<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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
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CELESTIAL SEASONINGS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 84-1097571
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
4600 Sleepytime Drive, Boulder CO 80301-3292
(Address of principal executive offices)
(303) 530-5300
(Registrant's telephone number, including area code)
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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 will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The approximate aggregate market value of voting and non-voting common
equity held by nonaffiliates of the registrant was $176,645,983 as of December
1, 1999.
Number of shares of Common Stock outstanding as of December 1, 1999:
8,361,940
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement to be dated on or about January 15, 2000--Incorporated into
Part III.
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PART I
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 60 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.
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, Red Zinger(R),
Raspberry Zinger(R), Tension Tamer(R), Country Peach Passion(R) and Wild Berry
Zinger(R) herb teas, a line of green teas, a line of wellness teas, a line of
organic teas, and a line of specialty black teas.
The Company's tea business began in the early 1970s. In 1984, the Company
was acquired by Kraft, Inc., and in 1988, the Company was acquired in a
management buyout. The Company completed its initial public offering of common
stock during 1993.
During 1995, the Company entered the dietary supplement market. In 1997,
the Company introduced a line of herbal supplements under the Celestial(TM)
Herbal Extracts name. The Company developed a more extensive line of dietary
supplement products under the Celestial Seasonings(R) brand during 1998.
The Tea Industry
The domestic tea industry consists of a number of general product
categories, including herb tea, green tea, wellness tea, specialty black tea,
commodity black tea, instant tea and ready-to-drink tea. The Company believes,
based on data derived from Information Resources, Inc. and the Company's
estimates, that annual domestic retail tea sales, excluding ready-to-drink
tea, are approximately $1.5 billion.
The Dietary Supplements Industry
The dietary supplements industry consists of three broad categories:
vitamins, minerals and herbal supplements. The Company believes, based on data
from Information Resources, Inc. and the Company's estimates, that annual
domestic retail sales of dietary supplements are approximately $11 billion.
Sales in the dietary supplements industry have been flat over the past year,
while the herbal supplements category has experienced a slight decline in
sales.
Products
The Company's tea products contain no artificial preservatives, are made
from high-quality, natural ingredients and are generally offered in 20 and 40
count packages sold in grocery, natural foods and other retail stores.
Industry sales of herb tea have grown only moderately in recent years, but
green tea has grown 70% over the past year to become a $70 million category.
Additionally, wellness teas have emerged as a high growth specialty tea
category in 1999 with sales up 27% over the past year and sales volume
reaching $22 million. By introducing new teas, such as green and wellness
teas, and overall category growth, the Company's sales growth in the beverage
segment was approximately 28% during 1999.
The following table sets forth the amounts and percentages of the Company's
net sales for each major business segment during the last three years. Changes
in net sales 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.
2
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Company Net Sales By Business Segment
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1999 1998 1997
--------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Beverages....................... $102,336 89.0% $ 79,875 78.2% $72,205 91.4%
Dietary supplements............. 9,152* 8.0 18,739 18.3 3,789 4.8
Other........................... 3,461 3.0 3,583 3.5 3,045 3.8
-------- ----- -------- ----- ------- -----
Total net sales................. 114,949 100.0% $102,197 100.0% $79,039 100.0%
===== ======== ===== ======= =====
Non-recurring item.............. (5,098)
--------
Total net sales................. $109,851
========
</TABLE>
- --------
* $4,054 after non-recurring item.
Beverages
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), Chamomile, Lemon Zinger(R), Peppermint,
Raspberry Zinger(R), Tension Tamer(R), Wild Berry Zinger(R), Country Peach
Passion(R), Mandarin Orange Spice(R) and Red Zinger(R).
Green Tea. The Company expanded its line of green teas during 1998. The
line includes Authentic Green Tea, Decaffeinated Green Tea, Emerald Gardens(R)
Green Tea, Honey Lemon Ginseng Green Tea and Misty Jasmine(TM) Green Tea.
During 1999 the Company added Decaffeinated Green Mandarin Orchard Tea and
Decaffeinated Mint Green Tea to this line. Net sales of green tea grew 206% in
1999.
