<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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, including zip code)
(303) 530-5300
(Registrant's telephone number, including area code)
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 [ ]
As of January 30, 1998 the Registrant had 4,132,563 shares of
Common Stock, $0.01 Par Value, outstanding. This report on Form
10-Q contains 14 pages.
<PAGE>
CELESTIAL SEASONINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION
- ------------------------------
PAGE(S)
-------
ITEM 1. FINANCIAL STATEMENTS
Unaudited consolidated income 3
statements
Unaudited consolidated balance 4
sheets
Unaudited consolidated statements of 5
cash flows
Notes to unaudited consolidated 6-7
financial statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS 8-10
OF OPERATIONS
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
PAGE 2
<PAGE>
CELESTIAL SEASONINGS, INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Case volume 1,491 1,439
Net sales $ 27,400 $ 25,673
Cost of goods sold 10,131 9,074
-------- --------
Gross profit 17,269 16,599
Operating expenses:
Selling and marketing 11,619 11,715
General and administrative 1,575 980
Amortization of intangibles 320 326
-------- --------
Total operating expenses 13,514 13,021
Operating income 3,755 3,578
Interest expense 116 181
-------- --------
Income before income taxes 3,639 3,397
Income taxes 1,401 1,359
-------- --------
Net income $ 2,238 $ 2,038
======== ========
Earnings per share:
Net income per common share $ 0.55 $ 0.50
======== ========
Weighted average common shares 4,062 4,051
======== ========
Earnings per share-assuming dilution:
Net income per common share $ 0.53 $ 0.49
======== ========
Weighted average common shares 4,250 4,122
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
PAGE 3
<PAGE>
CELESTIAL SEASONINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,794 $ 2,829
Accounts receivable, net of allowance
(Dec. - $242 Sept. - $165) 10,888 7,755
Inventory 9,714 8,410
Deferred income taxes 201 200
Prepaid expenses 385 641
-------- --------
Total current assets 25,982 19,835
Property, plant and equipment, net 16,779 17,085
Intangible assets, net 13,059 13,236
Goodwill, net 6,080 6,150
Deferred income taxes 279 263
Other assets 1,767 1,802
-------- --------
Total assets $ 63,946 $ 58,371
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,916 $ 4,160
Accrued liabilities and wages 5,882 4,584
Accrued income taxes 1,355 99
Accrued interest payable 31 31
Current portion of long-term debt 383 373
-------- --------
Total current liabilities 12,567 9,247
Long-term debt 5,975 6,073
Commitments
Stockholders' equity:
Common stock, $.01 par value -
authorized 15,000,000 shares;
Dec. - issued 4,073,865 shares,
outstanding 4,064,965 shares
Sept. - issued 4,068,491 shares,
outstanding 4,059,591 shares 41 41
Capital surplus 33,655 33,540
Retained earnings 11,883 9,645
Treasury stock, 8,900 shares of common stock at cost (175) (175)
-------- --------
Total stockholders' equity 45,404 43,051
-------- --------
Total liabilities and stockholders' equity $ 63,946 $ 58,371
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
PAGE 4
<PAGE>
CELESTIAL SEASONINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,238 $ 2,038
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 324 273
Amortization of intangibles 320 326
Amortization of financing fees 49 50
Deferred income taxes (17) 8
Changes in operating assets and liabilities:
Accounts receivable (3,133) (1,954)
Inventory (1,304) 85
Prepaid expenses 256 245
Accounts payable 756 1,833
Accrued liabilities and wages 1,298 918
Accrued income taxes 1,256 1,344
Accrued interest payable - (9)
-------- --------
Net cash provided by operating activities 2,043 5,157
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (18) (274)
Increase in intangible assets (73) (56)
(Increase) Decrease in other assets (14) 5
-------- --------
Net cash used in investing activities (105) (325)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance 115 24
Increase in long-term debt - 2,285
Reduction in long-term debt (88) (4,971)
-------- --------
Net cash provided by (used in) financing activities 27 (2,662)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,965 2,170
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,829 204
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,794 $ 2,374
======== ========
CASH PAID FOR INTEREST $ 61 $ 133
CASH PAID FOR INCOME TAXES $ 162 $ 6
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
PAGE 5
<PAGE>
CELESTIAL SEASONINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Basis of Presentation - Each fiscal quarter includes
thirteen weeks. The Company's first fiscal quarter ends on
the last Saturday of December. For presentation purposes,
however, the first fiscal quarter is presented as if it
ended on December 31.
The unaudited consolidated financial statements include
the accounts of the Company and its subsidiaries.
Intercompany balances have been eliminated in consolidation.
