper Valley Farms brand offset by reduced interest
due to the repayment of indebtedness and interest earnings in the third and
fourth quarters of 1998.
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 Organic Farms, Inc. in the second
quarter of fiscal 1997. Minority interest in loss of subsidiary was $687,000
for the year ended December 31, 1997. In 1998, the operations of the Idaho
dairy are reflected in the Company's consolidated financial statements.
EXTRAORDINARY ITEM. The extraordinary item relates to the early
extinguishment of the senior subordinated promissory notes and includes the
write-off of unaccreted discount of $667,000. The write-off was charged to
expense and is classified as an extraordinary item net of tax benefit of
$253,000 in the accompanying consolidated statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
Horizon Organic's primary sources of capital have been cash flows
from operations, trade payables, bank indebtedness and the sale of debt and
equity securities. Primary uses of cash have been the financing of the Idaho
dairy and Maryland dairy operations and acquisitions of brand names and
distribution networks. The following table presents a summary of the
Company's cash flows for fiscal 1999, 1998 and 1997:
29
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities $ 2,501 $ 3,667 $ (257)
Net cash used in investing activities (12,530) (19,249) (10,003)
Net cash (used in) provided by
financing activities (662) 29,562 10,064
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents $(10,691) $13,980 $ (196)
======== ======== ========
</TABLE>
Net cash provided by (used in) operations decreased to $2.5 million in
fiscal year 1999 from $3.7 million in fiscal year 1998. This decrease is
primarily attributable to an increase in accounts receivable and inventories,
partially offset by an increase in net income, accounts payable and accrued
expenses. The increase in fiscal 1998 is primarily attributable to non-cash
charges associated with depreciation and amortization and the disposal of
cattle combined with an increase in trade accounts payable and other accrued
expenses and the collection of trade accounts receivable, all of which were
offset by purchases of inventories.
Net cash used in investing activities was $12.5 million, $19.2
million and $10.0 million in fiscal 1999, 1998 and 1997, respectively. The
expenditures in 1999 were attributable to the acquisitions of The Organic Cow
of Vermont brand name and Rachel's Dairy, an increase in cattle purchases,
and marketable securities. The expenditures in 1998 primarily related to the
net investment in marketable securities; the acquisition of the Juniper
Valley Farms brand; and expenditures related to the purchase of property and
equipment at the Maryland dairy and the purchases and costs of raising cattle
at the Maryland dairy and the Idaho dairy. The expenditures in fiscal 1997
primarily related to the investment in and acquisition of Sunrise and
purchases of equipment.
Net cash provided by (used in) financing activities was ($0.7)
million, $29.6 million and $10.1 million in fiscal 1999, 1998 and 1997,
respectively. The decrease in cash provided by financing activities in fiscal
1999 is due primarily to the decrease in proceeds from the sale of common
stock. The increase in fiscal 1998 is primarily due to the Company receiving
net proceeds of $46.3 million from the sale of common stock through an
initial public offering and a concurrent placement, offset by the repayment
of indebtedness. 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.
Company management believes that cash and cash equivalents, funds
generated from operations and availability under the line of credit and
additional debt financing if necessary will be sufficient to meet the
Company's foreseeable operating and capital expenditure needs.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes thereto required
by this item are listed and set forth herein beginning on page F-1.
30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the section of the Company's 1999
Definitive Proxy Statement anticipated to be filed with the Securities and
Exchange Commission within 120 days of December 31, 1999 entitled "Proposal 1
- - -Election of Directors" and the section entitled "Management."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the section of the Company's 1999
Definitive Proxy Statement anticipated to be filed with the Securities and
Exchange Commission within 120 days of December 31, 1999 entitled "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section of the Company's 1999
Definitive Proxy Statement anticipated to be filed with the Securities and
Exchange Commission within 120 days of December 31, 1999 entitled "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section of the Company's 1999
Definitive Proxy Statement anticipated to be filed with the Securities and
Exchange Commission within 120 days of December 31, 1999 entitled "Certain
Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS ANNUAL REPORT ON
FORM 10-K.
1. Consolidated Financial Statements: The consolidated financial
statements of Horizon Organic Holding Corporation are included as
Appendix F of this report. See Index to Consolidated Financial
Statements on page F-1.
2. Financial Statement Schedules: The information is included
elsewhere herein.
3. Exhibits.
31
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders'
Equity and Comprehensive Income F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Horizon Organic Holding Corporation:
We have audited the consolidated balance sheets of Horizon Organic Holding
Corporation and subsidiaries (Company) as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horizon
Organic Holding Corporation and subsidiaries as of December 31, 1999 and 1998
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
KPMG LLP
Boulder, Colorado
March 7, 2000
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,693 14,384
Marketable securities 8,218 9,923
Trade accounts receivable, less allowance for doubtful accounts of
$167 in 1999 and $101 in 1998 10,168 4,873
Inventories 8,935 5,466
Deferred tax assets 334 281
Prepaid and other current assets 1,313 563
------------ ------------
Total current assets 32,661 35,490
------------ ------------
Property, equipment and cattle:
Cattle, net 12,737 9,725
Property and equipment, net 18,076 15,534
------------ ------------
Total property, equipment and cattle 30,813 25,259
------------ ------------
Other assets:
Intangible assets, net of accumulated amortization of $1,204 in
1999 and $467 in 1998 20,651 8,132
Other assets, net 487 475
------------ ------------
Total other assets 21,138 8,607
------------ ------------
Total assets $ 84,612 69,356
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,323 434
Trade accounts payable 7,756 4,693
Other accrued expenses 4,016 1,978
Income taxes payable 130 87
------------ ------------
Total current liabilities 14,225 7,192
------------ ------------
Long-term liabilities:
Long-term debt, less current portion 11,255 4,923
Accrued liabilities 82 --
Deferred income tax liabilities 1,162 1,271
------------ ------------
Total long-term liabilities 12,499 6,194
------------ ------------
Total liabilities 26,724 13,386
------------ ------------
Stockholders' equity (deficit):
Preferred stock, $.001 par value, authorized 5,000,000 and 2,000,000 shares