Wellness Tea. During 1998, the Company expanded its line of wellness teas,
some of which correspond to its line of dietary supplement products. These
products provide the healthful benefits of the Company's dietary supplement
line in an alternative format. This product line includes Sleepytime EXTRA,
Tension Tamer EXTRA, Detox A.M.(TM), Diet Partner, Echinacea, Echinacea
Complete Care(TM), GingerEase(TM), GinkgoSharp(TM), Ginseng Energy(TM),
LaxaTea(TM) and Mood Mender(TM). This product line experienced 195% growth in
net sales during 1999.
Specialty Black Tea. The Company's specialty black teas are made
exclusively from natural ingredients. Black tea products include Earl Grey,
English Breakfast, Fast Lane(R), Vanilla Maple, Ceylon Apricot Ginger and
Black Raspberry.
Dietary Supplements
During 1998, the Company launched a line of dietary supplement products
under the Celestial Seasonings brand. In 1999, the Company reformulated its
dietary supplements line using its new Standardized Whole Herb technology (as
described in "Research and Development," below) and also moved from 30 count
packaging to 60 count packaging. The current dietary supplement products
include a line of blends and a line of single herb extracts, all of which
contain high-quality standardized herbs and extracts. The Company's dietary
supplement products include St. John's Wort, Ginseng Energy(TM), Mood
Mender(TM), Tension Tamer(R), Sleepytime Extra(R), Ginkgo Biloba,
GinkgoSharp(R), Echinacea Complete Care(TM), Prostate Health and Joint
Fitness. Additionally, the Company markets a line of Celestial Seasonings(R)
Certified Organic Standardized herbal supplements to the natural foods market.
The transition to the reformulated dietary supplements line resulted in a
non-recurring charge to sales of $5.1 million, during the fourth quarter of
fiscal 1999, which represents the Company's estimate of total returns of its
discontinued 30 count supplements products.
3
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Other
Other includes direct retail sales by the Company, royalty income and sales
of other miscellaneous products. Direct sales by the Company totaled
$3,258,000 in 1999, primarily from its on-site retail store and mail order
catalogue. Total royalty income in 1999 was $203,000 primarily 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 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.
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. During the years ended September 30, 1999, 1998 and 1997, amounts
expensed for Company-sponsored research and development activities were
$1,254,000, $1,003,000 and $790,000, respectively.
During 1999, the Company's research and development department developed a
new technology for its dietary supplement products. This Standardized Whole
Herb technology combines the scientific reliability of standardized extracts
with the natural synergistic benefits of the whole plant. The resulting
product contains a full spectrum of efficacious compounds and maintains the
same standardization level as products containing only standardized extracts.
This new technology, therefore, delivers a significantly superior product at a
substantially lower cost. The Company has just completed its first successful
clinical trial on echinacea, indicating that the Standardized Whole Herb
technology is superior to conventional standardized extract.
Sales and Distribution
The Company's products are sold in all 50 states and approximately 50
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
$10,955,000, $9,672,000 and $8,807,000 in 1999, 1998 and 1997, respectively.
The major domestic channels of distribution for the Company's products are
supermarkets and grocery stores, natural foods markets and mass merchandisers.
During 1999, 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 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, beverage
and herbal supplement 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 and magazine advertising, couponing and other trial use
programs, with the balance spent on trade advertising and promotion, including
slotting fees, cooperative advertising and feature advertising.
4
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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.
The Company purchases most of its packaging materials domestically. The
Fort James Corporation, a packaging materials supplier, was the largest single
supplier in 1999. The ability of the Company to assure continuing production
of bagged tea depends upon the continuing access to tea bag paper. The Company
currently obtains most of its tea bag paper from a single domestic supplier,
which has proven to be a reliable source of quality paper. Alternative sources
for tea bag paper have been utilized in the past and are available for future
purchases.
Beverage 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 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. During 1999, the Company installed a new production line at a cost
of approximately $3.5 million, which increased its production capacity by
approximately 30%. This should provide the Company with sufficient production
capacity for the foreseeable future. The Company believes that its tea bagging
lines are among the most automated in the tea industry.
Dietary Supplement Production. The Company's dietary supplement product
lines are manufactured by independent co-packers located in the United States.
