<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-----------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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Commission File No. 000-24337
HORIZON ORGANIC HOLDING CORPORATION
(a Delaware Corporation)
I.R.S. Employer Identification Number 84-1405007
6311 Horizon Lane
Longmont, Colorado 80503
(303) 530-2711
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 / /.
As of October 31, 2000, the registrant had outstanding 9,835,883 shares of
its common stock, $.001 par value per share.
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HORIZON ORGANIC HOLDING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets............................................ 3
Consolidated Statements of Operations and Comprehensive Income (Loss).. 4-5
Consolidated Statements of Cash Flows.................................. 6
Notes to Consolidated Financial Statements............................. 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................10-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................... 14
SIGNATURE....................................................................... 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................ $ 4,091 $ 3,693
Marketable securities .................................... -- 8,218
Trade accounts receivable, net ........................... 15,885 10,168
Inventories .............................................. 22,891 8,935
Deferred income tax assets ............................... 334 334
Other current assets ..................................... 2,391 1,313
--------- ---------
Total current assets ................................ 45,592 32,661
Property, Equipment and Cattle
Cattle, net .............................................. 14,108 12,737
Property and equipment, net .............................. 23,269 18,076
--------- ---------
Total property, equipment and cattle ................ 37,377 30,813
Other Assets:
Intangible assets, net ................................... 43,993 20,651
Other assets, net ........................................ 869 487
--------- ---------
Total other assets .................................. 44,862 21,138
--------- ---------
Total Assets .................................. $ 127,831 $ 84,612
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable ................................... $ 12,352 $ 7,756
Current portion of long-term debt ........................ 5,256 2,323
Other accrued expenses ................................... 6,986 4,016
Income taxes payable ..................................... 189 130
--------- ---------
Total current liabilities ........................... 24,783 14,225
Long-Term Liabilities:
Long-term debt, less current portion ..................... 42,860 11,337
Deferred income tax liabilities .......................... 1,768 1,162
--------- ---------
Total long-term liabilities ......................... 44,628 12,499
--------- ---------
Total liabilities ............................. 69,411 26,724
Stockholders' Equity:
Preferred stock, $.001 par value,
authorized 2,000,000 shares; no shares issued
and outstanding ....................................... -- --
Common stock, $.001 par value, authorized
30,000,000 shares, issued and outstanding;
9,834,883 and 9,743,659 shares in 2000 and
1999, respectively .................................... 10 10
Additional paid-in capital ............................... 58,721 58,392
Accumulated other comprehensive loss - cumulative
foreign currency translation adjustment ................ (926) (31)
Retained earnings (deficit) .............................. 615 (483)
--------- ---------
Total stockholders' equity .......................... 58,420 57,888
--------- ---------
Total Liabilities and Stockholders' Equity .... $ 127,831 $ 84,612
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
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HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHESIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Net sales ............................................. $ 33,392 $ 22,798
Cost of sales ......................................... 23,093 14,655
-------- --------
Gross profit .................................. 10,299 8,143
-------- --------
Operating expenses:
Selling ....................................... 5,939 4,887
General and administrative .................... 2,077 1,544
Goodwill amortization ......................... 824 375
-------- --------
Total operating expenses .................. 8,840 6,806
-------- --------
Operating income ...................................... 1,459 1,337
-------- --------
Other income (expense):
Interest expense, net ......................... (965) (31)
Other expense, net ............................ (40) (38)
-------- --------
Total other expense ....................... (1,005) (69)
-------- --------
Income before income taxes ................ 454 1,268
Income tax expense .................................... (177) (507)
-------- --------
Net income ................................ $ 277 $ 761
======== ========
Basic and diluted earnings per share .................. $ .03 $ .08
======== ========
Weighted average shares outstanding, basic .... 9,814 9,719
Weighted average shares outstanding, diluted .. 10,078 10,093
Comprehensive income:
Net income .................................... $ 277 $ 761
Foreign currency translation adjustment ....... (825) 15
-------- --------
Comprehensive income (loss) ............... $ (548) $ 776
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
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HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHESIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Net sales ................................................... $ 89,419 $ 59,811
Cost of sales ............................................... 60,490 38,914