Interim Financial Information - The financial
information contained herein is unaudited but includes all
normal and recurring adjustments which, in the opinion of
management, are necessary to present fairly the information
set forth. The unaudited consolidated financial statements
should be read in conjunction with the consolidated
financial statements which are included in the Company's
Annual Report on Form 10-K for the year ended September 30,
1997. The Company's business is seasonal; therefore, results
for interim periods are not necessarily indicative of
results to be expected for the fiscal year of the Company
ending September 30, 1998. The Company believes that this
Quarterly Report filed on Form 10-Q is representative of its
financial position, its results of operations and its cash
flows for the periods ended December 31, 1997 and 1996
covered thereby.
Earnings Per Share - In accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per
Share," the increase in weighted average common shares -
assuming dilution is due to the application of the treasury
share method for outstanding stock options. The application
of the treasury share method resulted in an additional
188,000 and 71,000 weighted average shares for the quarters
ended December 31, 1997 and 1996, respectively.
2. DETAIL OF INVENTORY ACCOUNTS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
<S> <C> <C>
Raw materials and supplies $ 5,704 $ 4,924
Work in process 2,233 1,393
Finished goods 2,764 2,431
------- -------
10,701 8,748
Less inventory reserves 987 338
------- -------
Total $ 9,714 $ 8,410
======= =======
</TABLE>
PAGE 6
<PAGE>
3. 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.
4. SUBSEQUENT EVENT
On January 15, 1998, the Company acquired Mountain Chai
Company, a manufacturer and distributor of chai, a
traditional Indian-style tea. The effects of the transaction
are not material and are not included in the financial
statements presented.
PAGE 7
<PAGE>
CELESTIAL SEASONINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEASONALITY
The Company's business is seasonal and its quarterly results of
operations reflect the results of 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 five most recent quarters.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------
Fiscal 1998 Fiscal 1997
----------- ------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31
----------- ---------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Case sales 1,491 855 656 1,491 1,439
Net sales $ 27,400 $ 15,916 $ 11,589 $ 25,861 $ 25,673
Gross profit 17,269 9,439 6,401 16,994 16,599
Operating income 3,755 898 221 4,969 3,578
Operating margin 13.7% 5.6% 1.9% 19.2% 13.9%
Net income $ 2,238 $ 545 $ 74 $ 3,007 $ 2,038
Percent of fiscal year
net sales N/A 20.1% 14.7% 32.7% 32.5%
</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 promotional expenditures. 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 impact on case sales from
period to period due to the timing and extent of such trade
promotions can be significant.
RESULTS OF OPERATIONS
The following table is derived from the Company's unaudited
consolidated statements of operations 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)
----------------------- -------------------
Three Months Ended Three Months Ended
December 31, December 31,
------------------ ------------------
1997 1996 1997 to 1996
-------- -------- ------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 6.7%
Cost of goods sold 37.0 35.3 11.6
------ ------
Gross profit 63.0 64.7 4.0
Selling and marketing 42.4 45.6 (0.8)
General and administrative 5.7 3.8 60.7
Amortization of intangibles 1.2 1.3 (1.8)
------ ------
Operating income 13.7 14.0 4.9
Interest expense 0.4 0.7 (35.9)
------ ------
Income before income taxes 13.3 13.3 7.1
Income taxes 5.1 5.3 3.1
------ ------
Net income 8.2% 8.0% 9.8%
====== ======
</TABLE>
PAGE 8
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 1996
Net sales. Net sales for the three months ended December 31,
1997 increased 6.7% to $27.4 million from $25.7 million for the
comparable period in fiscal 1997. Case sales increased 3.6% to
1,491,000 cases from 1,439,000 cases. Net sales and case sales growth
was primarily the result of increased sales of the Company's
specialty black dry tea products. The Company's dietary supplement
products contributed net sales of approximately $0.9 million during
the first quarter of fiscal 1998, a 28.8% increase from fiscal 1997.
Gross profit. Gross profit for the three months ended December
31, 1997 increased 4.0% to $17.3 million from $16.6 million for the
comparable period in fiscal 1997. The Company's gross profit margin
as a percent of sales decreased to 63.0% from 64.7% for the
comparable prior year period. The decrease in gross profit margin as
a percent of sales is primarily due to increased sales of the
Company's lower margin specialty black tea products, as well as
increased sales in channels of distribution with lower margins.
Selling and marketing expenses. Selling and marketing expenses
for the three months ended December 31, 1997 remained relatively
unchanged from the comparable period in fiscal 1997, and decreased as
a percentage of net sales to 42.4% from 45.6%.
General and administrative expenses. General and administrative
expenses for the three months ended December 31, 1997 increased 60.7%
from the comparable period in fiscal 1997, and increased as a
percentage of net sales to 5.7% from 3.8%. The increase was
primarily due to legal fees associated with a shareholder's lawsuit
(see note 3), increased personnel costs and expenses incurred in
connection with the Company's acquisition efforts.