All co-packing locations are inspected by the Company. All lots of finished
product are statistically sampled and tested for quality. This testing
includes marker compounds, microbiological load and packaging quality. The
Company believes that its network of co-packers has 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), Wild
Berry Zinger(R), Tension Tamer(R), Country Peach Passion(R), Raspberry
Zinger(R) and GinkgoSharp(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
5
<PAGE>
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, green tea, wellness tea and specialty black tea.
The Company's specialty herb tea products, like other specialty tea products,
are priced higher than most commodity 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.
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 segment of the dietary supplement category. Sales of herbal
supplements have declined over the past year. The category consists of several
competitors in a broad spectrum of distribution channels. Private label and
Rexall Sundown, Inc. dominate the market on a national basis. Direct mail,
regional and private label competition is significant.
Employees
As of September 30, 1999, the Company employed 283 full-time employees. Of
this number, 79 were in management and sales, 73 were in administrative or
clerical positions and 131 were production and service employees. The Company
has implemented a number of programs to maintain a high level of employee
morale and productivity, 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 ("DSHEA"), which went into
effect in March 1999. DSHEA defines dietary supplements as a new category of
food, separate from conventional food. DSHEA requires specific nutritional
labeling requirements for dietary supplements and permits substantiated,
truthful and non-misleading statements of nutritional support to be made in
labeling, such as statements describing general well-being resulting from
consumption of a dietary ingredient, or the role of a nutrient or dietary
ingredient in affecting or maintaining a structure or function of the body.
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.
6
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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 Company leases 60,000 square feet of warehouse space in Boulder, Colorado
which is used for the storage and shipment of its products. The lease expires
in 2004.
ITEM 3.--LEGAL PROCEEDINGS
The information in Note 7 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.
7
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PART II
ITEM 5.--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the Nasdaq-Amex Market Group
("Nasdaq-Amex") under the symbol "CTEA." The following table sets forth the
high and low sales prices for the Common Stock for the periods indicated as
reported by Nasdaq-Amex. On December 1, 1999, the last reported sale price of
the Common Stock was $21.13 per share.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998:
First Quarter.............................................. $16.25 $13.19
Second Quarter............................................. $20.63 $15.25
Third Quarter.............................................. $28.81 $20.00
Fourth Quarter............................................. $26.75 $17.38
1999:
First Quarter.............................................. $26.75 $14.06
Second Quarter............................................. $31.75 $20.00
Third Quarter.............................................. $22.63 $14.00
Fourth Quarter............................................. $23.38 $16.50
</TABLE>
As of December 1, 1999, there were approximately 370 holders of record of
the Company's Common Stock. The Company declared a two-for-one stock split
effected in the form of a 100% common stock dividend during September 1998. All
sales prices for the Company's Common Stock are adjusted for the stock
dividend.
The Company has not paid cash dividends during the last five years. 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.
8
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ITEM 6.--SELECTED FINANCIAL DATA
The following data for each of the five fiscal years ended September 30, of
the specified year, is derived from the consolidated financial statements of
the Company. 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)
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Net sales.......................... $114,949 $102,197 $79,039 $72,998 $70,104
Non-recurring item--product return
program........................... (5,098) -- -- -- --
-------- -------- ------- ------- -------
109,851 102,197 79,039 72,998 70,104
-------- -------- ------- ------- -------
Cost of goods sold.................. 42,915 36,638 29,606 28,545 27,349
Non-recurring item--product return