-------- --------
Gross profit ........................................ 28,929 20,897
-------- --------
Operating expenses:
Selling ............................................. 17,752 12,828
General and administrative .......................... 6,097 4,118
Goodwill amortization ............................... 1,725 834
-------- --------
Total operating expenses ........................ 25,574 17,780
-------- --------
Operating income ............................................ 3,355 3,117
-------- --------
Other income (expense):
Interest income (expense), net ...................... (1,456) 212
Other expense, net .................................. (65) (115)
-------- --------
Total other income (expense) .................... (1,521) 97
-------- --------
Income before income taxes ...................... 1,834 3,214
Income tax expense .......................................... (736) (1,286)
-------- --------
Net income ...................................... $ 1,098 $ 1,928
======== ========
Basic earnings per share .................................... $ .11 $ .20
======== ========
Diluted earnings per share .................................. $ .11 $ .19
======== ========
Weighted average shares outstanding, basic .......... 9,782 9,692
Weighted average shares outstanding, diluted ........ 10,051 10,084
Comprehensive Income:
Net income .......................................... $ 1,098 $ 1,928
Impact of foreign currency translation adjustment ... (895) 38
-------- --------
Comprehensive Income ............................ $ 203 $ 1,966
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
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HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Net cash (used in) provided by operating activities ............. $ (5,582) $ 148
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired of $32 ....... (27,598) (5,592)
Sale (purchases) of marketable securities, net ............... 8,218 (656)
Purchases of land and equipment .............................. (4,813) (1,880)
Purchases and costs of cattle ................................ (6,978) (6,032)
Proceeds from equipment sales ................................ 18 116
Proceeds from cattle sales ................................... 2,367 1,601
Other, net ................................................... (107) 76
-------- --------
Net cash used in investing activities ..................... (28,893) (12,367)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt, other than lines of credit ..... (2,804) (970)
Proceeds from long-term debt ................................. 25,000 --
Proceeds from long-term line of credit ....................... 12,228 --
Proceeds from the exercise of warrants ....................... 28 137
Proceeds from the issuance of stock under ESPP ............... 58 55
Proceeds from the exercise of options ........................ 231 141
-------- --------
Net cash provided by (used in) financing activities ....... 34,741 (637)
-------- --------
Effect of exchange rate changes on cash ......................... 132 --
Net increase (decrease) in cash and cash equivalents ............ 398 (12,856)
Cash and cash equivalents at beginning of period ................ 3,693 14,384
-------- --------
Cash and cash equivalents at end of period ...................... $ 4,091 $ 1,528
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ..................... $ 1,664 $ 262
Net Cash paid (received) during the period for income taxes .. $ (248) $ 863
Non-cash investing and financing activities -
Note issued for acquisition .................................. $ -- $ 8,451
Common stock issued to directors ............................. $ 17 $ 21
Acquisition of 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
======== ========
Acquisition of Meadow Farms and Organic Matters.
Assets acquired and liabilities assumed were as follows:
Fair value of assets acquired .......................... $ 32,298 $ --
Cash paid for common stock ............................. 27,598 --
-------- --------
Liabilities assumed ................................. $ 4,700 $ --
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
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HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
Horizon Organic Holding Corporation (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally accompanying financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. In management's
opinion, all adjustments necessary for a fair presentation of the results of
operations for the periods presented have been made and are of a normal and
recurring nature. Operating results for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
These consolidated financial statements and accompanying notes should be
read in conjunction with the consolidated financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
2. TRANSLATION OF FOREIGN CURRENCIES
The accounts of the Company's subsidiaries in the United Kingdom are
measured using the local currency, which has been designated as the functional
currency. Assets and liabilities are translated at the exchange rate in effect
at the end of the period. Revenue and expenses are translated at the average
exchange rate for the period. Translation adjustments arising from the use of
differing exchange rates from period to period are included in comprehensive
income (loss) in stockholders' equity.
3. ACQUISITIONS
In April 1999, the Company acquired all of the assets and liabilities of
Rachel's Dairy Limited. ("Rachels"), a private company incorporated in England
and Wales, for approximately $2.4 million in cash plus acquisition costs of $.4
million. The acquisition was accounted for as a purchase and the excess of cost
over the fair value of acquired net assets of $2.5 million is recognized as
intangible assets and is being amortized on a straight-line basis over 15 years.