Amortization of intangibles. Amortization of intangibles,
including amortization of goodwill and other intangible assets for
the three months ended December 31, 1997, remained relatively
unchanged from the comparable period in fiscal 1997.
Operating income. Operating income for the three months ended
December 31, 1997, increased 4.9% to $3.8 million from $3.6 million
for the comparable period in fiscal 1997, primarily due to increased
net sales. Operating income as a percentage of net sales decreased to
13.7% from 14.0%, primarily due to increased general and
administrative expenses.
Interest expense. Interest expense for the three months ended
December 31, 1997 declined 35.9% from the comparable period in fiscal
1997 primarily as a result of reduced outstanding borrowings. The
Company extinguished its bank debt during the first quarter of fiscal
1997. Interest expense for the three months ended December 31, 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 the three months ended
December 31, 1997 increased 3.1% from the comparable period in fiscal
1997, primarily due to increased pre-tax income.
PAGE 9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The operations of the Company historically have been funded with
a combination of internally generated funds and external borrowings.
Other than funding ongoing operations, the Company's principal uses
of funds in the future will be the development of new or existing tea
and dietary supplement products and the possible acquisition of
brands, product lines or other assets. The Company expects its
primary sources of financing for its future business activities will
be funds from operations plus borrowings under credit facilities. The
Company currently believes that funds from operations and funds
expected to be available under the Company's credit facilities are
likely to be sufficient to meet operating and capital requirements
unless a significant acquisition is made. If necessary, the Company
believes it can increase availability under its credit facilities.
Cash and cash equivalents increased $2.0 million for the three
months ended December 31, 1997. Cash provided by operating activities
was $2.0 million for the three months ended December 31, 1997. The
Company's investing activities used cash of $0.1 million, while
financing activities provided cash of $27,000 for the three months
ended December 31, 1997.
The Company incurred capital expenditures of approximately
$91,000 during the three months ended December 31, 1997, including
$18,000 primarily for factory and computer equipment and $73,000 for
the design and development of new packaging artwork. The Company
currently anticipates making capital expenditures of approximately
$2.2 million in fiscal 1998.
OTHER DEVELOPMENTS
On January 15, 1998, the Company acquired Mountain Chai Company,
a manufacturer and distributor of chai, a traditional Indian-style
tea. The effects of this transaction are not material and are not
included in the financial statements presented.
The statements contained in this Quarterly Report on Form 10-Q
which are not historical facts, including, but not limited to,
statements found under the captions "Results of Operations,"
"Liquidity and Capital Resources" and "Other Developments" 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 Quarterly Report, 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 and the effect of governmental
regulation.
PAGE 10
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
The information in Note 3 to the Unaudited Consolidated Financial
Statements included in Part I is incorporated herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
Exhibit No. Description
- ----------- -----------
23.1 - Report of Deloitte & Touche LLP on consolidated
financial statements
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K for the quarter ended December 31, 1997.
PAGE 11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CELESTIAL SEASONINGS, INC.
(Registrant)
February 6, 1998 By: /s/ Darrell F. Askey
---------------------
Darrell F. Askey
Vice President - Finance and Chief Financial
Officer
(Principal Financial Officer)
PAGE 12
<PAGE>
INDEX TO EXHIBITS
The following exhibits are filed pursuant to Item 601 of Regulation S-K.
Sequentially
Exhibit Numbered
No. Description Pages
- ------- ----------- ------------
23.1 - Report of Deloitte & Touche LLP on
consolidated financial statements 14
PAGE 13
Exhibit 23.1
INDEPENDENT ACCOUNTANTS' REPORT
Celestial Seasonings, Inc.:
We have reviewed the accompanying consolidated balance sheet of
Celestial Seasonings, Inc. and subsidiaries (the "Company") as of
December 31, 1997 and the related consolidated statements of income
and cash flows for the three-month periods ended December 31, 1997
and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and of making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to such consolidated financial statements for
them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of the Company as
of September 30, 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended
(not presented herein); and in our report dated November 3, 1997, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of September 30, 1997 is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
Denver, Colorado
January 15, 1998
PAGE 14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CELESTIAL SEASONINGS, INC.'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 4794
<SECURITIES> 0
<RECEIVABLES> 11130
<ALLOWANCES> (242)
<INVENTORY> 9714
<CURRENT-ASSETS> 25982
<PP&E> 27607
<DEPRECIATION> (10828)
<TOTAL-ASSETS> 63946
<CURRENT-LIABILITIES> 12567
<BONDS> 5975
0
0
<COMMON> 41
<OTHER-SE> 45363
<TOTAL-LIABILITY-AND-EQUITY> 63946
<SALES> 27400
<TOTAL-REVENUES> 27400
<CGS> 10131
<TOTAL-COSTS> 10131
<OTHER-EXPENSES> 13514
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> 3639
<INCOME-TAX> 1401
<INCOME-CONTINUING> 2238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2238
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.53
</TABLE>