in 1999 and 1998, respectively; no shares issued or outstanding -- --
Common stock, $.001 par value; authorized 30,000,000 shares; 9,743,659 and
9,656,368 shares issued and outstanding in 1999 and 1998, respectively 10 10
Additional paid-in capital 58,392 57,845
Accumulated other comprehensive loss - foreign currency translation adjustment (31) --
Accumulated deficit (483) (1,885)
------------ ------------
Total stockholders' equity 57,888 55,970
------------ ------------
Commitments and contingencies (notes 8, 12, 14, 15 and 19)
Total liabilities and stockholders' equity $ 84,612 69,356
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 84,771 49,360 29,565
Cost of sales 56,591 32,615 22,639
---------- ---------- ----------
Gross profit 28,180 16,745 6,926
---------- ---------- ----------
Operating expenses:
Selling 18,399 11,007 5,656
General and administrative 7,400 3,338 2,384
---------- ---------- ----------
Total operating expenses 25,799 14,345 8,040
---------- ---------- ----------
Operating income (loss) 2,381 2,400 (1,114)
---------- ---------- ----------
Other income (expense):
Interest income 855 636 53
Interest expense, net of interest capitalized of $330
in 1997 (704) (1,394) (1,126)
Other, net (93) (67) (35)
---------- ---------- ----------
Total other income (expense) 58 (825) (1,108)
---------- ---------- ----------
Income (loss) before income taxes,
minority interest and extraordinary item 2,439 1,575 (2,222)
Income tax benefit (expense) (1,037) (675) 513
Minority interest in loss of subsidiary -- -- 687
---------- ---------- ----------
Income (loss) before extraordinary item 1,402 900 (1,022)
Extraordinary item-loss on early extinguishment of debt,
net of income tax benefit of $253 -- (414) --
---------- ---------- ----------
Net income (loss) $ 1,402 486 (1,022)
========== ========== ==========
Net income (loss) per basic share:
Income (loss) before extraordinary item $ .15 .12 (.23)
Extraordinary item -- (.05) --
---------- ---------- ----------
Net income (loss) per share $ .15 .07 (.23)
========== ========== ==========
Net income (loss) per diluted share:
Income (loss) before extraordinary item $ .14 .11 (.23)
Extraordinary item -- (.05) --
========== ========== ==========
Net income (loss) per share $ .14 .06 (.23)
========== ========== ==========
Weighted average shares outstanding:
Basic 9,668 7,339 4,488
Diluted 9,992 7,742 4,488
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(In thousands, except share amounts)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- PAID-IN ACCUMULATED TREASURY COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT STOCK INCOME EQUITY INCOME
------ ------ ------- ------- -------- ------------- ------------- -------------
<S> <C> <C>
Balance at December 31, 1997 5,052,418 $ 5 11,834 (2,371) (582) -- 8,886 --
--------- ------ ------- ------- ----- -------- -------- ---------
Issuance of common stock for
services 3,923 -- 25 -- -- -- 25 --
Issuance of common stock for cash,
net of offering costs 4,550,000 5 46,271 -- -- -- 46,276 --
Retirement of treasury stock -- -- (582) -- 582 -- -- --
Issuance of common stock for
director services 745 -- 10 -- -- -- 10 --
Exercise of warrants 43,349 -- 231 -- -- -- 231 --
Issuance of common stock
under ESPP 5,933 -- 56 -- -- -- 56 --
Net income -- -- -- 486 -- -- 486 486
--------- ------ ------- ------- ----- -------- -------- ---------
Balance at December 31, 1998 9,656,368 10 57,845 (1,885) -- -- 55,970
Total comprehensive income $ 486
=========
Issuance of common stock for
director services 2,679 -- 33 -- -- -- 33 --
Exercise of stock options and
warrants, net of tax benefit 74,099 -- 420 -- -- -- 420 --
Issuance of common stock
under ESPP 10,513 -- 94 -- -- -- 94 --
Foreign currency translation
adjustment -- -- -- -- -- (31) (31) (31)
Net income -- -- -- 1,402 -- -- 1,402 $1,402
--------- ------ ------- ------- ----- -------- -------- ---------
Balance at December 31, 1999 9,743,659 $ 10 58,392 (483) -- (31) 57,888
========= ====== ======= ======= ===== ======== ======== =========
Total comprehensive income $1,371
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,402 486 (1,022)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Provision for doubtful accounts 49 52 7
Depreciation and amortization 3,939 2,727 1,150
Equity in loss of Sunrise Organic Farms, Inc. -- -- 509
Loss on sale of cattle and equipment 1,738 1,509 1,006
Accretion on senior subordinated notes payable and
non-interest bearing notes payable -- 148 44
Deferred income tax (267) 233 (513)
Noncash payments for director services 33 10 --
Minority interest in loss of subsidiary -- -- (687)
Change in operating assets and liabilities:
Trade accounts receivable (4,920) (2,532) 523
Inventories (3,298) (525) (2,690)
Prepaid and other current assets (744) (244) (220)
Trade accounts payable 2,639 852 1,996
Payable to affiliates -- -- (513)
Other accrued expenses 1,887 864 167
Income taxes payable 43 87 (14)
---------- ---------- ----------
Net cash provided by (used in) operating activities 2,501 3,667 (257)
---------- ---------- ----------
Cash flows from investing activities:
Sale (purchase) of marketable securities, net 1,705 (9,923) --
Payments for acquisitions, net of cash acquired (5,592) -- (3,566)
Payments for certain assets of Juniper Valley Farms -- (2,140) --
Purchases of property and equipment (2,620) (2,432) (3,472)
Proceeds from equipment sales 116 246 66
Purchases of cattle, including interest capitalized of $330
in 1997 (8,517) (5,506) (3,595)
Proceeds from cattle sales 2,444 716 279
Other assets (66) (210) 285
---------- ---------- ----------
Net cash used in investing activities (12,530) (19,249) (10,003)
---------- ---------- ----------
</TABLE>
F-6
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Decrease in bank overdrafts $ -- -- (642)
Proceeds from long-term line of credit -- 25,691 24,411
Repayments of long-term line of credit -- (32,644) (23,918)
Repayments of term loan -- (4,000) (244)
Proceeds from long-term debt, other than line of credit -- 500 6,881
Repayments of long-term debt, other than line of credit (1,176) (6,798) (440)
Loan to Aurora Dairy Corporation -- 250 (250)
Proceeds from issuance of common stock, net -- 46,276 4,848
Payments to acquire treasury stock -- -- (582)
Proceeds from exercise of stock options and warrants, net of tax 420 231 --
Proceeds from issuance of common stock under ESPP 94 56 --
------------ ------------ ------------
Net cash provided by (used in) financing activities (662) 29,562 10,064
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (10,691) 13,980 (196)
Cash and cash equivalents at beginning of year 14,384 404 600
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,693 14,384 404
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of amount
capitalized of $330, in 1997 $ 408 1,430 1,024
============ ============ ============
Cash paid during the year for income taxes $ 1,201 101 31
============ ============ ============
Noncash investing and financing activities:
Additional capital lease obligations $ -- 49 88
============ ============ ============
Common stock issued for services $ -- 25 --
============ ============ ============
Common stock issued to outside directors $ 33 10 --
============ ============ ============
The Company purchased the remaining 73.175% of
common stock of Sunrise Organic Farms, Inc.
