<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- ----------------------------------------------------------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22018
CELESTIAL SEASONINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-1097571
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 Sleepytime Drive, Boulder CO 80301-3292
(Address of principal executive offices)
(303) 530-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
RIGHTS TO PURCHASE JUNIOR PARTICIPATING PREFERRED STOCK, SERIES A,
PAR VALUE $.01 PER SHARE
(Title of Each Class)
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
requirements 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 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 voting and non-voting
common equity held by nonaffiliates of the registrant was
$124,873,536 as of December 1, 1997.
Number of shares of Common Stock outstanding as of December 1,
1997: 4,060,928
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement dated January 5, 1998 - Incorporated into Part
III.
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PART I
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ITEM 1. - BUSINESS
General
Celestial Seasonings, Inc. (the "Company") is the largest
manufacturer and marketer of herb teas in the United States, with
an estimated 50% share of the herb tea category. The Company
developed and popularized the herb tea category in the United
States as a flavorful and non-caffeinated alternative to other
hot beverages. Currently the Company markets over 50 tea
varieties under the Celestial Seasonings brand. Celestial
Seasonings products are sold in substantially all of the major
supermarkets, grocery stores and natural foods markets in the
United States.
The Company develops high-quality, flavorful, natural products
as well as attractive, colorful and thought-provoking packaging.
The Company's products include Sleepytime(R), Lemon Zinger(R),
Peppermint, Chamomile, Mandarin Orange Spice(R), Wild Cherry
Blackberry, Cinnamon Apple Spice/TM/, Red Zinger(R), Raspberry Zinger(R)
and Wild Berry Zinger(R) herb teas, a line of medicinal herb teas,
a line of herbal and specialty black iced teas under the
Celestial Seasonings Brews In Your Fridge/TM/ name and a line of hot
specialty black teas.
During 1995, the Company entered the dietary supplement market
through the acquisition of the assets of Botalia Pharmaceutical,
Inc. Botalia's product lines currently include Herbal Choice(R),
Botalia Gold/TM/ and Prostate SP/TM/. In 1997, the Company introduced
a line of herbal supplements under the Celestial/TM/ Herbal Extracts
name. The Company is currently developing additional products for
this line which will be introduced in 1998.
The Company's tea business began in the early 1970s and grew
to become the nation's largest manufacturer of herb teas. In
1984, the Company was acquired by Kraft, Inc., and in 1988, the
Company was acquired in a management buyout. In 1993, the Company
completed its initial public offering of common stock.
The Tea Industry
The domestic tea industry consists of five general product
categories: herb tea, specialty black tea, black tea, instant tea
and ready-to-drink tea. The Company believes, based on data
derived from Information Resources, Inc. reports and the
Company's estimates, that annual domestic retail tea sales,
excluding ready-to-drink tea, are approximately $1.5 billion.
Products
The Company's tea products contain no artificial
preservatives, are made from high-quality, natural ingredients
and are generally offered in 20, 24 and 48 count packages.
Industry sales of hot herb tea have grown only moderately in
recent years, and because of the Company's share of the category,
the Company's tea sales tend to be reflective of the entire
category.
The following table sets forth the amounts and percentages of
the Company's net sales for each major product category during
the last three years. Changes in net sales by each product
category are affected by timing of promotional activities,
consumer trends and the development and introduction of new
products. Historical results may not be indicative of results in
future years.
<TABLE>
<CAPTION>
Company Net Sales By Product Category
Year Ended September 30,
-------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Dry tea $ 71,698 90.7% $ 69,258 94.9% $ 64,400 91.9%
Dietary supplements 3,789 4.8 1,917 2.6 456 0.6
Ready-to-drink bottled teas - - 354 0.5 2,168 3.1
Other 3,552 4.5 1,469 2.0 3,080 4.4
-------- ------ -------- ------ -------- ------
$ 79,039 100.0% $ 72,998 100.0% $ 70,104 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
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Dry Tea
Herb Tea. The Company's herb teas are made from all natural
ingredients and are offered in a wide variety of flavors. The
Company's top-selling herb tea products include Sleepytime(R),
Lemon Zinger(R), Peppermint, Chamomile, Mandarin Orange Spice(R),
Wild Cherry Blackberry, Cinnamon Apple Spice/TM/, Red Zinger(R), Wild
Berry Zinger(R) and Raspberry Zinger(R). During 1996, the Company
introduced a line of medicinal herb teas under the Herbal
Comfort/TM/ name and in 1997, repositioned this line under the
Celestial Seasonings brand. The current blends of Celestial
Seasonings medicinal teas are: Detox A.M./TM/, Diet Partner/TM/,
Echinacea, Gingerease/TM/, GinkgoSharp/TM/, Green Tea with Antioxidants
and Laxatea/TM/.
Herb and Specialty Black Iced Teas. The Company currently
markets a line of herb and specialty black iced teas, called
Brews In Your Fridge/TM/. Brews In Your Fridge teas can be brewed in
a refrigerator, using a patent pending technology, by placing tea
bags in cold water for approximately two hours. The Company's
herb iced tea products include Caribbean Kiwi Peach/TM/, CranRazz
Sunset/TM/ and Lemon Berry Zinger/TM/. The current flavors of specialty
black iced teas are: Old Fashioned Iced Tea/TM/, Sunny Lemon/TM/ and
Raspberry Kiwi.
Specialty Black and Green Tea. The Company's specialty black
teas are made exclusively from natural ingredients. Black tea
products include Misty Jasmine/TM/ Green Tea, Earl Grey, English
Breakfast, Fast Lane(R), Vanilla Maple, Emerald Gardens(R) Green Tea,
Ceylon Apricot Ginger, Black Raspberry and Morning Thunder(R).
Dietary Supplements
On June 30, 1995, the Company acquired the net assets of
Botalia Pharmaceutical, Inc. ("Botalia"), a developer and
marketer of dietary supplements. Botalia's products are
manufactured and packaged under an independent co-packing
arrangement. The Company currently distributes Botalia's products
under the Herbal Choice(R), Botalia Gold/TM/ and Prostate SP/TM/ product
lines. The major channels of distribution for Botalia's products
are drug stores and mass merchandisers. See Note 11 to the
Company's Consolidated Financial Statements included in Part II
regarding the Botalia acquisition.
In 1997, the Company introduced a line of herbal supplements
under the Celestial/TM/ Herbal Extracts name using independent co-
packers. During 1997, the line included Echinacea Cold Care/TM/,
Ginkgo Sharp/TM/, Ginseng Plus, Sleepytime Extra/TM/, Tension Tamer(R),
Total Antioxidant/TM/ and Tummy Mint/TM/.
Ready-to-drink Bottled Tea
The Company licensed its ready-to-drink iced teas to Royal
Crown Company, Inc. ("Royal Crown") in October 1995. The
agreement provided that Royal Crown would manufacture, market and
distribute ready-to-drink iced tea products in the United States
and Canada under the Celestial Seasonings(R) name, and the Company
would provide marketing and research and development support.
Under the agreement, Royal Crown made royalty payments to the
Company, and the Company was obligated to reinvest a portion of
the royalties in product development and brand building. This
agreement was terminated during 1997. Under the terms of the
agreement, the Company will continue to receive royalty payments
through December 31, 1997.
Prior to its license agreement with Royal Crown, from January
through December 1995, the Company manufactured and marketed
ready-to-drink iced tea bearing the Celestial Seasonings(R) name
using independent co-packers who prepared, bottled and stored the
Company's products. Sales of the products were made through a
limited network of independent beverage distributors. Prior to
January 1995, the Company licensed its ready-to-drink products to
Perrier Group of America, Inc.
The Company's ready-to-drink teas are marketed in the
following flavors: Lemon Zingerade/TM/, Cranberry Zinger/TM/,
Raspberry Zinger/TM/, Diet Raspberry Zinger/TM/, Strawberry Kiwi, Peach
Chamomile, Diet Peach Chamomile and Iced Tea with Lemon Ginseng.
Other
Other includes direct retail sales by the Company, royalty
income, bulk sales and sales of other miscellaneous products.
Direct retail sales by the Company totalled $2,686,000 in 1997,
primarily from the Company's on-site retail store and mail order
catalogue. Total royalty income in 1997 was $359,000. In
addition to the Royal Crown license agreement, royalty income was
also derived from a license agreement with Warner-Lambert Company
("Warner-Lambert") entered into in 1994. Under the agreement,
Warner-Lambert manufactures and distributes throat drops under the
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Celestial Seasonings Soothers/TM/ and Herbal Comfort/TM/ names. The
agreement is for a five year period and Warner-Lambert has
options to renew for one year periods thereafter. The current
products offered are Harvest Cherry/TM/, Honey-Lemon Chamomile,
Herbal Orange Spice/TM/, Golden Herbal Blend/TM/, Echinacea Herbal Mint
and Echinacea Autumn Berry/TM/.