program............................ 4,007 -- -- -- --
-------- -------- ------- ------- -------
46,922 36,638 29,606 28,545 27,349
-------- -------- ------- ------- -------
Gross profit........................ 62,929 65,559 49,433 44,453 42,755
Operating expenses:
Selling and marketing.............. 50,579 46,683 33,915 30,071 27,323
General and administrative......... 6,178 6,127 4,556 3,899 4,429
Non-recurring item--lawsuit
settlement........................ 1,200 -- -- -- --
Amortization of intangibles........ 1,202 1,308 1,296 1,493 1,823
-------- -------- ------- ------- -------
Operating income.................... 3,770 11,441 9,666 8,990 9,180
Interest expense.................... 746 631 493 874 1,264
-------- -------- ------- ------- -------
Income before income taxes.......... 3,024 10,810 9,173 8,116 7,916
Income taxes........................ 537 4,054 3,509 3,093 2,049
-------- -------- ------- ------- -------
Net income.......................... $ 2,487 $ 6,756 $ 5,664 $ 5,023 $ 5,867
======== ======== ======= ======= =======
Net income per common share--basic
(1)................................ $ 0.30 $ 0.82 $ 0.70 $ 0.62 $ 0.73
======== ======== ======= ======= =======
Net income per common share--
assuming dilution (1).............. $ 0.28 $ 0.77 $ 0.68 $ 0.61 $ 0.72
======== ======== ======= ======= =======
Net income per common share before
non-recurring
items--assuming dilution (1)....... $ 0.95 $ 0.77 $ 0.68 $ 0.61 $ 0.72
======== ======== ======= ======= =======
Weighted average common shares--
basic (1).......................... 8,320 8,250 8,107 8,088 8,053
Weighted average common shares--
assuming
dilution (1)....................... 8,848 8,732 8,281 8,230 8,172
Balance Sheet Data:
Working capital.................... $ 18,892 $ 23,131 $10,588 $ 7,882 $ 6,239
Total assets....................... 80,847 82,647 58,371 54,903 53,327
Long-term debt..................... 10,455 10,750 6,073 9,057 12,768
Stockholders' equity............... 54,488 51,320 43,051 37,217 31,909
Other Data:
Earnings before interest, taxes,
depreciation and amortization
("EBITDA")........................ $ 6,735 $ 14,055 $12,098 $11,551 $11,888
</TABLE>
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(1) During September 1998, the Company declared a two-for-one stock split
effected in the form of a 100% common stock dividend. All per share and
weighted average common share information has been restated to reflect the
stock dividend.
9
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ITEM 7.--MANAGEMENT'S DISCUSSION AND ANALYSISOF 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. All percentages stated represent
calculations before the recognition of non-recurring items.
<TABLE>
<CAPTION>
Percentage of Net
Sales
-------------------
Year Ended Period-to-Period
September 30, Increase/(Decrease)
------------------- ----------------------
1999 1998
Compared Compared
1999 1998 1997 to 1998 to 1997
----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................ 100.0% 100.0% 100.0% 12.5% 29.3%
Cost of goods sold....... 37.3 35.8 37.5 17.1 23.8
----- ----- -----
Gross profit............. 62.7 64.2 62.5 9.9 32.6
Operating expenses....... 50.4 53.0 50.3 7.1 36.1
----- ----- -----
Operating income......... 12.3 11.2 12.2 23.0 18.4
Interest expense......... 0.7 0.6 0.6 18.2 28.0
----- ----- -----
Income before income
taxes................... 11.6 10.6 11.6 23.3 17.8
Income taxes............. 4.3 4.0 4.4 21.7 15.5
----- ----- -----
Net income............... 7.3% 6.6% 7.2% 24.3 19.3
===== ===== =====
</TABLE>
Fiscal 1999 Compared to Fiscal 1998.
Net sales. Net sales for 1999, before the non-recurring item of $5.1
million, increased 12.5% to $114.9 million from $102.2 million in 1998. After
the non-recurring item, net sales for 1999 were $109.8 million, which
represents a 7.5% increase from $102.0 million in 1998. Net sales of the
Company's beverage products increased 28.1% to $102.3 million from $79.9
million in 1998. Net sales growth of beverage products was primarily the result
of increased sales of the Company's green and wellness tea products. The
Company's dietary supplements products contributed net sales of approximately
$9.2 million, before the non-recurring item, for 1999, as compared to $18.7
million in 1998, a decrease of 51.2%. After the non-recurring item, net sales
of dietary supplements were $4.1 million in 1999, a 78.4% decrease from 1998
net sales of $18.7 million. The decrease in supplements sales was primarily the
result of three factors: (1) the Company's transition from 30 count to 60 count
in product packaging resulted in a period of downtime for sales; (2) the
Company offered lower prices in an effort to move the 30 count inventory, and
(3) the total dietary supplements market experienced a decline.