In connection with this acquisition, assets acquired
and liabilities assumed were as follows:
Fair value of assets acquired $ -- -- 23,751
Cash paid for common stock -- -- (3,566)
Company stock issued for common stock -- -- (2,378)
------------ ------------ ------------
Liabilities assumed $ -- -- 17,807
============ ============ ============
The Company purchased Rachels Dairy Ltd. Assets
acquired and liabilities assumed were as follows:
Fair value of assets acquired $ 4,511 -- --
Cash paid for common stock (2,802) -- --
Debt assumed (947) -- --
------------ ------------ ------------
Liabilities assumed $ 762 -- --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Horizon Organic Holding Corporation (Company) produces and markets
organic milk and other organic dairy products which are sold to natural
food stores and supermarkets nationwide, and processes and markets
organic yogurt in the United Kingdom.
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. In 1997, in order to develop an
organic farm milk supply for products sold in the Eastern United States,
the Company began developing its second organic dairy farm in Maryland
(the Maryland Dairy). Shipments of organic farm milk from the Maryland
Dairy began in the first quarter of 1998. Horizon sources the remainder
of its organic farm milk supply through supply arrangements with
independent dairy cooperatives and farmers throughout the United States.
The Company operates in and judges its financial performance according to
three operating segments; marketing, dairy farm operations and
international.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
the Company's subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments and securities
with original maturities of three months or less at the time of
purchase to be cash equivalents.
(c) MARKETABLE SECURITIES
Marketable securities consist of commercial paper and U.S.
Treasury securities maturing within one year. Marketable
securities have been categorized as held-to-maturity and are
recorded at amortized cost which approximates cost. Marketable
securities at December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Commercial paper $ 4,548
U.S. Treasury 3,670
-------------
$ 8,218
=============
</TABLE>
(d) INVENTORIES
Inventories are stated at the lower of cost (average cost or
first-in, first-out method) or market.
F-8
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(e) PROPERTY, EQUIPMENT AND CATTLE
Property, equipment and cattle are carried at cost. Property
(other than land) is depreciated using accelerated methods over
the estimated useful lives which range from 3 to 27 years.
Equipment and cattle are depreciated using an accelerated method
over the estimated useful lives which range from three to seven
years.
The cost of cattle includes preproduction costs incurred from the
time cattle arrive at the dairy until they enter the milking herd.
(f) OTHER ASSETS
Other assets consist principally of loan origination fees and
artwork and plates. The cost of artwork and plates is amortized
using the straight-line method over three years. Loan origination
fees are amortized using the interest method over the term of the
respective loan. Accumulated amortization of loan origination
fees, organization costs and artwork at December 31, 1999 and 1998
totaled $215,000 and $196,000, respectively.
(g) REVENUE RECOGNITION
Net sales are recognized at the time of shipment, and provisions
are made for allowances, returns and guarantees. Sales to new
customers are at times made on a 90-day guarantee basis; if the
customer is unable to sell all of the Company's products during
the first 90 days after it becomes a customer, the Company issues
a credit for unsold inventory. Estimated returns are recognized as
a reduction to accounts receivable.
(h) ADVERTISING COSTS
Advertising costs are expensed in the year incurred. Advertising
costs, which are included in selling expenses, totaled $1,610,000,
$301,000 and $33,000 during 1999, 1998 and 1997, respectively.
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
operations in the period that includes the enactment date.
F-9
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(j) EARNINGS PER SHARE
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Income (loss) before extraordinary item $ 1,402 900 (1,022)
Extraordinary item, net of income tax benefit -- (414) --
---------- ---------- ----------
Net income (loss) $ 1,402 486 (1,022)
========== ========== ==========
Common and common equivalent shares outstanding:
Historical common shares outstanding
at beginning of year $ 9,656 5,052 3,648
Weighted average common equivalent
shares issued during year 12 2,287 840
---------- ---------- ----------
Weighted average common shares
issued - basic 9,668 7,339 4,488
Weighted average common equivalent
shares issued during period 324 403 --
---------- ---------- ----------
Weighted average common
shares issued - diluted $ 9,992 7,742 4,488
========== ========== ==========
Earnings per basic share:
Income (loss) per share $ .15 .12 (.23)
Extraordinary item per share -- (.05) --
---------- ---------- ----------
Net income (loss) per share $ .15 .07 (.23)
========== ========== ==========
Earnings per diluted share:
Income (loss) per share $ .14 .11 (.23)
Extraordinary item per share -- (.05) --
---------- ---------- ----------
Net income (loss) per share $ .14 .06 (.23)
========== ========== ==========
</TABLE>
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.
(k) 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
F-10
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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 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.
(l) INTANGIBLES AND LONG-LIVED ASSETS
The excess of purchase price over fair value of net assets
acquired, is amortized on a straight-line basis over the expected
period to be benefited of 15 years. The Company reviews long-lived
assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows
(without interest costs) expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
The Company has recorded no impairment losses.
(m) EMPLOYEE BENEFIT PLAN
The Company adopted a defined contribution retirement plan (Plan)
during 1997 under which eligible employees may elect to defer
current compensation by up to certain statutorily prescribed
annual limits and contribute such amount to the Plan. 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 $78,000, $58,000 and $33,000 to the Plan for the years
ended December 31, 1999, 1998 and 1997, respectively.
(n) SIGNIFICANT CUSTOMERS
The Company has a distributor which is comprised of five 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.
(o) 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.
F-11
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(p) RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997
financial statements to conform with the 1999 presentation.
(3) ACQUISITION OF RACHELS DAIRY, LTD.
On April 1, 1999, the Company acquired all the assets and liabilities of
Rachels Dairy Ltd. (Rachels), a company domiciled in the United Kingdom
for $2.4 million in cash plus acquisition costs of $.4 million. The
acquisition has been accounted for by the purchase method and the results
of operations for Rachels have been included in the Company's
consolidated financial statements as of April 1, 1999. The excess of cost
over fair value of acquired net assets of $2.5 million is being amortized
on a straight-line basis over 15 years.
The following unaudited pro forma financial information represents the
combined results of operations of the Company and Rachels as if the
acquisition occurred at the beginning of 1999 and 1998, after giving
effect to certain adjustments including amortization of goodwill,
additional depreciation expense and the related income tax effects. The
pro forma financial information does not necessarily reflect the
operations that would have occurred had the Company and Rachels
constituted a single entry during such periods.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------- --------------------
(unaudited, dollars in thousands)
<S> <C> <C>
Net sales $ 85,978 53,109
===================== ====================
Net income $ 1,421 514
===================== ====================
Net loss per basic share $ .15 .07
===================== ====================
Net loss per diluted share $ .14 .07
===================== ====================
</TABLE>
(4) PURCHASE OF CERTAIN ASSETS
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 notes payable; $2,000,000 term loan payable to a
bank, bearing interest at prime plus 2% and a $4,000,000 non-interest
bearing secured promissory note. The notes were paid in July 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. Intangible assets related to this transaction are $5,824,000 and
costs associated with the transaction are $570,000, which are being
amortized on a straight-line basis over 15 years. The non-interest
bearing note was recorded at its estimated present value which was
discounted at 10.5%.