The results of operations of Rachels have been included in the Company's
consolidated statement of operations beginning April 1, 1999.
On June 1, 2000, the Company acquired all of the outstanding and issued
common stock of Meadow Farms Limited ("Meadow Farms"), a private company
incorporated in England and Wales, for approximately $24.0 million in cash
plus acquisition costs of approximately $1.5 million. The acquisition
included Meadow Farms' wholly owned subsidiary, Organic Dairies Limited,
which operates a processing and packaging plant that produces fluid milk
which is marketed and sold by Meadow Farms. The acquisition was accounted for
as a purchase and the excess of cost over the fair value of acquired net
assets of approximately $24.0 million is recognized as intangible assets and
is being amortized on a straight-line basis generally over 15 years. The
Meadow Farms acquisition was financed with a $25 million Senior Secured Term
Note. Operating results of Meadow Farms have been included in the Company's
consolidated statement of operations beginning June 1, 2000.
Also on June 1, 2000, the Company acquired all of the outstanding and
issued common stock of Organic Matters Limited ("Organic Matters"), a private
company incorporated in England and Wales, for approximately $2.1 million in
cash. The acquisition was accounted for as a purchase and the excess of cost
over the fair value of acquired net assets of $2.1 million is recognized as
intangible assets and is being amortized on a straight-line basis over 15
years. Operating results of Organic Matters have been included in the
Company's consolidated statement of operations beginning June 1, 2000.
7
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The following unaudited pro forma financial information presents the combined
results of operations of the Company, Rachels and Meadow Farms as if the
acquisitions had occurred at the beginning of 1999, after giving effect to
certain adjustments including amortization of goodwill, interest expense,
reduction of milk bonus payments and income taxes. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company, Rachels and Meadow Farms constituted a single
entity during such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(unaudited, dollars in thousands) SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Net sales $ 33,392 28,164 $101,179 74,492
======== ====== ======== ======
Net income $ 277 744 $ 2,422 1,563
======== ====== ======== ======
Net income per share: basic $ .03 .08 $ .25 .16
======== ====== ======== ======
diluted $ .03 .07 $ .24 .15
======== ====== ======== ======
</TABLE>
4. LONG-TERM DEBT
On May 31, 2000 the Company entered into a $25.0 million Senior Secured
Term Loan with US Bank to finance the Meadow Farms acquisition. The note has
a due date of May 31, 2005 and bears interest at LIBOR plus a varying margin
spread of 1.65% to 2.5% (9.14% at September 30, 2000) with quarterly
principal payments. Interest payments are made in conjunction with LIBOR
pricing maturity dates.
The Company also increased its credit line facility with US Bank from
$20.0 million to $25.0 million. The credit line has a May 31, 2003 due date
and bears interest at LIBOR plus a varying margin spread of 1.65% to 2.5%
(9.14% at September 30, 2000). At September 30, 2000, the Company has
borrowed $12.2 million against the credit line facility. The availability of
the $25 million line of credit is reduced by outstanding letters of credit of
$7.5 million. Total availability under the line of credit is $5.3 million.
Both loans are secured by substantially all of the assets of the Company and
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 covenants.