Research and Development
The Company considers research and development of new products
to be a significant part of its overall philosophy and commitment
to developing high-quality products. A team of professional
product developers works with a sensory technologist to test
product prototypes with consumers. The research and development
department incorporates product ideas from all areas of the
Company in order to formulate new products. In addition to
developing new tea and dietary supplement products, the research
and development department routinely reformulates and revises
existing products. New blends of herbs and teas are submitted for
review and evaluation to tea-tasters and consumer focus groups.
Sales and Distribution
The Company's products are sold in all 50 states and
approximately 35 countries. The Company's sales are seasonal. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Seasonality" included in Part II, Item 7.
Net sales include total export sales of $8,807,000, $7,579,000
and $6,578,000 in 1997, 1996 and 1995, respectively.
The major domestic channels of distribution for the Company's
products are supermarkets and grocery stores, natural foods
markets, and food service operations such as restaurants,
universities and hotels. During 1997, no single customer
accounted for more than 10% of total Company sales.
The Company's products are sold by the Company's sales staff
and a network of brokers who represent the Company in connection
with sales to grocery, natural foods, food service and non-
grocery businesses. Brokers represent the Company in presenting
marketing and sales programs, supporting retail stores, selling
new items, and establishing sales promotions with customers. The
Company's policy is to grant its brokers rights to sell the
Company's products within a defined territory. All of the
Company's brokers also represent other food and beverage
manufacturers.
Marketing
The Company uses a mix of consumer and trade promotions as
well as advertising to market its products. The Company's
advertising and sales promotion expenditures are for national and
regional consumer promotion through television advertising,
couponing and other trial use programs, with the balance spent on
trade advertising and promotion, including slotting fees,
cooperative advertising and feature advertising.
Operations
Suppliers. The Company purchases its ingredients from numerous
foreign and domestic manufacturers, importers and growers, with
the majority of those purchases occurring outside of the United
States. The Company maintains long-term relationships with most
of its suppliers. Purchase arrangements with ingredient suppliers
are generally made annually and in U.S. currency. Purchases are
made through purchase orders or contracts, and price, delivery
terms and product specifications vary.
The Company's botanical purchasers visit major suppliers
around the world annually to procure ingredients and to assure
quality by observing production methods and providing product
specifications. Many ingredients are presently grown in countries
where labor-intensive cultivation is possible, and where the
Company often must educate the growers about product standards.
The Company performs laboratory analysis on incoming ingredient
shipments for the purpose of assuring that they meet the
Company's quality standards and those of the U.S. Food and Drug
Administration ("FDA").
The Company's ability to ensure a continuing supply of
ingredients at competitive prices depends on many factors beyond
its control, such as foreign political situations, embargoes,
changes in national and world economic conditions, currency
fluctuations and unfavorable climatic conditions. The Company
takes steps intended to lessen the risk of an interruption of
botanical supplies, including identification of alternative
sources and maintenance of appropriate inventory levels. The
Company has, in the past, maintained sufficient supplies for its
ongoing operations.
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The Company purchases the majority of its packaging materials
domestically. The James River Corporation, a packaging materials
supplier, was the largest single supplier in 1997. The ability of
the Company to assure continuing production of bagged tea depends
upon the continuing access to tea bag paper. The Company obtains
most of its tea bag paper from a single foreign supplier, which
has been a reliable source of quality paper. Alternative sources
for tea bag paper have been utilized in the past and should be
available for future purchases.
Production. The Company uses more than 100 ingredients in its
various tea blends. The Company separates and cleans herbs upon
receipt from suppliers at its facilities in Boulder, Colorado.
Individual herbs are combined in the Company's blending system,
and then the blends are taste-tested to ensure flavor
consistency. Finally, the Company packages herb blends into
finished products. A continuous line of automated equipment
deposits the blended herbs in tea bags and packages the tea bags,
first in cartons and then in cases. The Company believes that it
has sufficient production capacity for the foreseeable future.
The Company believes that its tea bagging lines are among the
most automated in the tea industry.
The Company's dietary supplement product lines are
manufactured by independent co-packers located in the United
States. The Company is presently taking steps to ensure its co-
packers have sufficient production capacity to meet its future
needs.
Trademarks and Copyrights
The Company has trademarks for most of its best-selling
brands, including Sleepytime(R), Lemon Zinger(R), Mandarin Orange
Spice(R), Red Zinger(R) and Wild Berry Zinger(R). The Company has made
various federal and international filings with respect to its
material trademarks, and intends to keep these filings current
and seek protection for new trademarks to the extent consistent
with business needs. The Company also copyrights certain of its
artwork and package designs. The Company is not aware of any
material challenge to the validity of any trademark or copyright
material to its business. However, due to the importance of
product package design and artwork to the success of its
business, the Company intends to take vigorous action to protect
against the imitation of its products and packages and to protect
its trademarks and copyrights to the extent consistent with
business needs.
Competition
The beverage market is large and highly competitive. The tea
portion of the beverage market is also highly competitive.
Competitive factors in the tea industry include product quality
and taste, brand awareness among consumers, variety of specialty
tea flavors, interesting or unique product names, product
packaging and package design, supermarket and grocery store shelf
space, alternative distribution channels, reputation, price,
advertising and promotion. The Company currently competes in the
specialty tea market segment which consists of herb tea and
specialty black tea (for both hot and iced consumption). Herb tea
produced for consumption as a hot tea accounted for a majority of
the Company's 1997 sales. The Company's specialty herb tea
products, like other specialty tea products, are priced higher
than most black tea products.
The Company's principal competitors on a national basis in the
specialty tea market segment are Thomas J. Lipton Company, a
division of Unilever PLC, which has substantially greater
financial resources than the Company, and R.C. Bigelow, Inc.
Additional competitors include a number of regional specialty tea
companies. There may be potential entrants which are not
currently in the specialty tea market who may have substantially
greater financial resources than the Company. Private label
competition in the specialty tea category is currently minimal.
A significant portion of the Company's tea sales in 1997 was
through grocery stores and supermarket chains. Such sales are
affected by the competitive factors facing the food retailing
industry, which sometimes requires food product companies,
including the Company, to pay "slotting" fees to grocers in order
to obtain shelf space, primarily for new product introductions.
The market for the Company's dietary supplement products is
highly competitive. Competition is based principally upon price,
quality of products, customer service and marketing support. The
Company currently competes in the herbal supplement market
segment of the dietary supplement category. Herbal supplements
are presently a high growth market segment consisting of
fragmented competitors in a broad spectrum of distribution
channels. No one company dominates the market on a national
basis. Direct mail, regional and private label competition is
significant.
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Employees
As of September 30, 1997, the Company employed 225 full-time
employees. Of this number, 67 were in management and sales, 63
were in administrative or clerical positions and 95 were
production and service employees. The Company has implemented a
number of programs to maintain a high level of employee morale
and productivity. The Company does not have a collective
bargaining agreement with any of its personnel, has not
experienced any material employee work stoppages and believes its
employee relations are satisfactory.
Government Regulation
The production and marketing of the Company's beverages and
dietary supplements are subject to the rules and regulations of
various federal, state and local food and health agencies,
including the FDA and the Federal Trade Commission. The Company
believes it is currently in compliance with the Dietary
Supplement Health and Education Act of 1994, which goes into
effect in March of 1999. In addition to laws relating to food and
dietary supplement products, the Company is subject to various
federal, state and local environmental laws and regulations which
limit the discharge, storage, handling and disposal of a variety
of substances. The Company's operations are also governed by laws
and regulations relating to workplace safety and worker health,
principally the Occupational Safety and Health Administration Act
and applicable state laws. The Company believes it presently
complies in all material respects with the foregoing laws and
regulations and does not anticipate any material capital
expenditures in connection with any government regulations.
ITEM 2. - PROPERTIES
The Company owns a manufacturing and office facility in
Boulder, Colorado built in 1990 on 42 acres of Company-owned
land. The facility has approximately 167,000 square feet, of
which 50,000 square feet is office space and 117,000 square feet
is manufacturing space. Management believes the property is in
satisfactory condition and suitable for the Company's purposes.
The property is encumbered under the Company's credit facility
and Industrial Revenue bonds.
ITEM 3. - LEGAL PROCEEDINGS
The information in Note 6 to the Company's Consolidated
Financial Statements included in Part II is incorporated herein.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
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ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the Nasdaq
National Market ("Nasdaq") under the symbol "CTEA." The
following table sets forth the high and low sale prices for the
Common Stock for the periods indicated as reported by Nasdaq. On
December 1, 1997 the last reported sale price of the Common Stock
was $30.75 per share.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1996:
First Quarter $ 22.00 $ 16.25
Second Quarter 26.00 18.75
Third Quarter 24.50 19.75
Fourth Quarter 22.50 18.50
1997:
First Quarter $ 24.50 $ 19.00
Second Quarter 23.75 19.50
Third Quarter 25.00 19.50
Fourth Quarter 28.63 22.75
</TABLE>
As of December 1, 1997, there were approximately 309 holders
of record of the Company's Common Stock.
The Company intends to retain earnings to fund the growth of
its business and therefore does not anticipate paying any cash
dividends on shares of Common Stock in the foreseeable future.