Gross profit. Gross profit for 1999, before non-recurring items of $9.1
million, increased 9.9% to $72.0 million from $65.6 million in 1998. The
Company's gross profit margin as a percent of net sales decreased to 62.7% from
64.2%. The Company experienced decreased margins in its dietary supplements
segment due to discounts offered and higher manufacturing cost due to a change
in product mix. Gross profit margin for the Company's beverage segment remained
relatively unchanged from 1998.
Operating expenses. Total operating expenses, before the non-recurring item
of $1.2 million, for 1999 increased 7.1% to $58.0 million from $54.1 million in
1998, and as a percentage of net sales decreased to 50.4% from 53.0%. The
increase in operating expenses was primarily due to increased trade promotion
expenses associated with ongoing development of the Company's beverage products
and increased advertising expenses associated with building its brand
awareness.
Operating income. Operating income for 1999, before non-recurring items,
increased 23.0% to $14.1 million from $11.4 million in 1998, and as a
percentage of net sales increased to 12.3% from 11.2%. The
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increase was primarily due to increased sales, particularly of green and
wellness teas, and increased gross profit and was partially offset by increased
operating expenses.
Interest expense. Interest expense for 1999 increased 18.2 % from 1998
primarily as a result of increased borrowings during the year under the
Company's credit facility in support of inventories of its dietary supplement
products and accounts receivable.
Non-recurring items. During the fourth quarter of 1999, the Company decided
to cease production of its 30 count supplements product line and focus it
efforts on the new 60 count product line which utilizes a new Standardized
Whole Herb technology. In conjunction with the discontinuance of the 30 count
products, the Company decided to offer a return program to its customers.
Accordingly, the Company reversed sales and cost of sales for the estimated 30
count products still with customers and recorded a writedown of inventory on
hand and expected to be returned. The effect of non-recurring items on net
sales and cost of goods sold for the year ended September 30, 1999 is as
follows (in thousands):
<TABLE>
<S> <C>
Net sales...................... $114,949
Estimated returns.............. (5,098)
--------
Total net sales................ $109,851
========
Cost of goods sold............. $ 42,915
Estimated returns.............. (2,549)
Inventory writeoff............. 6,556
--------
Total cost of goods sold....... $ 46,922
========
</TABLE>
Additionally, the Company entered into a settlement agreement relating to a
shareholder lawsuit (See Note 7 to the Company's Consolidated Financial
Statements included in Part II) resulting in a one-time charge of $1,200,000.
Income taxes. The effective income tax rate for 1999 was 17.8% as compared
to 37.5% in 1998. The decreased rate was primarily due to additional tax
deductions generated from the Company's contributions of 30 count dietary
supplement products to a qualified organization, which provided the products to
the needy, ill and children.
Fiscal 1998 Compared to Fiscal 1997
Net sales. Net sales for 1998 increased 29.3% to $102.2 million from $79.0
million in 1997. Net sales growth was primarily the result of increased sales
of the Company's dietary supplement products and the expansion of a line of
green tea products. The Company's dietary supplement products contributed net
sales of $18.7 million for 1998, as compared to $3.8 million in 1997. This
increase was partially offset by a decrease in sales of the Company's iced and
specialty black tea products.
Gross profit. As a result of the Company's increase in net sales, gross
profit for 1998 increased 32.6% to $65.6 million from $49.4 million in 1997.
The Company's gross profit margin increased to 64.2% from 62.5%. The increase
in gross margin was primarily due to decreased sales of the Company's iced tea
products, which have lower margins than the Company's hot tea and dietary
supplement products, favorable pricing on key herbs used in the Company's
products, and the impact of greater utilization of the Company's manufacturing
facility.
Operating expenses. Operating expenses for 1998 increased 36.1% to $54.1
million from $39.8 million in 1997, and increased as a percentage of net sales
to 53.0% from 50.3%. The increase in operating expenses primarily was due to
increased personnel costs, trade and consumer promotion expenses associated
with the introduction of the Company's dietary supplements line and legal fees
associated with a shareholder's lawsuit (see note 6 of Notes to Consolidated
Financial Statements).