F-12
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
In April 1999, the Company acquired certain intangible assets including
The Organic Cow brand name for $10.9 million. The acquisition was
financed with a cash payment of $2.4 million and a $8.5 million
promissory note payable to the seller, bearing interest at 5.3% per annum
and payable in annual installments over four years. The intangible asset
recorded of $10.9 million plus acquisition costs of $.3 million is being
amortized on a straight-line basis over 15 years.
(5) INVENTORIES
Inventories consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
Grain and feed $ 5,223 3,365
Crops growing, fertilizer and other 320 438
Finished goods 1,726 1,409
Raw materials 1,666 254
-------------------- --------------------
$ 8,935 5,466
==================== ====================
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Land and water rights $ 2,799 2,799
Dairies and feedlot 10,632 10,034
Rolling stock, vehicles and farm equipment 2,503 1,781
Cream separator 622 622
Employee housing 942 930
Intermediate crop life 95 23
Office equipment and other 3,221 817
------------------- -------------------
20,814 17,006
Less accumulated depreciation (2,738) (1,472)
------------------- -------------------
Total property and equipment $ 18,076 15,534
=================== ===================
</TABLE>
F-13
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(7) CATTLE
Cattle consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Number of head-milking cows 6,856 5,551
Number of head-replacement heifers 3,753 2,999
------------------ ------------------
Total cattle 10,609 8,550
================== ==================
Cost-milking cows $ 11,084 8,408
Cost-replacement heifers 3,634 2,589
------------------ ------------------
14,718 10,997
Less accumulated depreciation (1,981) (1,272)
------------------ ------------------
$ 12,737 9,725
================== ==================
</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) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Note payable to H.P. Hood Inc. with interest at 5.3%, payable in annual
installments over four years $ 8,451 --
Notes payable to Peoples Bank of Kent County, Maryland with interest at
prime (8.5% at December 31, 1999), payable in monthly installments
with the unpaid balance due April 15, 2018, secured by certain
property. The note holder has the right to demand repayment of
principal and interest in full at any time on or after April 15, 2001 479 493
Note payable to Peoples Bank of Kent County, Maryland with interest at prime
(8.5% at December 31, 1999), payable in monthly installments with the
unpaid balance due October 27, 2002, secured by certain property
660 687
Note payable to Farm Credit Services with interest at 6.5%, payable in
monthly installments with the unpaid balance due July 1, 2010 3,453 3,673
Revolving line of credit with U.S. Bancorp Ag Credit, Inc. with maximum
borrowing of $20,000,000 with interest at prime less .25%, secured by
substantially all assets of the Company, available through June 30,
2000
-- --
</TABLE>
F-14
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Obligations under capital leases with terms from two to five years with
imputed interest rates ranging from 7.04% to 10.89% secured by
related equipment $ 287 504
Other debt 248 --
------------- -------------
Total long-term debt 13,578 5,357
Less current portion (2,323) (434)
------------- -------------
Long-term debt, excluding current portion $ 11,255 4,923
============= =============
</TABLE>
The revolving line of credit 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.
The Company entered into a $8.5 million promissory note payable to H. P.
Hood Inc., bearing interest at 5.3%, payable in annual installments over
4 years and secured by a letter of credit, covered by the $20,000,000
revolving line of credit with U.S. Bancorp Ag Credit, Inc. Maximum
borrowings under this line of credit is determined net of any letters of
credit associated with the line of credit, or $11.5 million.
Aggregate maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
December 31:
2000 $ 2,323
2001 2,425
2002 3,125
2003 2,624
2004 323
Thereafter 2,758
-----------------
Total $ 13,578
=================
</TABLE>
F-15
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(9) INCOME TAXES
Income tax (expense) benefit attributable to income (loss) consists of
(in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------------- ------------- -------------
<S> <C> <C> <C>
Year ended December 31, 1999:
U.S. federal $ (1,006) 135 (871)
State (192) 26 (166)
-------------- ------------- -------------
$ (1,198) 161 (1,037)
============== ============= =============
Year ended December 31, 1998:
U.S. federal $ (372) (196) (568)
State (70) (37) (107)
-------------- ------------- -------------
$ (442) (233) (675)
============== ============= =============
Year ended December 31, 1997:
U.S. federal $ -- 452 452
State -- 61 61
-------------- ------------- -------------
$ -- 513 513
============== ============= =============
</TABLE>
Income tax (expense) benefit attributable to income (loss) differed from
the amounts computed by applying the U.S. federal income tax rate of 34%
to pretax income (loss) as a result of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Computed "expected" tax (expense) benefit $ (829) (536) 755
(Increase) reduction in income taxes
resulting from:
State and local income taxes, net of
federal benefit (110) (70) 40
Permanent differences (115) (69) (60)
Change in valuation allowance -- -- 122
1997 pre-acquisition losses purchased -- -- (348)
Other, net 17 -- 4
------------------ ------------------ ------------------
$ (1,037) (675) 513
================== ================== ==================
</TABLE>
F-16
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Deferred tax assets:
Artwork and plates and cattle depreciation $ 151 183
Net operating loss carryforwards 717 727
Write off of intangibles in purchase accounting 71 83
Start-up costs capitalized for tax 102 136
Other, net 310 85
------------------ ------------------
Net deferred tax assets 1,351 1,214
Deferred tax liability -
step-up of property, equipment and cattle in
acquisition (2,179) (2,204)
------------------ ------------------
Net deferred tax liabilities (828) (990)
Less current net deferred tax assets (334) (281)
------------------ ------------------
Long term deferred income tax liability $ (1,162) (1,271)
================== ==================
</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 management's
projections of future taxable income and future taxable income generated
from the reversal of deferred tax liabilities over the periods in which
the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences, accordingly, there is no valuation allowance in
1999 or 1998.
At December 31, 1999, the Company has net operating loss carryforwards
for U.S. federal income tax purposes of $1,886,000 which are available to
offset future federal taxable income and expire in the following years
(in thousands):
<TABLE>
<S> <C>
2011 $ 1,288
2012 598
---------------------
Total $ 1,886
=====================
</TABLE>
(10) STOCKHOLDERS' EQUITY
On July 2, 1998, the Company completed its initial public offering
selling 3,450,000 shares of Common Stock at an initial public offering
price of $11.00 per share. Concurrently, the Company sold 1,100,000
shares of Common Stock to Suiza Foods Corporation in a private placement
at a price of $11.00 per share. The Company received proceeds of
$50,050,000 which was reduced by offering costs of $3,774,000 from these
offerings.
F-17
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
In December 1999, two warrants were exercised to purchase an aggregate of
25,769 shares of the Company's common stock for approximately $138,000.
The warrants had an exercise price of $5.335 per share.
In April 1998, the Company retired its 120,000 shares of treasury stock.
(11) 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
value at date of grant.