Payment of dividends is also restricted by the Company's credit
facility.
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ITEM 6. - SELECTED FINANCIAL DATA
The following data for each of the five fiscal years ended
September 30, 1997 is derived from the consolidated financial
statements of the Company (other than case sales, which are
derived from other Company records). The following data should be
read in conjunction with the Company's financial statements,
related notes thereto and other financial information included
elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
(in thousands, except per share amounts)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Net sales $ 79,039 $ 72,998 $ 70,104 $ 65,041 $ 59,109
Cost of goods sold 29,606 28,545 27,349 24,322 22,319
-------- -------- -------- -------- --------
Gross profit 49,433 44,453 42,755 40,719 36,790
Operating expenses:
Selling and marketing 33,915 30,071 27,323 26,306 24,104
General and administrative 4,556 3,899 4,429 3,861 3,416
Amortization of intangibles 1,296 1,493 1,823 2,046 2,959
-------- -------- -------- -------- --------
Operating income 9,666 8,990 9,180 8,506 6,311
Interest expense 493 874 1,264 1,345 3,851
-------- -------- -------- -------- --------
Income before income taxes 9,173 8,116 7,916 7,161 2,460
Income taxes 3,509 3,093 2,049 698 68
-------- -------- -------- -------- --------
Income before extraordinary item 5,664 5,023 5,867 6,463 2,392
Extraordinary item, net of tax benefit - - - - (3,058)
-------- -------- -------- -------- --------
Net income (loss) 5,664 5,023 5,867 6,463 (666)
Preferred stock dividend requirements - - - - 2,468
-------- -------- -------- -------- --------
Net income (loss) attributable
to common stock $ 5,664 $ 5,023 $ 5,867 $ 6,463 $ (3,134)
======== ======== ======== ======== ========
Net income (loss) per common share:
Income (Loss) before
extraordinary item $ 1.37 $ 1.22 $ 1.44 $ 1.57 $ (0.03)
Extraordinary item - - - - (1.35)
-------- -------- -------- -------- --------
Net income (loss) $ 1.37 $ 1.22 $ 1.44 $ 1.57 $ (1.38)
======== ======== ======== ======== ========
Weighted average common shares 4,141 4,115 4,086 4,106 2,263
Balance Sheet Data:
Working capital $ 10,588 $ 7,882 $ 6,239 $ 4,624 $ 3,710
Total assets 58,371 54,903 53,327 51,705 49,983
Long-term debt 6,073 9,057 12,768 17,432 22,566
Stockholders' equity 43,051 37,217 31,909 25,898 19,398
Other Data:
Case sales 4,441 4,338 4,274 3,812 3,468
Earnings before interest, taxes,
depreciation and amortization
(EBITDA) $ 12,098 $ 11,551 $ 11,888 $ 11,280 $ 10,022
</TABLE>
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ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table is derived from the Company's Consolidated
Income Statements for the periods indicated and presents (i) the
results of operations as a percentage of net sales and (ii) the
percentage change in the dollar amounts of each item from the
prior period.
<TABLE>
<CAPTION>
Period-to-Period
Percentage of Net Sales Increase/(Decrease)
-------------------------------------------------
1997 1996
Year Ended September 30, Compared Compared
1997 1996 1995 to 1996 to 1995
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 8.3 % 4.1 %
Cost of goods sold 37.5 39.1 39.0 3.7 4.4
----------------------------
Gross profit 62.5 60.9 61.0 11.2 4.0
Selling and marketing 42.9 41.2 39.0 12.8 10.1
General and administrative 5.8 5.3 6.3 16.9 (12.0)
Amortization of intangibles 1.6 2.1 2.6 (13.2) (18.1)
----------------------------
Operating income 12.2 12.3 13.1 7.5 (2.1)
Interest expense 0.6 1.2 1.8 (43.6) (30.9)
----------------------------
Income before income taxes 11.6 11.1 11.3 13.0 2.5
Income taxes 4.4 4.2 2.9 13.4 51.0
----------------------------
Net income 7.2 % 6.9 % 8.4 % 12.8 (14.4)
============================
</TABLE>
Fiscal 1997 Compared to Fiscal 1996
Net sales. Net sales for 1997 increased 8.3% to $79.0 million
from $73.0 million in 1996. The increase primarily was
attributable to an increase in case sales of 2.4% to 4,441,000
cases from 4,338,000 cases. Net sales and case sales growth was
the result of increased sales of the Company's herb and specialty
black hot tea products in the Company's traditional channels of
distribution as well as expansion in international markets. The
increase was partially offset by a decrease in sales of the
Company's iced tea products. Fiscal 1997 net sales of the
Company's dry tea products also reflect a price increase
implemented during the third quarter of fiscal 1996. The
Company's dietary supplement products contributed net sales of
$3.8 million for 1997, a 97.7% increase from 1996.
Gross profit. As a result of the Company's increase in net
sales, gross profit for 1997 increased 11.2% to $49.4 million
from $44.5 million in 1996. The Company's gross profit margin
increased to 62.5% from 60.9%. The increase in gross margin was
primarily due to increased sales of the Company's higher margin
hot herb tea products, along with a decrease in sales of the
Company's lower margin iced tea products. In addition, the
Company realized higher gross margins from its dietary supplement
products during 1997, as compared to 1996, due to increased
operating efficiencies and more competitive inventory pricing.
Selling and marketing expenses. Selling and marketing expenses
for 1997 increased 12.8% to $33.9 million from $30.1 million in
1996, and increased as a percentage of net sales to 42.9% from
41.2%. The increase in selling and marketing expenses primarily
was due to increased trade promotion expenses. This increase was
partially offset by a decrease in consumer promotion expenses.
General and administrative expenses. General and
administrative expenses for 1997 increased 16.9% to $4.6 million
from $3.9 million in 1996, and increased as a percentage of net
sales to 5.8% from 5.3%. This increase was primarily due to costs
incurred for the recruitment of a new executive officer.
Amortization of intangibles. Amortization of intangibles,
including amortization of goodwill and other intangible assets
for 1997, decreased 13.2% to $1.3 million from $1.5 million in
1996. Amortization of intangibles was lower for 1997, as compared
to 1996, as certain intangible assets became fully amortized or
were written off. These reductions were partially offset by
increases in amortization on new additions to artwork and plates
resulting from the Company's continued development of new
products and improved packaging.
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Operating income. Operating income for 1997 increased 7.5% to
$9.7 million from $9.0 million in 1996. The increase was
primarily due to increased net sales and improved gross profit
margins, and was partially offset by increased selling and
marketing expenses. Operating income as a percentage of net sales
remained relatively unchanged.
Interest expense. Interest expense for 1997 decreased 43.6%
from 1996 primarily as a result of reduced outstanding
borrowings. The Company extinguished its bank debt during the
first quarter of fiscal 1997. Interest expense for 1997 primarily
relates to Industrial Revenue bonds which are secured by the
Company's facility and fees relating to continued availability of
the Company's bank credit facility.
Income taxes. Income tax expense for 1997 increased 13.4% from
1996. The increase in income tax expense primarily was due to
increased pretax income.
Net income. Net income for 1997 increased 12.8% to $5.7
million from $5.0 million in 1996, and as a percentage of net
sales was 7.2% in 1997 compared to 6.9% in 1996. This increase
was primarily attributable to increased net sales and improved
gross profit margins.
Fiscal 1996 Compared to Fiscal 1995
Net sales. Net sales for 1996 increased 4.1% to $73.0 million
from $70.1 million in 1995. The increase primarily was
attributable to an increase in case sales of 1.5% to 4,338,000
cases from 4,274,000 cases. Case sales growth was the result of a
5.8% increase in sales of the Company's herb and specialty black
dry tea products and the contribution of dietary supplement
product sales. This increase in sales volume reflects increased
shipments to the Company's traditional channels of distribution
as well as expansion into other channels. The increase was
partially offset by a decrease in case sales of ready-to-drink
bottled tea, a product licensed to Royal Crown Company, Inc.,
during part of 1995 and 1996. Three quarters in 1995 reflected
sales of bottled iced tea as compared to one quarter in 1996.
Gross profit. As a result of the Company's increase in net
sales, gross profit for 1996 increased 4.0% to $44.5 million from
$42.8 million in 1995. The Company's gross profit margin of 60.9%
was essentially unchanged from the prior year.
Selling and marketing expenses. Selling and marketing expenses
for 1996 increased 10.1% to $30.1 million from $27.3 million in
1995, and increased as a percentage of net sales to 41.2% from
39.0%. The increase in selling and marketing expenses primarily
was due to an increase in advertising expenses. This increase was
partially offset by a decrease in trade promotion expenses.
General and administrative expenses. General and
administrative expenses for 1996 decreased 12.0% to $3.9 million
from $4.4 million in 1995, and decreased as a percentage of net
sales to 5.3% from 6.3%. The primary reason for the decrease was
a one-time charge of approximately $0.4 million incurred in 1995
related to the Company's acquisition efforts.