11
<PAGE>
Operating income. Operating income for 1998 increased 18.4% to $11.4 million
from $9.7 million in 1997. The increase was primarily due to increased net
sales and improved gross profit margins, and was partially offset by increased
selling and marketing, and general and administrative expenses. Operating
income as a percentage of net sales decreased to 11.2% from 12.2% primarily due
to increased selling and marketing expenses.
Interest expense. Interest expense for 1998 increased 28.0% from 1997
primarily as a result of increased borrowings under the Company's credit
facility. Borrowings were necessary to fund increased working capital
requirements, primarily in the form of accounts receivable and inventory,
associated with the introduction of the Company's dietary supplements line.
Income taxes. Income tax expense for 1998 increased 15.5% from 1997 due to
increased pretax income.
Net income. Net income for 1998 increased 19.3% to $6.8 million from $5.7
million in 1997. This increase was primarily attributable to increased net
sales and improved gross profit margins. Net income as a percentage of net
sales decreased to 6.6% from 7.2% primarily due to increased selling and
marketing expenses.
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>
1999 Quarters Ended
dollars and cases in thousands
---------------------------------------------------------
Sept. 30 Sept. 30
after non- before non-
recurring items recurring items June 30 Mar. 31 Dec. 31
--------------- --------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Case volume............. 1,194 1,267 1,229 1,733 1,896
Net sales............... $19,876 $24,974 $20,737 $31,576 $37,662
Gross profit............ 5,321 14,426 12,705 21,244 23,659
Operating income
(loss)................. (7,061) 3,244 2,054 4,367 4,410
Operating margin........ (35.5)% 12.9% 9.9% 13.8% 11.7%
Net income (loss)....... $(3,933) $ 1,977 $ 1,202 $ 2,613 $ 2,605
Percent of fiscal year
net sales.............. N/A 21.7% 18.0% 27.5% 32.8%
</TABLE>
<TABLE>
<CAPTION>
1998 Quarters Ended
dollars and cases in thousands
----------------------------------
Sept.
30 June 30 Mar. 31 Dec. 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
Case volume................................. 1,120 857 1,611 1,491
Net sales................................... $23,073 $19,395 $32,329 $27,400
Gross profit................................ 14,586 12,573 21,131 17,269
Operating income............................ 1,782 355 5,549 3,755
Operating margin............................ 7.7% 1.8% 17.2% 13.7%
Net income.................................. $ 1,053 $ 124 $ 3,341 $ 2,238
Percent of fiscal year net sales............ 22.6% 19.0% 31.6% 26.8%
</TABLE>
Quarterly fluctuations in the Company's sales volume and operating results
are due to a number of factors, including the timing of trade promotions,
advertising and consumer promotions. The impact on sales volume and operating
results, due to the timing and extent of these factors, can be significant.
12
<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 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 in the short and
long term, unless a significant acquisition is made.
On November 2, 1998, the Company entered into a new three year credit
facility which includes a revolving credit loan of up to $15,000,000 (the
"Revolving Loan"), and a standby letter of credit commitment in the approximate
amount of $7,000,000 (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 currently bear
interest at rates ranging from LIBOR plus 0.75% to the Federal Funds Rate plus
1.00%, subject to increases if the Company fails to achieve certain future
operating results. The Letter of Credit Facility includes annual financing fees
of 0.50%, and loans resulting from a draw under the Letter of Credit Facility
bear interest at a rate equal to the interest rate then applicable to the
Revolving Loan. During 1999, the interest rate payable under the credit
facility ranged from 5.1 to 6.5 percent. The Revolving Loan is due on November
2, 2001 and the Letter of Credit Facility expires on November 2, 2002. The
credit facility imposes certain ratio maintenance requirements on the Company,
including minimum EBITDA levels, interest coverage, current ratio and net
worth, and certain restrictive covenants including limitations on indebtedness,
liens, sales of assets, mergers and investments. On September 30, 1999, the
Company was in default of the required EBITDA level for the year ended
September 30, 1999, due to the non-recurring items recognized during the fourth
quarter. The Company subsequently received a waiver from its debt holder.
Future borrowings under the credit facility will provide for working capital
and may be used for acquisition financing.