5. REPORTABLE SEGMENTS
The Company has three segments of business, the marketing company, the
dairy farm operations and the international operations. The marketing company is
responsible for acquiring, processing and marketing organic fluid milk, organic
dairy products, and organic non-dairy products. The dairy farm operations are
responsible for producing farm milk for use by the marketing company in the
production of its products and for sales to third parties. The dairy farms sell
organic farm milk to the marketing company at an inter-company transfer price
that approximates fair value. International represents the operations in the
United Kingdom that were acquired in the second quarter of 1999 and in June
2000. The following table sets forth selected segment data for the three and
nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SALES BY SEGMENT
Marketing $ 24,700 21,301 $ 75,096 56,874
Dairy farm operations 6,618 5,263 19,672 15,100
International 8,692 1,497 14,323 2,937
--------- --------- --------- ---------
Total net sales 40,010 28,061 109,091 74,911
Intersegment sales (6,618) (5,263) (19,672) (15,100)
--------- --------- --------- ---------
Net sales $ 33,392 22,798 $ 89,419 59,811
========= ========= ========= =========
INCOME FROM OPERATIONS
Marketing $ 415 404 $ 113 1,205
Dairy farm operations 913 868 2,884 1,717
International 131 65 358 195
--------- --------- --------- ---------
Income from operations 1,459 1,337 3,355 3,117
Interest and other income (expense), net (1,005) (69) (1,521) 97
--------- --------- --------- ---------
Income before income taxes $ 454 1,268 $ 1,834 3,214
========= ========= ========= =========
</TABLE>
8
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The following table sets forth selected segment data as of September 30, 2000
and December 31, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
TOTAL ASSETS BY SEGMENT
Marketing $ 115,437 $ 79,623
Dairy farm operations 45,513 38,471
International 37,291 4,764
--------- ---------
Total assets including intersegment assets 198,241 122,858
Intersegment assets (70,410) (38,246)
--------- ---------
Total assets $ 127,831 $ 84,612
========= =========
</TABLE>
6. EARNINGS PER SHARE
Basic income per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding.
Diluted income per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
increased for potentially dilutive common shares outstanding during the period.
The dilutive effect of stock options, warrants, and their equivalents are
calculated using the treasury stock method. Excluded from the dilutive
calculation are 260,250 options outstanding as antidilutive. The following table
sets forth the calculation of earnings per share for the three and nine months
ended September 30, 2000 and 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 277 761 $ 1,098 1,928
Common and common equivalent shares outstanding:
Historical common shares outstanding at
beginning of period 9,786 9,697 9,744 9,656
Weighted average common equivalent shares
issued during period 28 22 38 36
------- ------- ------- -------
Weighted average common shares - basic 9,814 9,719 9,782 9,692
Weighted average common equivalent shares
outstanding during period 264 374 269 392
------- ------- ------- -------
Weighted average common shares - diluted 10,078 10,093 10,051 10,084
======= ======= ======= =======
Net income per basic share $ .03 .08 $ .11 .20
======= ======= ======= =======
Net income per diluted share $ .03 .08 $ .11 .19
======= ======= ======= =======
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's unaudited consolidated financial statements and
accompanying notes included herein and the Company's Annual Report on Form
10-K for the year ended December 31, 1999. Except for the historical
information contained herein, the discussion in this Quarterly Report on Form
10-Q contains certain forward-looking statements that involve risks and
uncertainties. Future events may differ materially from those discussed
herein, due to a number of factors, including uncertainties related to the
charges the Company is required to pay as a result of government regulation.
These factors are more fully discussed in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999, under the headings "Risk
Factors -- Possibility of Adverse Effects Resulting from United States Dairy
Support Program and Federal Milk Marketing Order Program." In addition, the
Company's results could also be affected by a number of other risks and
uncertainties which are more fully discussed under the headings "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. Net sales for the three months ended September 30, 2000
were $33.4 million, an increase of $10.6 million, or 46%, from $22.8 million
for the comparable period in 1999. This increase was primarily due to the
three months of operations from the Meadow Farms Limited (Meadow Farms) and
Organic Matters Limited (Organic Matters) acquisitions in the United Kingdom.
Also, this increase was partially due to the increased sales of existing
products to existing accounts and the continued development of conventional
grocery food channels. The Company's growth rate compared to the comparable
period in 1999 was impacted by two factors. First, the three months ended
September 30, 2000 is the first quarter in which the Company's sales are
compared to a prior period which included three months of sales from The
Organic Cow brand, which was acquired April 30, 1999. Second, sales in the
three months ended September 30, 2000 were negatively impacted by
approximately $1.5 million of lost sales due to external processor capacity
constraints.
GROSS PROFIT. Gross profit for the three months ended September 30,
2000 was $10.3 million, an increase of $2.2 million, or 27%, from $8.1
million for the comparable period in 1999. As a percentage of net sales,
gross profit decreased to 30.8% from 35.7%. This decrease in gross profit as
a percentage of net sales was due primarily to an increased product mix of
private label versus branded milk sales in the United Kingdom. Also, the
decrease was partially due to higher sales of ultra pasteurized milk in the
United States which carries a lower margin than the Company's other products.