Amortization of intangibles. Amortization of intangibles,
including amortization of goodwill and other intangible assets
for 1996, decreased 18.1% to $1.5 million from $1.8 million in
1995. Amortization of intangibles was lower for 1996, as compared
to 1995, as certain intangible assets became fully amortized or
were written off. These reductions were partially offset by
amortization on new additions to artwork and plates resulting
from the Company's continued development of new products and
improved packaging.
Operating income. Operating income for 1996 decreased 2.1% to
$9.0 million from $9.2 million in 1995. The reduction was
primarily due to increased selling and marketing expenses, as
discussed above. Operating income as a percentage of net sales
decreased to 12.3% from 13.1% primarily due to increased
operating expenses.
Interest expense. Interest expense for 1996 decreased 30.9%
from 1995 primarily as a result of reduced outstanding
borrowings.
Income taxes. Income tax expense for 1996 increased 51.0% from
1995. The increase primarily was due to the utilization of net
operating loss carryforwards in 1995 and realization of deferred
tax assets during 1995 for which valuation allowances had been
provided in prior periods in accordance with SFAS No. 109. These
items were not available in 1996.
Net income. Net income for 1996 decreased 14.4% to $5.0
million from $5.9 million in 1995, and as a percentage of net
sales was 6.9% in 1996 compared to 8.4% in 1995. This decrease
was primarily attributable to increased income tax expense in
1996.
Page 10
<PAGE>
Seasonality
The Company's business is seasonal and its quarterly results
of operations reflect seasonal trends resulting from increased
demand for the Company's hot tea products in the cooler months of
the year. The following table sets forth selected unaudited
quarterly consolidated financial and operational data for the
eight most recent quarters.
<TABLE>
<CAPTION>
1997 Quarters Ended
--------------------------------------
Dollars and cases in thousands
--------------------------------------
Sept. 30 June 30 Mar. 31 Dec. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Case sales 855 656 1,491 1,439
Net sales $ 15,916 $ 11,589 $ 25,861 $ 25,673%
Gross profit 9,439 6,401 16,994 16,599
Operating income 898 221 4,969 3,578
Operating margin 5.6% 1.9% 19.2% 13.9%
Net income $ 545 $ 74 $ 3,007 $ 2,038
Net sales as a percent of annual 20.1% 14.7% 32.7% 32.5%
net sales
<CAPTION>
1996 Quarters Ended
---------------------------------------
Dollars and cases in thousands
---------------------------------------
Sept. 30 June 30 Mar. 31 Dec. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Case sales 832 647 1,437 1,422
Net sales $ 14,587 $ 10,829 $ 23,950 $ 23,632
Gross profit 8,536 5,840 15,195 14,882
Operating income (loss) 906 (139) 4,929 3,294
Operating margin 6.2% (1.3)% 20.6% 13.9%
Net income (loss) $ 466 $ (136) $ 2,841 $ 1,852
Net sales as a percent of annual 20.0% 14.8 % 32.8% 32.4%
net sales
</TABLE>
The Company has experienced quarterly fluctuations in sales
volume and operating results when compared to previous years due
to a number of factors, including the timing of trade promotions,
advertising and consumer promotions. The Company, as is common in
the tea industry, offers trade promotions for limited time
periods on specific items in order to provide incentives for the
purchase and promotion of products. The timing and extent of such
trade promotions can have a significant impact on case sales from
period to period.
Liquidity and Capital Resources
The operations of the Company historically have been funded
with a combination of internally generated funds and external
borrowings. Purchases of inventory, marketing expenditures and
support of accounts receivable have historically been, and are
expected to remain, the Company's principal recurring uses of
funds for the foreseeable future. The Company's other principal
uses of funds in the future will be the development of new or
existing tea and dietary supplement products, the possible
acquisition of brands, product lines or other assets and the
repurchase of shares of common stock. The Company expects its
primary sources of financing for its future business activities
will be funds from operations plus borrowings under the Company's
credit facility. The Company currently believes that funds from
operations and funds expected to be available under the Company's
credit facility are likely to be sufficient to meet operating and
capital requirements unless a significant acquisition is made. If
necessary, the Company may consider changes to its credit
facility to increase availability.
The Company has reviewed its systems for compliance with the
year 2000. All systems are either fully compliant or will be
within the next year. The Company does not anticipate any
significant expenditures in achieving year 2000 compliance.
Cash and cash equivalents increased by $2.6 million in 1997.
Cash provided by operating activities of the Company was $8.2
million. The Company's investing activities used cash of $2.8
million for 1997, primarily for capital expenditures, including
$1.4 million primarily for factory and computer equipment and
$0.7 million for the design and development of new packaging
artwork. The Company anticipates making capital expenditures of
approximately $2.5 million in 1998. Financing activities of the
Company used cash of $2.8 million for 1997, principally for the
extinguishment of bank debt.
Page 11
<PAGE>
The Company's existing credit facility includes a revolving
working capital facility of up to $8,000,000 subject to a
borrowing base (the "Revolving Loan"), a reducing revolving loan
of up to $12,000,000 (the "Reducing Loan") and a standby letter
of credit commitment in an amount of $6,736,000 (the "Letter of
Credit Facility") to support outstanding Economic Development
Revenue Bonds issued to finance the Company's manufacturing
facility. Borrowings under the credit facility bear interest at
rates ranging from LIBOR plus 1.00% to prime, subject to
increases if the Company fails to achieve certain future
operating results. The Letter of Credit Facility includes annual
financing fees of 1.00%, and loans resulting from a drawing under
the Letter of Credit Facility bear interest at the prime rate
plus 1.00%. The Revolving Loan is due on July 20, 1998, the
Reducing Loan is subject to semi-annual commitment reductions
through July 19, 2000, and the Letter of Credit Facility expires
on July 19, 2000. The credit facility imposes certain ratio
maintenance requirements on the Company, including minimum EBITDA
levels, interest coverage, current ratio, net worth and fixed
charge coverage, and certain restrictive covenants including
limitations on indebtedness, liens, capital expenditures, sales
of assets, mergers, investments and dividends. Future borrowings
under the credit facility will provide for working capital and
may be used for acquisition financing.
Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings per Share." SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS"), and
supersedes Accounting Principles Board Opinion No. 15 ("APB 15")
and its related interpretations. It replaces the presentation of
primary EPS with a presentation of basic EPS, which excludes
dilution, and requires dual presentation of basic and diluted EPS
for all entities with complex capital structures. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB 15. SFAS
128 is effective for periods ending after December 15, 1997,
including interim periods, and will require restatement of all
prior period EPS data presented; earlier application is not
permitted.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." SFAS 130 requires companies to
disclose comprehensive income and its components. The Company
currently has no items of other comprehensive income and
therefore SFAS 130 does not apply.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related
Information," which will be effective for the Company beginning
October 1, 1998. SFAS 131 redefines how operating segments are
determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The
Company anticipates, with the adoption of SFAS 131, it will
expand its segment disclosures of its current product lines. The
Company believes the segment information required to be disclosed
under SFAS 131 will be more comprehensive than previously
provided, including expanded disclosures of income statement and
balance sheet items for each of its reportable operating
segments.
Forward-Looking Statements
The statements contained in this Annual Report on Form 10-K
which are not historical facts, including, but not limited to,
certain statements found under the captions "Business," "Results
of Operations" and "Liquidity and Capital Resources" above, are
forward-looking statements that involve a number of risks and
uncertainties. The actual results of the future events described
in such forward-looking statements could differ materially from
those stated in such forward-looking statements. Among the
factors that could cause actual results to differ materially are
the risks and uncertainties discussed in this Annual Report on
Form 10-K, including, without limitation, the portions of such
reports under the captions referenced above, and the
uncertainties set forth from time to time in the Company's
filings with the Securities and Exchange Commission, and other
public statements. Such risks and uncertainties include, without
limitation, seasonality, interest in the Company's products,
general economic conditions, consumer trends, costs and
availability of raw materials, competition, litigation and the
effect of governmental regulation.
ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Page 12
<PAGE>
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Celestial Seasonings, Inc.:
We have audited the accompanying consolidated balance sheets
of Celestial Seasonings, Inc. and subsidiaries (the "Company,"
Note 2) as of September 30, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended September
30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on the 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, such consolidated financial statements present
fairly, in all material respects, the financial position of
Celestial Seasonings, Inc. and its subsidiaries at September 30,
1997 and 1996 and the results of their operations and their cash
flows for each of the three years in the period ended September
30, 1997, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Denver, Colorado
November 3, 1997
Page 13
<PAGE>
<TABLE>
<CAPTION>
CELESTIAL SEASONINGS, INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
Year Ended September 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 79,039 $ 72,998 $ 70,104
Cost of goods sold 29,606 28,545 27,349
-------- -------- --------
Gross profit 49,433 44,453 42,755
Operating expenses:
Selling and marketing 33,915 30,071 27,323
General and administrative 4,556 3,899 4,429
Amortization of intangibles 1,296 1,493 1,823
-------- -------- --------
Total operating expenses 39,767 35,463 33,575
Operating income 9,666 8,990 9,180
Interest expense 493 874 1,264
-------- -------- --------
Income before income taxes 9,173 8,116 7,916
Income taxes 3,509 3,093 2,049
-------- -------- --------
Net income $ 5,664 $ 5,023 $ 5,867
======== ======== ========
Net income per common share $ 1.37 $ 1.22 $ 1.44
======== ======== ========
Weighted average common shares 4,141 4,115 4,086
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 14
<PAGE>
<TABLE>
<CAPTION>
CELESTIAL SEASONINGS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
September 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,829 $ 204
Accounts receivable, net of allowance
(1997-$165, 1996-$148) 7,755 8,133
Inventory 8,410 6,808
Deferred income taxes 200 7
Prepaid income taxes - 470
Prepaid expenses 641 889
-------- --------
Total current assets 19,835 16,511
Property, plant and equipment, net 17,085 16,871
Intangible assets, net 13,236 13,514
Goodwill, net 6,150 6,430
Deferred income taxes 263 287
Other assets 1,802 1,290
-------- --------
Total assets $ 58,371 $ 54,903
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,160 $ 3,754
Accrued liabilities and wages 4,584 4,462
Accrued income taxes 99 -
Accrued interest payable 31 52
Current portion of long-term debt 373 361
-------- --------
Total current liabilities 9,247 8,629
Long-term debt 6,073 9,057
Commitments
Stockholders' equity:
Preferred stock, $.01 par value -
authorized 1,000,000 shares;none issued and outstanding
Common stock, $.01 par value - authorized 15,000,000 shares;
1997-issued 4,068,491 shares, outstanding 4,059,591 shares;
1996-issued 4,054,472 shares, outstanding 4,049,472 shares 41 41
Capital surplus 33,540 33,290
Retained earnings 9,645 3,981
Treasury stock, 8,900 and 5,000 shares of common stock (175) (95)
at cost
-------- --------
Total stockholders' equity 43,051 37,217
-------- --------
Total liabilities and stockholders' equity $ 58,371 $ 54,903
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 15
<PAGE>
<TABLE>
<CAPTION>
CELESTIAL SEASONINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended September 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,664 $ 5,023 $ 5,867
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,136 1,068 885
Amortization of intangibles 1,296 1,493 1,823
Amortization of financing fees 196 223 224
Deferred income taxes (169) 770 (697)
Gain on sale of assets - - (201)
Changes in operating assets and liabilities:
Accounts receivable 378 (2,835) 804
Inventory (1,602) 913 (1,832)
Prepaid expenses 248 (229) 45
Accounts payable 406 238 (606)
Accrued liabilities and wages 122 (570) 281
Accrued and prepaid income taxes 569 (1,034) 295
Accrued interest payable (21) (2) (36)
-------- -------- --------
Net cash provided by operating activities 8,223 5,058 6,852
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets - - 202
Capital expenditures (1,362) (1,294) (454)
Increase in intangible assets (738) (636) (616)
Acquisition of subsidiary - - (1,171)
Investment in affiliates - - (130)
(Increase) Decrease in other assets (708) 121 (56)
-------- -------- --------
Net cash used in investing activities (2,808) (1,809) (2,225)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance 250 285 239
Acquisition of treasury stock (80) - (95)
Increase in long-term debt 2,285 12,265 8,900
Reduction in long-term debt (5,245) (15,970) (13,562)
-------- -------- --------
Net cash used in financing activities (2,790) (3,420) (4,518)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,625 (171) 109
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 204 375 266
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,829 $ 204 $ 375
======== ======== ========
CASH PAID FOR INTEREST $ 333 $ 654 $ 1,080
CASH PAID FOR INCOME TAXES $ 3,109 $ 3,357 $ 2,450
</TABLE>
See accompanying notes to consolidated financial statements.
Page 16
<PAGE>
<TABLE>
<CAPTION>
CELESTIAL SEASONINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Retained
Earnings
Common Stock Capital (Accumulated Treasury Stock Total
----------------- ----------------
Shares Amount Surplus Deficit) Shares Amount Equity
--------- ------ -------- ----------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 4,020,790 $ 40 $ 32,767 $ (6,909) - $ - $ 25,898
Issuance of common stock 20,588 - 239 239
Acquisition of treasury stock (5,000) (95) (95)
Net income 5,867 5,867
--------- ---- -------- -------- ------- ------- --------
BALANCE, SEPTEMBER 30, 1995 4,041,378 40 33,006 (1,042) (5,000) (95) 31,909
Issuance of common stock 13,094 1 284 285
Net income 5,023 5,023
--------- ---- -------- -------- ------- ------- --------
BALANCE, SEPTEMBER 30, 1996 4,054,472 41 33,290 3,981 (5,000) (95) 37,217
Issuance of common stock 14,019 - 250 250
Acquisition of treasury stock (3,900) (80) (80)
Net income 5,664 5,664
--------- ---- -------- -------- ------- ------- --------
BALANCE, SEPTEMBER 30, 1997 4,068,491 $ 41 $ 33,540 $ 9,645 (8,900) $ (175) $ 43,051
========= ==== ======== ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 17
<PAGE>
CELESTIAL SEASONINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
Celestial Seasonings, Inc. is the largest manufacturer and
marketer of herb teas in the United States, with an estimated 50%
share of the herb tea category. The Company developed and
popularized the herb tea category in the United States as a
flavorful and non-caffeinated alternative to other hot beverages.
Currently the Company markets over 50 tea varieties under the
Celestial Seasonings(R) brand. Celestial Seasonings products are
sold in substantially all of the major supermarkets, grocery
stores and natural foods markets in the United States.
2. Significant Accounting Policies
Basis of presentation. The consolidated financial statements
include the accounts of Celestial Seasonings, Inc. and
subsidiaries (the "Company"). All material intercompany balances
and transactions have been eliminated in consolidation. The
Company's year ends on the last Saturday of each September. For
presentation purposes, however, such year is presented as if it
ended on September 30. All references to years refer to the
Company's fiscal years.
Use of estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
through the reporting period. Actual results could differ from
these estimates.
Cash and cash equivalents. Cash and cash equivalents include
cash on hand and on deposit and investments in highly liquid,
short-term financial instruments purchased with a maturity of
three months or less.
Inventory. Inventory is stated at the lower of cost or market
using the first-in, first-out (FIFO) method.
Earnings per share. Earnings per share is based on the
weighted average number of shares outstanding and, if dilutive,
common stock equivalents of the Company.
During February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings per Share." SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS"), and
supersedes Accounting Principles Board Opinion No. 15 ("APB 15")
and its related interpretations. It replaces the presentation of
primary EPS with a presentation of basic EPS, which excludes
dilution, and requires dual presentation of basic and diluted EPS
for all entities with complex capital structures. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB 15. SFAS
128 is effective for periods ending after December 15, 1997,
including interim periods, and will require restatement of all
prior period EPS data presented; earlier application is not
permitted. The following table sets forth pro forma earnings per
share in accordance with the requirements of SFAS 128 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Basic earnings per share:
Net income per common share $ 1.40 $ 1.24 $ 1.46
======= ======= =======
Weighted average common shares 4,054 4,044 4,026
======= ======= =======
Diluted earnings per share:
Net income per common share $ 1.37 $ 1.22 $ 1.44
======= ======= =======
Weighted average common shares 4,141 4,115 4,086
======= ======= =======
</TABLE>
Export sales. Net sales include total export sales of
$8,807,000, $7,579,000 and $6,578,000 in 1997, 1996 and 1995,
respectively.
Page 18
<PAGE>
Depreciation and amortization. Depreciation and amortization
of property, plant and equipment is provided on the straight-line
method over the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Building 32
Vehicles 3
Factory equipment 7
Office and other equipment 3
</TABLE>
Maintenance, repairs and renewals that neither materially add
to the value of the property nor appreciably prolong its life are
charged to expense as incurred.
Amortization of intangible assets is provided on the straight-
line method over the following estimated useful lives:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Goodwill 15 to 40
Trademarks and copyrights 40
Grocery shelf space 40
Manufacturing process and workforce 7
Artwork and plates 3
Other 3 to 8
</TABLE>
Accumulated amortization of goodwill was $1,508,000 and
$1,227,000 respectively, at September 30, 1997 and 1996.
In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," the Company
periodically evaluates the recoverability of the net carrying
value of property, plant and equipment, intangible assets, and
goodwill based upon current and anticipated net income and
undiscounted cash flows, and if necessary an impairment is
recorded. The Company has recorded no such impairments in 1997,
1996 or 1995.
Research and development costs. Research and development costs
are charged to expense when incurred. During the years ended
September 30, 1997, 1996 and 1995, amounts expensed for Company-
sponsored research and development activities were $1,090,000,
$955,000 and $1,005,000, respectively.
Concentrations of credit risk. Areas which potentially subject
the Company to significant concentrations of credit risk consist
primarily of accounts receivable. Concentrations of credit risk
associated with accounts receivable are limited due to the
Company's large number of customers and their dispersion across
many different geographic areas. As of September 30, 1997, the
Company had no significant concentrations of credit risk.