Cash and cash equivalents decreased by $1.9 million in 1999. Cash provided
by operating activities of the Company was $11.9 million. The Company's
investing activities used cash of $10.3 million for 1999, primarily for capital
expenditures, including $6.3 million primarily for factory and computer
equipment and $0.4 million for the design and development of new packaging
artwork. The Company anticipates making capital expenditures of approximately
$5.0 million in 2000. Financing activities of the Company used cash of $3.5
million for 1999.
Backlog
At the end of 1999 and 1998, the Company's order backlog was immaterial.
Year 2000 Compliance
A number of computer programs are written using two digits rather than four
to define the applicable year. As a result, computer programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company, after an inventory of its business systems and business
interactions, has executed a plan to prepare its systems and business
relationships for the Year 2000. The Company believes all internal components
of its systems are Year 2000 compliant. The Company has developed a contingency
plan which includes non-computerized backup systems and will remain in effect
until the year 2000.
The ability of the Company to achieve Year 2000 compliance is, however,
highly dependent upon compliance of the systems of the Company's customers,
suppliers and other third parties with which the Company has business
relationships. Through communication with key supply chain partners the Company
believes that most, if not all are Year 2000 compliant.
13
<PAGE>
The total cost to the Company of Year 2000 compliance activities has not yet
been, and is not anticipated to be, material to its financial position or
results of operations in any given year. These costs, and the date on which the
Company plans to complete the Year 2000 modification and testing processes, are
based on management's best estimates, which were derived using numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
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," "Liquidity and Capital
Resources," "Backlog" and "Year 2000 Compliance" 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, consumer acceptance of new products, general economic
conditions, consumer trends, costs and availability of raw materials and
management information systems, competition, litigation and the effect of
governmental regulation. The Company disclaims any intention or obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 7A.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<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,
1999 and 1998 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Denver, Colorado
November 3, 1999
15
<PAGE>
Celestial Seasonings, Inc.
Consolidated Income Statements
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net sales........................................... $114,949 $102,197 $79,039
Non-recurring item--product return program (Note
3)................................................. (5,098) -- --
-------- -------- -------
109,851 102,197 79,039
-------- -------- -------
Cost of goods sold.................................. 42,915 36,638 29,606
Non-recurring item--product return program (Note
3)................................................. 4,007 -- --
-------- -------- -------
46,922 36,638 29,606
-------- -------- -------
Gross profit...................................... 62,929 65,559 49,433
Operating expenses:
Selling and marketing.............................. 50,579 46,683 33,915
General and administrative......................... 6,178 6,127 4,556
Non-recurring item--lawsuit settlement (Notes 3 and
7)................................................ 1,200 -- --
Amortization of intangibles........................ 1,202 1,308 1,296
-------- -------- -------
Total operating expenses.......................... 59,159 54,118 39,767
Operating income.................................... 3,770 11,441 9,666
Interest expense.................................... 746 631 493
-------- -------- -------
Income before income taxes.......................... 3,024 10,810 9,173
Income taxes........................................ 537 4,054 3,509
-------- -------- -------
Net income.......................................... $ 2,487 $ 6,756 $ 5,664
======== ======== =======
Earnings per share--basic:
Net income per common share........................ $ 0.30 $ 0.82 $ 0.70
======== ======== =======
Weighted average common shares..................... 8,320 8,250 8,107
======== ======== =======
Earnings per share--assuming dilution:
Net income per common share........................ $ 0.28 $ 0.77 $ 0.68
======== ======== =======
Weighted average common shares..................... 8,848 8,732 8,281
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Celestial Seasonings, Inc.