SELLING EXPENSES. Selling expenses for the three months ended
September 30, 2000 were $5.9 million, an increase of $1.0 million, or 20%,
from $4.9 million for the comparable period in 1999. As a percentage of net
sales, selling expenses decreased to 17.8% from 21.4%. This decrease in
selling expenses as a percentage of net sales was primarily due to cost
savings in the United States associated with reduced trade promotions,
warehouse consolidation and direct delivery shipments, partially offset by
increased fuel costs. Also, the decrease in selling expenses as a percentage
of net sales was partially due to increased leverage of selling expenses over
a larger revenue base, partially offset by increased logistics costs for
expanded distribution.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the three months ended September 30, 2000 were $2.1 million, an
increase of $.6 million, or 40%, from $1.5 million during the comparable
period in 1999. As a percentage of net sales, general and administrative
expenses decreased to 6.2% from 6.8%. This decrease in the percentage of
general and administrative expenses to net sales was due to improved
productivity.
GOODWILL AMORTIZATION. Goodwill amortization expenses for the three
months ended September 30, 2000 were $.8 million, an increase of $.4 million,
or 100%, from $.4 million during the comparable period in 1999. This
increase in goodwill amortization was primarily due to amortization of
intangible assets associated with the acquisitions of Meadow Farms and
Organic Matters on June 1, 2000.
OTHER INCOME (EXPENSE), NET. Other income (expense), net for the
three months ended September 30, 2000 was an expense of $1.0 million compared
to expense of $.1 million during the comparable period in 1999. This change
was
10
<PAGE>
due to a reduced cash position as a result of the acquisitions of The Organic
Cow, Rachels Dairy Limited (Rachels), Meadow Farms, Organic Matters and other
capital expenditures. Additionally, this change was due to the increased
interest expense associated with the $25 million term note used to finance
the Meadow Farms and Organic Matters acquisitions and the increase in amounts
outstanding under the Company's line of credit.
INCOME TAX EXPENSE. Income tax expense for the three months ended
September 30, 2000 was $.2 million, or 39% of income before income taxes, a
decrease of $.3 million from $.5 million, or 40% of income before taxes, for
the comparable period in 1999. The relationship between the expected income
tax expense computed by applying the United States federal statutory rate of
34% to income before income taxes and actual income tax expense results
primarily because of (i) foreign income tax expense provided on foreign
earnings, (ii) state and local income taxes and (iii) amortization of certain
goodwill not deductible for United States tax purposes.
NET INCOME. The Company generated net income of $.3 million for the
three months ended September 30, 2000, a decrease of $.5 million compared to
net income of $.8 million for the comparable period in 1999. The decrease in
net income was primarily due to higher sales of ultra pasteurized milk in the
United States which carries a lower margin than the Company's other products
and increased goodwill amortization and interest expense associated with the
acquisitions of Meadow Farms and Organic Matters.
COMPREHENSIVE INCOME (LOSS). Comprehensive income decreased to a loss
of $.5 million for the three months ended September 30, 2000 from $.8 million
in income during the comparable period in 1999. This decrease was primarily
due to the translation of the Company's investment in its United Kingdom
(U.K.) subsidiaries to U.S. dollars from pound sterling ($.8 million). The
Company translates its U.K. assets and liabilities at the exchange rate in
effect at the end of the period. At June 30, 2000 and September 30, 2000,
U.K. pound sterling translated to U.S. dollars at approximately 1.518 and
1.464 dollars to the pound sterling, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. Net sales for the nine months ended September 30, 2000
were $89.4 million, an increase of $29.6 million, or 50%, from $59.8 million
for the comparable period in 1999. This increase was primarily due to the
increased sales of existing products to existing accounts and the continued
development of conventional grocery food channels. Also, this increase was
due in part to the acquisition of The Organic Cow brand in the northeastern
U.S. and the acquisitions of Rachels, Meadow Farms and Organic Matters in the
United Kingdom.