Fair value of financial instruments. Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments," requires disclosure of the fair values of
certain of the Company's assets and liabilities. The carrying
amounts of cash and cash equivalents, accounts receivable and
accounts payable at September 30, 1997 and 1996 approximate fair
value due to their short-term maturities. The carrying value of
long-term debt at September 30, 1997 and 1996 also approximates
fair value as interest rates are adjusted to current market rates
on a monthly basis.
Comprehensive income. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income."
SFAS 130 requires companies to disclose comprehensive income and
its components. The Company currently has no items of other
comprehensive income and therefore SFAS 130 does not apply.
Operating segments. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information," which will be effective for
the Company beginning October 1, 1998. SFAS 131 redefines how
operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's
operating segments. The Company anticipates, with the adoption of
SFAS 131, it will expand its segment disclosures of its current
product lines. The Company believes the segment information
required to be disclosed under SFAS 131 will be more
comprehensive than previously provided, including expanded
disclosures of income statement and balance sheet items for each
of its reportable operating segments.
Page 19
<PAGE>
3. Detail of Certain Balance Sheet Accounts (in thousands)
<TABLE>
<CAPTION>
September 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Inventory:
Raw materials and supplies $ 4,924 $ 4,486
Work in process 1,393 888
Finished goods 2,431 1,665
-------- --------
8,748 7,039
Less inventory reserves 338 231
-------- --------
Total $ 8,410 $ 6,808
======== ========
Property, plant and equipment:
Land $ 5,931 $ 5,921
Building 8,771 8,701
Machinery and equipment 12,585 11,368
Furniture and fixtures 303 283
-------- --------
27,590 26,273
Less accumulated depreciation 10,505 9,402
-------- --------
Total $ 17,085 $ 16,871
======== ========
Intangible assets:
Trademarks and copyrights $ 9,848 $ 9,848
Grocery shelf space 5,700 5,700
Manufacturing process and workforce 4,879 4,879
Artwork and plates 4,972 4,237
Other 1,570 1,570
-------- --------
26,969 26,234
Less accumulated amortization 13,733 12,720
-------- --------
Total $ 13,236 $ 13,514
======== ========
Other assets:
Financing fees $ 1,830 $ 1,830
Less accumulated amortization 1,040 844
-------- --------
790 986
Long-term note receivable from
executive officer 898 -
Other 114 304
-------- --------
Total $ 1,802 $ 1,290
======== ========
</TABLE>
Page 20
<PAGE>
4. Long-term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------
1997 1996
------- -------
<S> <C> <C>
Term loans payable to banks $ - $ 2,600
Borrowings related to Economic Development
Revenue Bonds due in monthly installments
through November 1, 2009, interest payable
monthly at variable rates 6,350 6,650
Other 96 168
------- -------
6,446 9,418
Less current portion 373 361
------- -------
Total $ 6,073 $ 9,057
======= =======
</TABLE>
The Company's existing bank credit facility (the "Facility")
includes a revolving working capital facility, a reducing
revolving facility and a letter of credit facility. The
commitment under the revolving working capital facility (no
borrowings outstanding at September 30, 1997) is $8,000,000,
subject to a borrowing base which is based on the Company's
accounts receivable and inventory, and has a final maturity of
July 20, 1998. The commitment under the reducing revolving
facility (no borrowings outstanding at September 30, 1997) is
$12,000,000 at September 30, 1997, with semi-annual reductions of
the commitment until final maturity at July 19, 2000. Borrowings
under these facilities bear interest at rates ranging from LIBOR
plus 1.00% to prime. The commitment under the letter of credit
facility is $6,736,000 and expires July 19, 2000, with fees of
1.00% per annum of the total commitment. Borrowings under this
facility (none at September 30, 1997) bear interest at the prime
rate plus 1.00%.
The Facility imposes certain ratio maintenance requirements on
the Company, including minimum EBITDA levels, interest coverage,
current ratio, net worth and fixed charge coverage, and certain
restrictive covenants including limitations on indebtedness,
liens, capital expenditures, sales of assets, mergers,
investments and dividends. Borrowings under the Facility are
secured by substantially all of the assets of the Company.
Borrowings related to Economic Development Revenue Bonds (the
"Bonds") bear interest at a variable rate (3.90% at September 30,
1997) and are secured by a letter of credit issued under the
Facility. The Bonds mature December 1, 2009. The Bonds can be
tendered monthly to the Bond trustee at face value plus accrued
interest, with payment for tendered Bonds made from drawdowns
under the letter of credit. Drawdowns under the letter of credit
bear interest at prime plus 1.00%, and are repaid through resale
of the Bonds. Any outstanding drawdowns must be repaid on July
19, 2000.
The aggregate annual maturities of long-term debt during the
five years subsequent to September 30, 1997 are: 1998 - $373,000;
1999 - $323,000; 2000 - $375,000; 2001 - $400,000; and 2002 -
$475,000.
5. Commitments
The Company leases various office and manufacturing equipment.
Total rental expense for the equipment for the years ended
September 30, 1997, 1996 and 1995 was $397,000, $367,000 and
$457,000, respectively. At September 30, 1997, minimum rental
commitments by year under noncancelable operating leases are:
1998 - $211,000; 1999 - $93,000; 2000 - $72,000; 2001 - $54,000;
and 2002 - $17,000.
Page 21
<PAGE>
6. Legal Proceedings
On May 5, 1995, a purported stockholder of the Company filed a
lawsuit, Schwartz v. Celestial Seasonings, Inc. et al., in the
---------------------------------------------
United States District Court for the District of Colorado (Civil
Action Number: 95-K-1045), in connection with disclosures by the
Company concerning the Company's license agreement with Perrier
Group of America, Inc. which was terminated on January 1, 1995.
In addition to the Company, the complaint names as defendants
certain of the Company's present and former directors and
officers, PaineWebber, Inc., Shearson/Lehman Brothers, Inc., and
Vestar/Celestial Investment Limited Partnership. The complaint,
which was pled as a class action on behalf of persons who
acquired the Company's common stock from July 12, 1993 through
May 18, 1994, sought money damages from the Company and the other
defendants for the class in the amount of their loss on their
investment in the Company's common stock, punitive damages, costs
and expenses of the action, and such other relief as the court
may order.
On November 6, 1995, the federal district court granted a
motion by the Company and the other defendants to dismiss the
case. The court's order became final on December 11, 1995, after
the plaintiff failed to amend the complaint within the time
permitted by the district court. The plaintiff appealed the
district court's decision to the United States Court of Appeals
for the Tenth Circuit.
On September 5, 1997, the Tenth Circuit Court of Appeals
reversed the decision of the district court. The Appeals Court
found that the plaintiff's complaint alleged sufficient facts to
support his claim. The case has been returned to the district
court for further proceedings. The Company and the other
defendants filed a new motion to dismiss the case on different
legal grounds. Due to the uncertainties inherent in the
litigation process, the Company is unable to predict the outcome
of this matter.
The Company is also a party to ordinary routine litigation
incidental to its business. The Company does not expect any of
such incidental litigation to have a material adverse effect on
the Company's results of operations or financial condition.
7. Stockholders' Equity
Preferred stock. In July 1993, the Company authorized the
issuance of 1,000,000 shares of $0.01 par value Preferred Stock
and designated 10,000 shares as a Series A Junior Participating
Preferred Stock in connection with the adoption of a rights
agreement. No shares were outstanding at September 30, 1997.
Stock-based compensation plans. At September 30, 1997, the
Company has four stock-based compensation plans. The Company
applies APB Opinion 25 ("APB 25"), "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its
plans. Under APB 25, no compensation expense is recognized for
options granted to employees which are at or above market value.
Accordingly, no compensation cost has been recognized for the
stock option and stock purchase plans. Had compensation cost for
the Company's stock-based compensation plans been determined
based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma net income and earnings
per share would have been as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net income As reported $ 5,664 $ 5,023
Pro forma $ 5,153 $ 4,896
Net income per common share As reported $ 1.37 $ 1.22
Pro forma $ 1.25 $ 1.19
</TABLE>
The amounts reflected in the pro forma disclosure are not
indicative of future amounts when the new method will apply to
all outstanding, nonvested awards.
Page 22
<PAGE>
Stock option plans. During 1991, the Company adopted an
incentive and non-qualified stock option plan that provided for
the granting of options to purchase up to 46,112 shares of the
Company's common stock to employees. The options generally vested
over a four year period and expired five years from the grant
date. No further grants will be made under the plan.
In 1991, the Company granted options to an executive officer
to purchase 95,630 shares of the Company's common stock in
connection with capital contributions made by the officer and
certain other agreements. Such options were immediately vested at
the grant date, are exercisable half at $8.26 per share and half
at $11.45 per share, and expire in 2031.
During 1993, the Company adopted an incentive and non-
qualified stock option plan that provided for the granting of
options to purchase up to 131,000 shares of the Company's common
stock. Options granted at the time of the Company's initial
public offering in 1993 vested over one year and five year
periods. Options granted subsequent to the Company's initial
public offering generally vest over a five year period. Options
granted under this plan expire ten years from the grant date.