In 1997, a total of 214,125 shares were granted by the Board. 4,000
nonqualified shares were granted to outside agents that vested
immediately and expire in 2000. 5,250 nonqualified shares were granted to
outside agents that vest 25% per year beginning one year after the grant
date and expire in 2002. 168,875 qualified shares were granted to
employees that vest 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. 27,000
nonqualified shares were granted to directors that vest 25% per year
beginning one year after grant date and expire in 2002.
In 1998, a total of 66,250 shares were granted by the Board. 1,000
nonqualified shares were granted to outside agents that vest 25% per year
beginning one year after grant date and expire in 2003. 62,250 qualified
shares were granted to employees that vest 25% per year beginning one
year after grant date and expire in 2003. 3,000 nonqualified shares were
granted to a director that vest 25% per year beginning one year after
grant date and expire in 2003.
In 1999, a total 426,500 shares were granted by the Board. 175,436
nonqualified shares were granted to outside agents that vest 25% per year
beginning one year after grant date and expire in 2004. 251,064 qualified
shares were granted to employees that vest 25% per year beginning one
year after grant date and expire in 2004.
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $6.27, $2.82 and $1.12, respectively, on the date
of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1999 -- no expected dividend yield,
expected volatility of 59%, risk-free interest rate of 5.8%, and expected
lives of 5 years, 1998 -- no expected dividend yield, expected volatility
of 50% for options granted after July 2, 1998, risk-free interest rates
ranging from 4.17% to 5.69% depending on the life of the option, and
expected option lives of 4.5 years, 1997 -- no expected dividend yield,
expected volatility of 50% for options granted after July 2, 1998,
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
F-18
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss), as reported $ 1,402 486 (1,022)
============ ============ ============
Net income (loss), pro forma $ 1,125 463 (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.
Stock option activity during the years indicated was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF RANGE OF EXERCISE
SHARES EXERCISE PRICES PRICE
--------------- -------------------- -------------
<S> <C> <C> <C>
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
Granted 66,250 $6.50 - $12.75 $10.08
Canceled (7,750) $6.50 - $12.75 $12.55
---------------
Balance at December 31, 1998 598,768 $1.25 - $14.88 $3.91
Granted 426,500 $7.01 - $17.25 $11.25
Exercised (48,330) $1.25 - $6.50 $3.33
Canceled (23,875) $3.22 - $17.25 $10.45
---------------
Balance at December 31, 1999 953,063 $1.25 - $17.25 $7.03
===============
Number of options exercisable at
December 31, 1999 363,946
===============
</TABLE>
F-19
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER WEIGHTED
REMAINING EXERCISABLE AT AVERAGE
NUMBER CONTRACTUAL LIFE DECEMBER 31, EXERCISE
EXERCISE PRICE OUTSTANDING (YEARS) 1999 PRICE
--------------------- ------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
$ 1.25 75,000 4.2 75,000 $ 1.25
2.00 - 2.10 151,250 1.3 151,250 2.09
3.22 - 3.54 77,500 .9 57,500 3.36
4.85 - 7.01 249,563 2.4 76,007 5.96
8.25 - 11.00 244,250 4.8 4,189 8.98
12.63 - 17.25 155,500 3.8 -- 14.92
------------------- ------------------
953,063 3.1 363,946 $ 3.01
=================== ================== ================== ==================
</TABLE>
Canceled options are a result of employee terminations and forfeitures.
As of December 31, the Company had 37,000 options available for grant
under the Plan.
(12) LEASES
The Company has noncancelable operating leases, primarily for office
space and office equipment, expiring at various dates from 2000 to 2007.
These leases generally require the Company to pay all executory costs
such as maintenance and insurance. Rent expense totaled, $271,000 in
1999, $278,000 in 1998 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, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------------- ----------------
<S> <C> <C>
Year ended December 31:
2000 $ 119 672
2001 90 639
2002 74 484
2003 44 442
2004 -- 435
---------------- ----------------
Total minimum lease payments 327 2,672
================
Less amounts representing interest (40)
----------------
Present value of minimum capital lease
payments 287
Less current portion (99)
----------------
Capital lease obligations, less current portion $ 188
================
</TABLE>
F-20
<PAGE>
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, marketable securities,
trade accounts receivable, other current assets, other assets, trade
accounts payable and other accrued expenses approximate fair value
because of the short maturity of these instruments.
The carrying amounts of long-term debt approximates fair value because
the interest rates are variable at market rates or because the rates are
based on currently offered rates by lending institutions for similar debt
instruments of comparable maturities.
(14) RELATED PARTY TRANSACTIONS
The Company subleased a portion of its office to a company controlled by
a director and stockholder of the Company. The sublease ended July 1999.
Rental income under the agreement was approximately $1,900 per month.
(a) RELATED PARTY TRANSACTIONS WITH AURORA DAIRY CORPORATION
The Company entered into a Dairy Herd Management and Supply
Agreement on March 5, 1999 (subsequently amended on June 9, 1999)
with Aurora Dairy Corporation (ADC) whose majority owner is a
Company board member. The agreement allows the Company to provide
and maintain an organic dairy herd at ADC's facilities in
Platteville, Colorado approximating 1,150 head milking. The
Company is to provide the feed for the animals while also paying
for approximately $270,000 in equipment and leasehold
improvements. ADC is to manage the herd and pay for all operating
expenses outside of the feed, breeding and cattle costs and the
related leasehold/company purchased equipment depreciation. The
management fees vary throughout the term of the contract but
require a minimum of $90,000 per month. The contract runs from
October 1999 through September 2002. The Company has the option to
renew the agreement for up to an additional 18 months in six-month
increments provided that the Company gives ADC notice of its
extension by June 30, 2002.
The payments made during 1999 to ADC for the management fee were
$270,000. Other miscellaneous charges associated with this herd
for services provided outside of the contract during 1999 was
approximately $9,000.
During 1999, 597 heifers were purchased from ADC for $561,875.
Equity and purchase rights in over 2,000 head of other heifers
were purchased for $102,600 during the year from ADC. $3,036 was
paid to ADC for consulting work for the Maryland Farm.
(b) ROBINSON DAIRY, INC.
On January 1, 1999, the Company entered into a Processing and
Distribution Agreement (Agreement) with Robinson Dairy, Inc.,
(Robinson) whereby the Company will not engage another processor
located within the state of Colorado. A director of the Company
controlled
F-21
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Robinson. Per the agreement, the Company will pay minimum
co-packing fees for processing product through December 31, 2003.
The Company incurred expenses of approximately $779,000,
$1,049,000 and $660,000 during 1999, 1998 and 1997, respectively.
During 1998, the Company paid fees to one of its directors for the
guarantee of certain debt at one percent of the amount guaranteed.
The Company paid approximately $29,000 to this director in
connection with guarantee fees in 1998. The guarantees were
released in 1998.
(c) SUIZA
In 1998, Horizon entered into agreements with Suiza, a leading
manufacturer and distributor of fresh milk and related dairy
products. The Company's arrangement with Suiza includes processing
and distribution agreements with certain of Suiza's subsidiaries.