GROSS PROFIT. Gross profit for the nine months ended September 30,
2000 was $28.9 million, an increase of $8.0 million, or 38%, from $20.9
million for the comparable period in 1999. As a percentage of net sales,
gross profit decreased to 32.4% from 34.9%. This decrease in gross profit as
a percentage of net sales was due primarily to higher sales of ultra
pasteurized milk in the United States which carries a lower margin than the
Company's other products. Also, the decrease was partially due to an
increased product mix of private label versus branded milk sales in the
United Kingdom.
SELLING EXPENSES. Selling expenses for the nine months ended
September 30, 2000 were $17.8 million, an increase of $5.0 million, or 39%,
from $12.8 million for the comparable period in 1999. As a percentage of net
sales, selling expenses decreased to 19.9% from 21.4%. This decrease in
selling expenses as a percentage of net sales was primarily due to cost
savings in the United States associated with reduced trade promotions,
warehouse consolidation, and direct delivery shipments, partially offset by
increased fuel costs. Also, the decrease in selling expenses as a percentage
of net sales was partially due to increased leverage of selling expenses over
a larger revenue base, partially offset by increased logistics costs for
expanded distribution.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the nine months ended September 30, 2000 were $6.1 million, an
increase of $2.0 million, or 49%, from $4.1 million during the comparable
period in 1999. As a percentage of net sales, general and administrative
expenses decreased to 6.8% from 6.9%. This decrease in percentage of general
and administrative expenses to net sales was due to improved productivity.
GOODWILL AMORTIZATION. Goodwill amortization expenses for the nine
months ended September 30, 2000 were $1.7 million, an increase of $.9
million, or 113%, from $.8 million during the comparable period in 1999.
This increase in goodwill amortization was primarily due to amortization of
intangible assets associated with the acquisitions
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of Meadow Farms and Organic Matters on June 1, 2000 and a full nine months
goodwill amortization on Rachels and The Organic Cow acquisitions.
OTHER INCOME (EXPENSE), NET. Other income (expense), net for the nine
months ended September 30, 2000 was an expense of $1.5 million compared to
income of $.1 million during the comparable period in 1999. This change was
due to a reduced cash position as a result of the acquisitions of The Organic
Cow, Rachels, Meadow Farms, Organic Matters and other capital expenditures.
Additionally, this change was due to the increased interest expense
associated with the $25 million term note used to finance the Meadow Farms
and Organic Matters acquisitions and the increase in amounts outstanding
under the Company's line of credit.
INCOME TAX EXPENSE. Income tax expense for the nine months ended
September 30, 2000 was $.7 million, or 40% of income before income taxes, a
decrease of $.6 million from $1.3 million, or 40% of income before taxes, for
the comparable period in 1999. The relationship between the expected income
tax expense computed by applying the United States federal statutory rate of
34% to income before income taxes and actual income tax expense results
primarily because of (i) foreign income tax expense provided on foreign
earnings, (ii) state and local income taxes and (iii) amortization of certain
goodwill not deductible for United States tax purposes.
NET INCOME. The Company generated net income of $1.1 million for the
nine months ended September 30, 2000, a decrease of $.8 million compared to
net income of $1.9 million for the comparable period in 1999. The decrease
in net income was primarily due to higher sales of ultra pasteurized milk in
the United States which carries a lower margin than the Company's other
products and increased goodwill amortization and interest expense associated
with the acquisitions of Meadow Farms and Organic Matters.
COMPREHENSIVE INCOME (LOSS). Comprehensive income decreased to income
of $.2 million for the nine months ended September 30, 2000 from $2.0 million
in income during the comparable period in 1999. This decrease was primarily
due to the translation of the Company's investment in its United Kingdom
(U.K.) subsidiaries to U.S. dollars from pound sterling ($.9 million). The
Company translates its U.K. assets and liabilities at the exchange rate in
effect at the end of the period. At December 31, 1999 and September 30,
2000, U.K. pound sterling translated to U.S. dollars at approximately 1.617
and 1.464 dollars to the pound sterling, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY (USED IN) OPERATIONS. Cash used in operations during
the nine months ended September 30, 2000 was $5.6 million, an increase of
$5.7 million from cash provided by operations of $.1 million during the
comparable period in 1999. The increase in cash used in operations was due
primarily to increased trade accounts receivable from sales growth and
inventories due to the seasonal increase in finished goods (butter and
powdered milk) and feed stocks for the Company's dairy cows.