During 1995, the Company approved an increase in the number of
options that may be granted under the plan to 225,000 shares.
In 1993, the Company granted options to purchase 10,000 shares
of the Company's common stock to a director of the Company. The
options vest over a three year period and expire ten years from
the grant date.
In 1995, the Company adopted a non-qualified stock option plan
for non-employee directors. The plan provides for up to 75,000
shares of the Company's common stock for issuance upon exercise
of options granted to new non-employee directors and in lieu of
meeting fees paid to non-employee directors. The options vest
over a one year period and expire ten years from the grant date.
In 1997, in addition to options and shares granted under the
1993 plan, the Company granted options to an executive officer to
purchase 165,000 shares of the Company's common stock. The
options were granted in connection with the officer's employment
agreement and vest over a five year period and expire ten years
from the grant date.
In the above pro forma amounts, the fair value of each option
grant is estimated on the date of the grant using the Black-
Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: no
estimated dividends for both years; expected volatility of 31
percent for both years; risk-free interest rates of between 6.0
and 6.8 percent and between 5.3 and 6.9 percent; and expected
lives of 6 years for both years.
Employee stock purchase plan. Under the Company's Employee
Stock Purchase Plan (the "Plan") the Company is authorized to
issue up to 26,200 shares of common stock to its full-time
employees, nearly all of whom are eligible to participate. Under
the terms of the Plan, employees can choose each year to have up
to 10 percent of their annual base earnings withheld to purchase
the Company's common stock. The purchase price of the stock is 85
percent of the lower of the market price at the beginning or end
of each six month participation period. Approximately 20 percent
of eligible employees have participated in the Plan in the last 3
years. Under the Plan, the Company sold 2,901 shares and 2,640
shares to employees in 1997 and 1996, respectively. In the above
pro forma amounts, compensation cost is recognized for the fair
value of the employees' purchase rights using the Black-Scholes
model with the following assumptions for 1997 and 1996,
respectively: no estimated dividends for both years; expected
volatility of 31 percent for both years; risk-free interest rates
of between 5.3 and 5.7 percent and between 5.2 and 5.5 percent;
and an expected life of 6 months for both years. The weighted
average fair value of those purchase rights granted in 1997 and
1996 were $4.82 and $4.78, respectively.
Page 23
<PAGE>
The following table summarizes the status of the Company's
stock option plans as of September 30, 1997, 1996 and 1995, and
changes during the years ending on those dates:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 256,191 $ 15.03 280,511 $ 14.93 273,477 $ 15.53
Granted 248,600 $ 21.49 45,154 $ 20.46 69,000 $ 16.39
Exercised (9,009) $ 16.06 (7,360) $ 18.96 (16,634) $ 10.15
Forfeited (15,992) $ 17.70 (62,114) $ 18.06 (45,332) $ 22.52
------------------------- ------------------------- -------------------------
Outstanding at end of year 479,790 $ 18.27 256,191 $ 15.03 280,511 $ 14.93
========================= ========================= =========================
Options exercisable
at year-end 187,196 $ 13.76 168,488 $ 13.10 155,180 $ 13.04
Weighted average fair value
of options granted
during the year $ 9.70 $ 8.70 $ 7.20
</TABLE>
The following table summarizes information about stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 9/30/97 Contractual Life Exercise Price at 9/30/97 Exercise Price
- ----------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 7.63 - $ 11.45 109,778 30.1 years $ 9.89 109,778 $ 9.89
$ 14.25 - $ 16.88 19,875 7.1 years $ 15.15 11,937 $ 15.06
$ 17.25 - $ 21.00 98,285 6.9 years $ 19.71 60,531 $ 19.83
$ 21.25 - $ 26.00 251,852 9.6 years $ 21.60 4,950 $ 22.10
- ----------------- ----------- ---------------- ---------------- ----------- ----------------
$ 7.63 - $ 26.00 479,790 13.6 years $ 18.27 187,196 $ 13.76
- ----------------- ----------- ---------------- ---------------- ----------- ----------------
</TABLE>
Page 24
<PAGE>
8. Income Taxes
The components of income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Federal:
Current $ 3,201 $ 2,101 $ 2,180
Deferred (150) 663 (490)
-------- ------- --------
3,051 2,764 1,690
-------- -------- --------
State:
Current 477 222 566
Deferred (19) 107 (207)
-------- -------- --------
458 329 359
-------- -------- --------
Total $ 3,509 $ 3,093 $ 2,049
======== ======== ========
</TABLE>
The Company's income tax expense in 1997, 1996 and 1995
differed from the federal statutory provision as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Income tax at statutory rates $ 3,119 $ 2,759 $ 2,691
Utilization of operating loss carryforwards - - (650)
Realization of deferred tax assets for which
valuation allowances had been provided - - (429)
Increase in deferred tax assets for which
valuation allowances are provided - 59 95
State income taxes, net of federal benefit 302 217 237
Other 88 58 105
------- ------- --------
Total $ 3,509 $ 3,093 $ 2,049
======= ======= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes.
Components of the Company's net deferred tax assets at
September 30 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Current deferred tax assets:
Accruals $ 253 $ 245
Reserves 4 (60)
Capitalized costs 39 93
Prepayments (96) (271)
------- --------
Current deferred tax assets, net $ 200 $ 7
======= ========
Noncurrent deferred tax assets:
Amortization $ 2,665 $ 2,291
Depreciation (382) (123)
Valuation allowance (2,020) (1,881)
------- --------
Noncurrent deferred tax assets, net $ 263 $ 287
======= ========
</TABLE>
At September 30, 1997, the potential future benefits from
noncurrent deferred tax assets relating to intangible assets,
which are not amortizable for tax purposes, are fully reserved by
means of a valuation allowance, due to the uncertainty of their
future realization. The net change in the valuation allowance in
1997 was $139,000.
Page 25
<PAGE>
9. Employee Benefit Plans
The Company has a contributory thrift plan covering all
employees. Each year, based on the achievement of certain
targeted operating results, the Company can contribute to the
plan an amount equal to 1% to 2.5% of thriftable wages.
Additionally, the Company matches a portion (currently 50%) of
participant contributions up to limits provided in the plan. The
Company's contributions are funded currently and were $334,000,
$323,000 and $312,000 for 1997, 1996 and 1995, respectively.
During 1989, the Company formed an employee stock ownership
plan covering all employees. The Company's contributions for
1997, 1996 and 1995 were $90,000, $75,000 and $75,000,
respectively. The plan held 25,337 shares of the Company's common
stock at September 30, 1997.
10. Related Party Transactions
The Company earned royalty income totaling $417,000 during
1995 from a company whose former chairman of the board of
directors serves as a director of the Company. During 1995, the
Company paid royalty expense totaling $25,000 to that company
associated with the termination of the agreement.
The Company had sales to an affiliate of $5,000, $128,000 and
$357,000 during 1997, 1996 and 1995, respectively. As of
September 30, 1997 and 1996 amounts due from the affiliate
totaled $0 and $48,000, respectively. The affiliate ceased
operations effective December 31, 1996.
During 1997, the Company, pursuant to an employment agreement,
provided an executive officer with an interest free loan of up to
$1,500,000 to be used for the purchase of a home. The loan is
payable upon the earlier of the sale of executive's former home
or 18 months after the purchase of a new home. As of September
30, 1997 amounts due from executive totaled $898,000.
11. Business Combination
On June 30, 1995, the Company acquired the net assets of
Botalia Pharmaceutical, Inc., a developer and marketer of dietary
supplements. The transaction was accounted for as a purchase
business combination and the results of operations for the period
July 1, 1995 through September 30, 1995 were included in the 1995
consolidated income statement of the Company. The total cash
consideration for the acquisition, including acquisition costs of
approximately $300,000, was approximately $1.2 million. As a
result of this transaction, goodwill of approximately $1.1
million was recorded and is being amortized over 15 years on a
straight-line basis. Pro forma information for this acquisition
is not material and therefore is not presented.
During 1996, the Company completed its purchase price
allocation and recorded an increase to goodwill of approximately
$871,000, primarily for the accrual of additional preacquisition
liabilities. This amount is being amortized on a straight-line
basis over the remaining goodwill life of 14 years.
Page 26
<PAGE>
12. Quarterly Financial Data (Unaudited):
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
1997 Quarters Ended
-----------------------------------------
Sept. 30 June 30 Mar. 31 Dec. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Case sales 855 656 1,491 1,439
Net sales $ 15,916 $ 11,589 $ 25,861 $ 25,673
Gross profit 9,439 6,401 16,994 16,599
Operating income 898 221 4,969 3,578
Net income 545 74 3,007 2,038
Net income per share $ 0.13 $ 0.02 $ 0.73 $ 0.49
Net sales as a percent of annual
net sales 20.1% 14.7% 32.7% 32.5%
<CAPTION>
1996 Quarters Ended
-----------------------------------------
Sept. 30 June 30 Mar. 31 Dec. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Case sales 832 647 1,437 1,422
Net sales $ 14,587 $ 10,829 $ 23,950 $ 23,632
Gross profit 8,536 5,840 15,195 14,882
Operating income (loss) 906 (139) 4,929 3,294
Net income (loss) 466 (136) 2,841 1,852
Net income (loss) per share $ 0.11 $ (0.03) $ 0.69 $ 0.45
Net sales as a percent of annual
net sales 20.0% 14.8% 32.8% 32.4%
</TABLE>
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Page 27
<PAGE>
PART III
--------
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections labeled "Election of Directors," "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Executive
Officers" appearing in the Company's Proxy Statement in
connection with the 1998 Annual Meeting of Stockholders are
incorporated herein by reference.