Horizon's relationship with Suiza includes five-year processing
and distribution agreements with two of Suiza's subsidiaries. The
processing and distribution agreements generally provide that both
Model Dairy and Garelick Farms will distribute all SKUs of
Horizon's organic fluid milk products which are available for sale
in their respective territories. Amounts paid to Suiza and its
subsidiaries under these agreements total $4,487,000 and
$1,677,000 in 1999 and 1998, respectively.
(15) PURCHASE COMMITMENTS
The Company contracts with various organic farmers and cooperatives
throughout the United States for organic farm milk. Except for one
contract which extends through 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 the organic milk as conventional milk and records the
difference in the Company's purchase price and the conventional price in
cost of sales.
(16) EMPLOYEE STOCK PURCHASE PLAN
In April 1998, the Board adopted the 1998 Employee Stock Purchase Plan
(the Purchase Plan), to provide employees of the Company with an
opportunity to purchase common stock through payroll deductions. Under
the Purchase Plan, 250,000 shares of common stock have been reserved for
issuance. The Purchase Plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue
Code. The Board may authorize participation by eligible employees,
including officers, in periodic offerings following the adoption of the
Purchase Plan. A new offering period begins every six months. The Board
authorized an offering commencing July 2, 1998 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 for at least three months preceding the
beginning of the offering and work at least 20 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
F-22
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
purchased under the Purchase Plan will be equal to 85% of the lower of
the fair 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 in control, the Company and the Board
have discretion to provide that each right to purchase common stock will
be assumed or an equivalent right substituted by the successor
corporation, or the Board may shorten an offering and provide for all
sums collected by payroll deductions to be applied to purchase stock
immediately prior to the change in control. The Purchase Plan may be
terminated at the Board's discretion.
F-23
<PAGE>
HORIZON ORGANIC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(17) QUARTERLY RESULTS (UNAUDITED)
The following table sets forth selected quarterly unaudited financial
information for the fiscal years ended December 31, 1999 and 1998 (in thousands
except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 16,423 20,590 22,798 24,960
Gross profit 5,522 7,232 8,143 7,283
Total operating expenses (4,868) (6,106) (6,806) (8,019)
Operating income (loss) 654 1,126 1,337 (736)
Other income (expense) 182 (16) (69) (39)
Income (loss) before income taxes 836 1,110 1,268 (775)
Income tax benefit (expense) (334) (444) (507) 248
Net income (loss) 502 666 761 (527)
Net income (loss) per share, basic .05 .07 .08 (.06)
Net income (loss) per share, diluted .05 .07 .08 (.05)
Weighted average shares outstanding - basic 9,666 9,692 9,719 9,544
Weighted average shares outstanding - diluted 10,099 10,129 10,093 9,868
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 10,102 11,793 12,762 14,703
Gross profit 3,079 3,753 4,607 5,306
Total operating expenses (2,745) (3,193) (3,873) (4,534)
Operating income 334 560 734 772
Other income (expense) (492) (676) 140 203
Income (loss) before income taxes and
extraordinary item (158) (116) 874 975
Income tax benefit (expense) 43 23 (352) (389)
Income (loss) before extraordinary item (115) (93) 522 586
Extraordinary item, net -- -- (414) --
Net income (loss) (115) (93) 108 586
Net income (loss) per share, basic (.02) (.02) (.01) .06
Net income (loss) per share, diluted (.02) (.02) (.01) .06
Weighted average shares outstanding - basic 5,056 5,056 9,557 9,611
Weighted average shares outstanding - diluted 5,056 5,056 10,046 10,052
</TABLE>
F-24
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(18) REPORTABLE SEGMENTS
The Company has three segments of business, the marketing company, the
dairy farm operations and International. Thesegmenting company is
responsible for acquiring, processing and marketing organic fluid milk,
organic dairy products and organic non-dairy products. The dairy farm
operations are responsible for producing farm milk for use by the
marketing company in the production of its products and for sales to
third parties. International is the processor. The following table sets
forth selected
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------------
DAIRY FARM INTER-
MARKETING OPERATIONS NATIONAL SUBTOTAL ELIMINATIONS TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales - external customers $ 80,417 -- 4,354 84,771 -- 84,771
Net sales - internal -- 20,597 -- 20,597 (20,597) --
---------- ---------- ---------- ---------- ---------- ----------
Total net sales 80,417 20,597 4,354 105,368 (20,597) 84,771
========== ========== ========== ========== ========== ==========
Depreciation and amortization $ 1,287 2,500 152 3,939 -- 3,939
Loss on sale of cattle and equipment -- 1,738 -- 1,738 -- 1,738
Interest income 1,681 17 -- 1,698 (843) 855
Interest expense (447) (976) (124) (1,547) 843 (704)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income (expense) 1,234 (959) (124) 151 -- 151
========== ========== ========== ========== ========== ==========
Income tax expense $ (420) (589) (28) (1,037) -- (1,037)
Net income 569 795 38 1,402 -- 1,402
Segment assets 79,623 38,471 4,764 122,858 (38,246) 84,612
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------
DAIRY FARM
MARKETING OPERATIONS SUBTOTAL ELIMINATIONS TOTAL
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net sales - external customers $ 49,255 105 49,360 -- 49,360
Net sales - internal -- 16,848 16,848 (16,848) --
---------- ---------- ---------- ---------- --------
Total net sales 49,255 16,953 66,208 (16,848) 49,360
========== ========== ========== ========== ========
Depreciation and amortization $ 591 2,136 2,727 -- 2,727
Loss on sale of cattle and equipment 2 1,507 1,509 -- 1,509
Interest income 2,222 18 2,240 (1,604) 636
Interest expense (1,027) (1,971) (2,998) 1,604 (1,394)
---------- ---------- ---------- ---------- --------
Net interest income (expense) 1,195 (1,953) (758) -- (758)
========== ========== ========== ========== ========
Income tax (expense) benefit $ (1,362) 687 (675) -- (675)
Extraordinary item, net of tax (414) -- (414) -- (414)
Net income (loss) 1,406 (920) 486 486
Segment assets 66,187 32,268 98,455 (29,099) 69,356
</TABLE>
F-25
<PAGE>
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(19) SUBSEQUENT EVENT
On March 2, 2000, the Company purchased a dairy farm consisting of 607
acres in Wilton, California (Sacramento County). The Company believes
that this acquisition will permit it to develop another organic milk
supply closer to its contracted processors when and if it chooses to do
so. The price paid of approximately $1.4 million is net of conservation
easements sold to The Nature Conservancy and includes existing
residences. One of these easements provides for 110 acres to be set aside
in perpetuity for a garter snake preserve while utilizing the area for
dairy wastewater treatment. The second easement requires that 473 acres
be used for agriculture in perpetuity provided that 60 acres are set
aside for permanent agricultural facilities including agricultural
residences. The land is considered to be immediately organically
certifiable and the environmental permits have already been granted to
the Company.