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities
during the nine months ended September 30, 2000 totaled $28.9 million,
compared to $12.4 million for the corresponding period in 1999. The increase
was due primarily to the acquisitions of Meadow Farms and Organic Matters in
the United Kingdom.
CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by financing
activities during the nine months ended September 30, 2000 totaled $34.7
million, compared to $.6 million used in financing activities for the
corresponding period in 1999. This increase was primarily due to the Company
entering into a $25.0 million term loan with US Bank to finance the Meadow
Farms acquisition. Additionally, the Company began to utilize its line of
credit with US Bank for operating needs as working capital grew from $18.4
million to $20.8 million.
Company management believes that cash and cash equivalents, cash
expected to be generated from operations and the availability of funds under
the line of credit will be sufficient to meet the Company's current operating
and capital expenditure needs.
LONG-TERM DEBT. On May 31, 2000 the Company entered into a $25.0
million Senior Secured Term Loan with US Bank to finance the Meadow Farms
acquisition. The note has a due date of May 31, 2005 and bears interest at
LIBOR plus a varying margin spread of 1.65% to 2.5% (9.14% at September 30,
2000) with quarterly principal payments. Interest payments are made in
conjunction with LIBOR pricing maturity dates.
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The Company also increased its credit line facility with US Bank from
$20.0 million to $25.0 million. The credit line has a May 31, 2003 due date
and bears interest at LIBOR plus a varying margin spread of 1.65% to 2.5%
(9.14% at September 30, 2000). At September 30, 2000, the Company has
borrowed $12.2 million against the credit line facility. The availability of
the $25 million line of credit is reduced by outstanding letters of credit,
which at September 30, 2000, were $7.5 million, primarily associated with The
Organic Cow acquisition as discussed below. Total availability under the
line of credit is $5.3 million at September 30, 2000. Both loans are secured
by substantially all of the assets of the Company and 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
covenants.
In conjunction with The Organic Cow acquisition, the Company issued an
$8.5 million promissory note payable to the seller, bearing interest at 5.3%,
and payable in four annual installments with a final maturity in 2003. At
September 30, 2000, the balance of the note was $6.5 million and reduces the
availability of the line of credit with US Bank as noted above.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("FAS
133"), which is effective for fiscal years beginning after June 15, 2000.
FAS No. 133 requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting
from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies under the
standard for hedge accounting. The Company does not anticipate any impact on
its financial condition or results of operations as a result of implementing
this standard.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25 (FIN 44). This
interpretation provides guidance on the accounting for certain stock option
transactions and subsequent amendments to stock option transactions. FIN 44
is effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998 or January 12, 2000. To the extent that
FIN 44 covers events occurring during the period from December 15, 1998 and
January 12, 2000, but before July 1, 2000, the effects of applying this
Interpretation are to be recognized on a prospective basis. The Company
adopted FIN 44 on July 1, 2000. Based upon the Company's application of FIN
44, its adoption had no effect on the Company's consolidated financial
statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. Subsequently, the SEC delayed the
implementation date of SAB 101 for registrants with fiscal years beginning
after December 15, 1999. The Company will adopt SAB 101 on October 1, 2000.
Based upon the Company's application of SAB 101, its adoption will have no
effect on the Company's consolidated financial statements.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
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
27.1 Financial Data Schedule
Exhibits identified above are incorporated by reference as follows:
+ Incorporated by reference to Registrant's Registration Statement on Form
S-1, No. 333-51465
B) Reports on Form 8-K
During the period ending September 30, 2000, the Company filed one report on
Form 8-K/A. That report was filed on August 14, 2000. The Form 8-K/A was filed
for the purpose of filing the financial statements of Meadow Farms Limited
("Meadow Farms") required by Item 7(a) of Form 8-K and the pro forma financial
information required by Item 7(b) on Form 8-K.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HORIZON ORGANIC HOLDING CORPORATION
Date: November 14, 2000 /s/ Thomas P. Briggs
------------------------------
Thomas P. Briggs
Vice President, Finance and
Administration, Chief Financial Officer,
Treasurer and Assistant Secretary
(principal financial and accounting
officer of the Company)
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