ITEM 11. - EXECUTIVE COMPENSATION
The sections labeled "Compensation of Directors and Executive
Officers," "Executive Compensation," "Option Grants in Last
Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year
and Year-end Option Values," "Employment Agreements,"
"Compensation Committee Report" and "Performance Graph" appearing
in the Company's Proxy Statement in connection with the 1998
Annual Meeting of Stockholders are incorporated herein by
reference.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The section labeled "Principal Stockholders" appearing in the
Company's Proxy Statement in connection with the 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Relationships and Related
Transactions" appearing in the Company's Proxy Statement in
connection with the 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
Page 28
<PAGE>
PART IV
-------
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report 13
Consolidated Income Statements for the years ended
September 30, 1997, 1996 and 1995 14
Consolidated Balance Sheets at September 30, 1997 and 1996 15
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 16
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, 1996 and 1995 17
Notes to Consolidated Financial Statements 18-27
Quarterly Financial Data (Unaudited) 27
2. Index to Financial Statement Schedule
The following schedule is filed as part of this Form 10-K:
II - Valuation and Qualifying Accounts for the years ended
September 30, 1997, 1996 and 1995 34
</TABLE>
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the consolidated financial statements or notes thereto.
Page 29
<PAGE>
3. Exhibits
The following exhibits are filed pursuant to Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <C> <S>
(a) 3.1 - Amended and Restated Certificate of Incorporation of Registrant.
(a) 3.2 - Bylaws of Registrant.
(a) 4.1 - Common Stock certificate.
(a) 4.2 - Rights Agreement dated as of July 19, 1993 between Registrant
and Harris Trust and Savings Bank, as Rights agent.
(a) 10.1 - Incentive and Non-Qualified Stock Option Plan of Registrant as
Successor to Celestial Holdings, Inc. adopted February 26, 1991.
(f) 10.2 - 1993 Long-Term Incentive Plan of Registrant adopted June 7,
1993, as amended.
(e) 10.3 - 1994 Non-Employee Director Compensation Plan adopted August
4, 1994.
(b) 10.4 - Credit Agreement dated as of July 19, 1993, among Registrant
and Fleet National Bank as a lender and agent.
(g) 10.5 - Amendments 1, 2 and 3 to the Credit Agreement dated as of
July 19, 1993, among Registrant and Fleet National Bank as a
lender and agent.
(a) 10.6 - Loan Agreement dated as of December 1, 1989 between Registrant
and Colorado Housing and Finance Authority.
(c) 10.7 - Employment Agreement dated May 22, 1992 between Registrant
and John D. Hale.
(d) 10.8 - Employment Agreement dated November 16, 1993 between Registrant
and Abbe G. Kuhn.
(d) 10.9 - Employment Agreement dated February 15, 1994 between Registrant
and Marie A. Gambon.
(h) 10.10 - Employment Agreement dated June 16, 1997 between Registrant
and Stephen B. Hughes.
(h) 10.11 - Executive Agreement dated June 16, 1997 between Registrant
and Mo Siegel.
(h) 10.12 - Stock Option Agreement dated June 16, 1997 between Registrant
and Stephen B. Hughes.
(h) 10.13 - Option Agreement dated June 13, 1997 between Registrant
and Mo Siegel.
23.1 - Report of Deloitte & Touche LLP on consolidated financial
statement schedule.
23.2 - Consent of Deloitte & Touche LLP.
27.1 - Financial Data Schedule.
</TABLE>
Page 30
<PAGE>
Exhibits identified above are incorporated by reference as follows:
(a) Incorporated by reference to the Registrant's
Registration Statement on Form S-1 No. 33-64012, as amended,
filed with the Securities and Exchange Commission on June 7,
1993.
(b) Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993.
(c) Incorporated by reference to the Registrant's
Registration Statement on Form S-1 No. 33-72900, as amended,
filed with the Securities and Exchange Commission on
December 15, 1993.
(d) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1994.
(e) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1995.
(f) Incorporated by reference to the Registrant's Proxy
Statement in connection with the 1995 Annual Meeting of
Stockholders, filed with the Securities and Exchange
Commission on January 4, 1995.
(g) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1996.
(h) Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the quarter ending
September 30, 1997.
Page 31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, as amended, the Registrant has duly
caused this Annual Report on Form 10-K for the year ended
September 30, 1997 to be signed on its behalf by the undersigned,
thereunto duly authorized.
CELESTIAL SEASONINGS, INC.
By: /S/ DARRELL F. ASKEY
--------------------
Darrell F. Askey
Vice President - Finance
and Chief Financial Officer
Date: December 15, 1997
Page 32
<PAGE>
Pursuant to the requirements of the Securities Act of 1934,
this Annual Report on Form 10-K for the year ended September 30,
1997 has been signed below by the following persons, on behalf of
the Registrant and in the capacities indicated on the date
indicated.
Signature Title Date
--------- ----- ----
/S/ MO SIEGEL Chairman December 15, 1997
- -------------
Mo Siegel
/S/ STEPHEN B. HUGHES President, December 15, 1997
- --------------------- Chief Executive Officer and
Stephen B. Hughes Director
/S/ RONALD V. DAVIS Director December 15, 1997
- -------------------
Ronald V. Davis
/S/ MARINA HAHN Director December 15, 1997
- ---------------
Marina Hahn
/S/ JOHN D. HOWARD Director December 15, 1997
- ------------------
John D. Howard
/S/ JAMES P. KELLEY Director December 15, 1997
- -------------------
James P. Kelley
/S/ LEONARD LIEBERMAN Director December 15, 1997
- ---------------------
Leonard Lieberman
/S/ DARRELL F. ASKEY Vice President - Finance and December 15, 1997
- --------------------- Chief Financial Officer
Darrell F. Askey (Principal Financial Officer)
/S/ SANFORD D. GOLDBERG Controller December 15, 1997
- ----------------------- (Principal Accounting Officer)
Sanford D. Goldberg
Page 33
<PAGE>
SCHEDULE II
CELESTIAL SEASONINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Charged to Write- End
Classification of Year Expenses offs of Year
<S> <C> <C> <C> <C>
For the year ended September 30, 1995:
Allowance for doubtful accounts. . . . $ 114 $ 120 $ (163) $ 71
Inventory reserves . . . . . . . . . . 217 845 (183) 879
For the year ended September 30, 1996:
Allowance for doubtful accounts. . . . 71 77 - 148
Inventory reserves . . . . . . . . . . 879 68 (716) 231
For the year ended September 30, 1997:
Allowance for doubtful accounts. . . . 148 17 - 165
Inventory reserves . . . . . . . . . . 231 372 (265) 338
</TABLE>
Page 34
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Celestial
Seasonings, Inc.:
We have audited the consolidated financial statements of
Celestial Seasonings, Inc. and subsidiaries (the "Company") as of
September 30, 1997 and 1996, and for each of the three years in
the period ended September 30, 1997, and have issued our report
thereon dated November 3, 1997; such consolidated financial
statements and report are included in your 1997 Annual Report to
Stockholders and are included herein. Our audits also included
the consolidated financial statement schedule of the Company,
listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Denver, Colorado
November 3, 1997
Page 35
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements No. 33-69120, 33-67356, 33-67538 and
33-89340 of Celestial Seasonings, Inc. on Forms S-8 of our reports
dated November 3, 1997 appearing in this Annual Report on Form 10-K
of Celestial Seasonings, Inc. for the year ended September 30, 1997.
Deloitte & Touche LLP
Denver, Colorado
December 19, 1997
Page 36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CELESTIAL SEASONINGS, INC.'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,829
<SECURITIES> 0
<RECEIVABLES> 7,920
<ALLOWANCES> (165)
<INVENTORY> 8,410
<CURRENT-ASSETS> 19,835
<PP&E> 27,590
<DEPRECIATION> (10,505)
<TOTAL-ASSETS> 58,371
<CURRENT-LIABILITIES> 9,247
<BONDS> 6,073
0
0
<COMMON> 41
<OTHER-SE> 43,010
<TOTAL-LIABILITY-AND-EQUITY> 58,371
<SALES> 79,039
<TOTAL-REVENUES> 79,039
<CGS> 29,606
<TOTAL-COSTS> 29,606
<OTHER-EXPENSES> 39,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 493
<INCOME-PRETAX> 9,173
<INCOME-TAX> 3,509
<INCOME-CONTINUING> 5,664
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,664
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
</TABLE>