F-26
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
3.1+ Amended and Restated Certificate of Incorporation.
3.2+ Amended and Restated Bylaws of the Company.
4.1+ Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen stock certificate representing shares of Common Stock of
the Company.
10.1+* 1998 Equity Incentive Plan.
10.2+* Form of Company's Stock Option Agreement.
10.3+* 1998 Employee Stock Purchase Plan.
10.4+ Form of Indemnity Agreement.
10.5+ Form of Warrant to Purchase Common Stock.
10.6+ Warrant to Purchase Common Stock issued to McCabe Mintz & Co.
10.7+ Loan and Security Agreement, dated July 15, 1997, among FBS Ag
Credit, Inc., the Company, Horizon Organic Dairy, Inc. ("HOD"),
Horizon Organic Dairy, Maryland Farm, Inc., and Horizon Organic
Dairy, Idaho Farm, Inc., as amended by the First Amendment to Loan
and Security Agreement dated March 23, 1998, as amended by the
Second Amendment to the Loan And Security Agreement dated April 6,
1998.
10.8+ 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.
10.9+ Asset Purchase Agreement, dated as of April 8, 1998, between the
Company and Worcester Creameries Corp.
10.10+ Amended Executive Employment Agreement, effective January 1, 1998,
between the Company and Barnet Feinblum.
10.11+ Amended Executive Employment Agreement, effective January 1, 1998,
between the Company and Mark A. Retzloff.
10.12+ Amended Executive Employment Agreement, effective January 1, 1998,
between the Company and Paul Repetto.
10.13+ Office Lease for Horizon Building, dated October 10, 1996, between
HOD and MUM II, LLC, as amended by the Addendum to Lease and
Second Addendum to Lease, dated October 10, 1996 and Third
Addendum to Lease, dated March 31, 1997.
10.14+ Stock Purchase Agreement, dated as of June 5, 1998, between the
Company and Suiza Foods Corporation ("Suiza").
10.15+ Stockholder Agreement, dated as of June 5, 1998, between the
Company and Suiza.
10.16++ 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, as amended by the Third Amendment to Loan and Security
Agreement dated October 14, 1998.
10.17++++ Horizon Organic Holding Corporation Dairy Business Agreement by
and among Horizon Organic Holding Corporation, H.P. Hood Inc. and
The Organic Cow L.L.C. dated April 30, 1999.
10.18* Amended and Restated Employment Agreement, effective November 29,
1999, between Company and Charles F. Marcy.
21.1+ Statement re: subsidiaries of the Company.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney. Reference is made to the signature page
contained herein.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ ------------------------
<S> <C>
99.1+++* Form of Incentive Stock Option Agreement between the Company
and Marc Peperzak.
99.2+++* Form of Non-Qualified Stock Option Agreement dated January
10, 1998.
99.3+++* Stock Option Agreement between the Company and Barnet M.
Feinblum dated June 1, 1995.
99.4+++* Stock Option Agreement between the Company and Barnet M.
Feinblum dated June 1, 1995.
99.5+++* Form of Stock Option Agreement dated May 15, 1995.
</TABLE>
Exhibits identified above are incorporated by reference as follows:
+Incorporated by reference to the Registrant's Registration Statement on Form
S-1 No. 333-51465.
++Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
+++Incorporated by reference to the Registrant's Registration Statement on Form
S-8, No. 333-64905.
++++Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999.
* Indicates each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
b) REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 2000.
HORIZON ORGANIC HOLDING CORPORATION
By: /s/ CHARLES F. MARCY
-----------------------------------------
Charles F. Marcy
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles F. Marcy and Don J. Gaidano, or
any of them, his or her attorney-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this Report,
and to file the same, with exhibits thereto and other documents in connections
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ THOMAS D. MCCLOSKEY, JR. Chairman of the Board of Directors March 30, 2000
- - -----------------------------------------
THOMAS D. MCCLOSKEY, JR.
/s/ CHARLES F. MARCY President, Chief Executive Officer, Director March 30, 2000
- - ----------------------------------------- (PRINCIPAL EXECUTIVE OFFICER)
CHARLES F. MARCY
/s/ DON J. GAIDANO Vice President, Finance & Administration March 30, 2000
- - ----------------------------------------- Chief Financial Officer, and Treasurer
DON J. GAIDANO (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ PAUL B. REPETTO Director March 30, 2000
- - -----------------------------------------
PAUL B. REPETTO
/s/ MARK A. RETZLOFF Senior Vice President, Corporate Development, March 30, 2000
- - ----------------------------------------- Director
MARK A. RETZLOFF
/s/ MARCUS B. PEPERZAK Director March 30, 2000
- - -----------------------------------------
MARCUS B. PEPERZAK
/s/ BARNET M. FEINBLUM Director March 30, 2000
- - -----------------------------------------
BARNET M. FEINBLUM
/s/ CLARK R. MANDIGO II Director March 30, 2000
- - -----------------------------------------
CLARK R. MANDIGO II
/s/ RICHARD L. ROBINSON Director March 30, 2000
- - -----------------------------------------
RICHARD L. ROBINSON
/s/ G. IRWIN GORDON Director March 30, 2000
- - -----------------------------------------
G. IRWIN GORDON
/S/ MICHELLE GOOLSBY Director March 30, 2000
- - -----------------------------------------
MICHELLE GOOLSBY
</TABLE>
<PAGE>
[HORIZON LETTERHEAD]
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
November 11, 1999
Charles F. Marcy
11500 Brookwood Boulevard
Leawood, Kansas 66211
913-663-2963
Dear Chuck,
It is my extreme pleasure to confirm our offer of employment as President and
Chief Operating Officer for Horizon Organic Holding Corporation (HOH)
pursuant to this Amended and Restated Employment Agreement which shall
supercede and replace in its entirety the Employment Agreement, dated as of
November 4, 1999, between you and the Company. This is a full-time, exempt
position reporting to Barney Feinblum, Chief Executive Officer. The details
of our employment offer to you are confirmed below:
EMPLOYMENT TERMS AND CONDITIONS
TERMS:
1. EFFECTIVE DATE OF HIRE: November 29, 1999
2. BASE SALARY: $9,615.39 per pay-cycle with 26 pay cycles per year
($250,000.14 if annualized). You will have annual compensation reviews
that are performance/merit based, scheduled on the anniversary of your hire
date. The Compensation Committee of the Board will determine annual merit
increase compensation adjustments.
3. SUCCESSION: The position of President and Chief Operating Office is
identified as the successor to the Chief Executive Officer position. The
succession to President/CEO is scheduled concurrent with the May 21, 2000,
Shareholder's meeting.
<PAGE>
At the time your position and responsibilities are elevated to President /
CEO, your base compensation will be increased from $9,615.39 per pay
cycle to $10,577.00 per pay cycle ($275,002.00 if annualized).
4. BOARD OF DIRECTORS: The positions of President / COO as well as President /
CEO are identified as members of the HOH Board of Directors.
5. BONUS: As President / COO, you will participate in the Horizon Organic
Dairy Bonus Compensation Plan at 45% of base salary at target performance,
with a maximum potential bonus of 90% of base salary for extraordinary
performance. Your bonus consideration for 1999 will be prorated from date
of hire to December 31, 1999.
At the time you are promoted to President / CEO, you will participate in
the BCP at 55% of base salary at target performance, with a maximum
potential bonus of 110% of base salary for extraordinary performance.
Bonus consideration is based on a combination of corporate and individual
performance factors, the details of which will be mutually determined by
you and the CEO during your service as President / COO and mutually
determined by you and the Board during your service as President / CEO.
6. PAID TIME OFF: You will accrue Paid Time Off (PTO) at the rate of 26 days
per employment year. You will have an additional 10 days of PTO in your PTO
on your date of hire.
7. STOCK OPTIONS: On your start date, you will be awarded, in accordance
with the Horizon qualified Equity Incentive Plan, a vesting stock option to
purchase 150,000 shares of HOH common stock at the strike price at the
close of business on the day of the signed Employment Agreement or the
strike price on your start date, whichever is the lower PLUS 50,000
restricted stock options of HOH common stock at 85% of the strike price at
the close of business on the day of the signed Employment Agreement or the
strike price on your start date, whichever is lower. At the time you are
promoted to President / CEO you will receive additional 50,000 options at
the fair market value at that time. All of the stock options described in
this paragraph 7 are referred to in this letter agreement as the "Stock
Options."
Except as provided otherwise in this paragraph 7, the Stock Options will
vest at 25% per year on the anniversary date of the award with a 5-year
exercise period. In the event of a Change of Control of HOH, the Stock
Options immediately shall become exercisable in full. A "Change in Control"
of HOH shall be deemed to have occurred if (i) any person (as such term is
used in Sections 13(d) and 14(d) (2) of the Securities and Exchange Act of
1934 (the "Exchange Act")), other than HOH, is or becomes the beneficial
owner (as defined in Rule 13D-3 under the Exchange Act), directly or
indirectly, of 50% or more of the combined voting
<PAGE>
power of the outstanding shares of capital stock of HOH entitled to vote
generally in the election of directors (calculated as provided in Rule
13d-3(d) under the Exchange Act in the case of rights to acquire capital
stock), whether by means of a tender offer or exchange offer, Transaction
or otherwise; or (ii) the Board or stockholders of HOH approve a
Transaction. A "Transaction" is: a) any consolidation or merger of HOH
other than a merger solely to effect a reincorporation or a merger of HOH as
to which stockholder approval is not required pursuant to Sections 251(f)
or 253 of the Delaware General Corporation Law; or b) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of 50% or more of the assets of HOH.
8. BENEFITS: You will be eligible to participate in all company benefits
including:
- Wellness and insurance (life, short- and long-term disability,
medical, dental and vision), from first day of employment providing you
complete the required enrollment forms within the first 30 days of
employment.
- 401-K program with eligibility for participation to commence after one
year of regular full-time employment. Enrollment windows are available
at the beginning of each quarter following one year of employment.
The 401-K plan is currently being restructured for a January 2000
implementation. Among other changes, we are evaluating the acceleration
of participation eligibility.
- Employee stock purchase plan after a 90 days of regular full-time
employment with enrollment periods of July 1st and January 1st of each
year.
9. MOVING ALLOWANCE: HOH will reimburse you (or pay on your behalf) all
costs related to your relocation to Colorado up to $100,000.00 for related
relocation expenses, such as realtor fees/closing costs on the
sale/purchase of your home, house-hunting trips to Colorado, temporary
housing, living expenses, etc.
10. SEVERANCE: HOH agrees to pay, as severance, contingent upon the execution
of a release and non-compete agreement, 18 months of base salary at the
base salary rate in effect at the time of termination in the form of
salary continuation (39 pay cycles) with the exception of termination for
cause or voluntary termination (such severance payment referred to herein
as the "Severance"). The release agreement will be full and final; the
duration of the non-compete will be equal to the duration of the
severance/salary continuation, i.e., 18 months and will be limited in
scope to the organic products industry.
<PAGE>
CONDITIONS:
TERMINATION WITHOUT CAUSE: HOH will have the right to terminate employment
at any time without 'cause'. In such event, contingent upon the execution of
a release and non-compete agreement, HOH agrees to pay the Severance and the
pro rata portion of your bonus from January 1st of the year in which the
termination occurred to the termination date based upon year end plan
achievement, paid out at the same time as other bonus plan participants.
VOLUNTARY TERMINATION: You may voluntarily terminate employment at any time,
after which no further compensation shall be paid, nor will there be any
entitlement to Severance. However, HOH agrees to pay, at the same time as
other bonus plan participants, your bonus on a prorated basis based upon
year-end plan achievement. Should you decide to voluntarily terminate
employment with HOH, you agree to give at least 30 days notice of resignation.
In the event of a Change of Control of HOH or significant change in
responsibilities, you will have the right to receive the Severance upon your
voluntary termination.
TERMINATION FOR CAUSE: HOH will have the right to terminate for 'cause' if a
written notification has been given and curative solution has not been
reached within 15 days of notification. For these purposes, 'cause' shall be
found to exist if you have been convicted of a felony, committed an act
involving the misappropriation of funds of HOH or any other act which in the
reasonable judgement of HOH is deliberately intended to bring harm or injury
to the business or property of HOH. In the event of termination for cause,
there will be no further compensation, bonus, or severance compensation. You
will be entitled to all compensation, benefits and unreimbursed expenses
accrued through the date of termination.
COMPANY POLICIES: Throughout your employment, you will be expected to abide
by all of the company's policies, procedures and code of conduct.
This offer is contingent upon your ability to provide Horizon Organic Dairy
the necessary I-9 information documenting your right to work in the U.S.A.
Chuck, we are very excited about your joining our team and are looking
forward to working with you. We are confident that you will make a
significant contribution to our business. Welcome to Horizon Organic Dairy!
<PAGE>
Please indicate your acceptance of this Amended and Restated Employment
Agreement by signing below and returning one original to Human Resources.
Sincerely,
/s/ Gary Merriman
Gary Merriman
Vice President, Human Resources
Accepted: /s/ Charles F. Marcy
-------------------------------------
Declined:
-------------------------------------
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Horizon Organic Holding Corporation:
We consent to incorporation by reference in the registration statement (No.
333-64905) on Form S-8 of Horizon Organic Holding Corporation of our report
dated March 7, 2000, relating to the consolidated balance sheets of Horizon
Organic Holding Corporation and subsidiaries as of December 31, 1999, and
1998, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1999, which report appears in the
December 31, 1999 annual report on Form 10-K of Horizon Organic Holding
Corporation.
KPMG LLP
Boulder, Colorado
March 29, 2000
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999, AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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