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 637 $ 2,533
Accounts receivable, net of allowance for
doubtful accounts
(1999--$727, 1998--$534)..................... 16,885 15,156
Inventory..................................... 10,721 23,185
Deferred income taxes......................... 3,461 93
Prepaid income taxes.......................... 524 630
Prepaid expenses.............................. 2,568 2,111
------- -------
Total current assets......................... 34,796 43,708
Property, plant and equipment, net............. 23,540 19,240
Intangible assets, net......................... 12,078 12,598
Goodwill, net.................................. 5,590 5,870
Deferred income taxes.......................... 291 217
Other assets................................... 4,552 1,014
------- -------
Total assets................................... $80,847 $82,647
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 6,587 $ 8,656
Accrued liabilities and wages................. 8,883 7,551
Accrued interest payable...................... 59 47
Current portion of long-term debt............. 375 4,323
------- -------
Total current liabilities.................... 15,904 20,577
Long-term debt................................. 10,455 10,750
Commitments
Stockholders' equity:
Common stock, $.01 par value--authorized
15,000,000 shares;
1999--issued 8,369,135 shares, outstanding
8,351,335 shares;
1998--issued 8,322,528 shares, outstanding
8,304,728 shares............................ 84 83
Capital surplus............................... 35,691 35,011
Retained earnings............................. 18,888 16,401
Treasury stock, 17,800 shares of common stock
at cost...................................... (175) (175)
------- -------
Total stockholders' equity................... 54,488 51,320
------- -------
Total liabilities and stockholders' equity.... $80,847 $82,647
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
Celestial Seasonings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 2,487 $ 6,756
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation.............................................. 1,763 1,306
Amortization of intangibles............................... 1,202 1,308
Amortization of financing fees............................ 211 194
Deferred income taxes..................................... (3,442) 153
Loss on disposal of assets................................ 63 --
Changes in operating assets and liabilities:
Accounts receivable....................................... (1,729) (7,401)
Inventory................................................. 12,464 (14,775)
Prepaid income taxes...................................... 106 --
Prepaid expenses.......................................... (457) (1,470)
Accounts payable.......................................... (2,069) 4,496
Accrued liabilities and wages............................. 1,332 2,967
Accrued income taxes...................................... -- (729)
Accrued interest payable.................................. 12 16
-------- --------
Net cash provided by (used in) operating activities...... 11,943 (7,179)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of asset................................ 148 --
Capital expenditures....................................... (6,274) (3,461)
Increase in intangible assets.............................. (402) (390)
(Increase) decrease in other assets........................ (3,749) 594
-------- --------
Net cash used in investing activities.................... (10,277) (3,257)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance........................ 681 1,513
Increase in long-term debt................................. 13,075 9,000
Reduction in long-term debt................................ (17,318) (373)
-------- --------
Net cash (used in) provided by financing activities...... (3,562) 10,140
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (1,896) (296)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 2,533 2,829
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 637 $ 2,533
======== ========
CASH PAID FOR INTEREST...................................... $ 511 $ 420
CASH PAID FOR INCOME TAXES.................................. $ 3,873 $ 4,630
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Celestial Seasonings, Inc.
Consolidated Statements of Stockholders' Equity
(dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
---------------- Capital Retained --------------- Total
Shares Amount Surplus Earnings Shares Amount Equity
--------- ------ ------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30,
1996................... 8,108,944 $81 $33,250 $ 3,981 (10,000) $ (95) $37,217
Issuance of common
stock................. 28,038 -- 250 250
Acquisition of treasury
stock................. (7,800) (80) (80)
Net income............. 5,664 5,664
--------- --- ------- ------- ------- ----- -------
BALANCE, SEPTEMBER 30,
1997................... 8,136,982 81 33,500 9,645 (17,800) (175) 43,051
Issuance of common
stock................. 185,546 2 1,511 1,513
Net income............. 6,756 6,756
--------- --- ------- ------- ------- ----- -------
BALANCE, SEPTEMBER 30,
1998................... 8,322,528 83 35,011 16,401 (17,800) (175) 51,320
Issuance of common
stock................. 46,607 1 680 681
Net income............. 2,487 2,487
--------- --- ------- ------- ------- ----- -------
BALANCE, SEPTEMBER 30,
1999................... 8,369,135 $84 $35,691 $18,888 (17,800) $(175) $54,488
========= === ======= ======= ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<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 60 tea varieties under the
Celestial Seasonings(R) brand. Celestial Seasonings' tea products are sold in
substantially all of the major supermarkets, grocery stores and natural foods
markets in the United States. Additionally, the Company markets a line of
dietary supplements under the Celestial Seasonings brand. The Company currently
markets approximately 20 products in major supermarkets, natural foods markets,
drug stores and mass merchandisers 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. 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 528,000, 482,000 and 174,000 weighted
average shares for 1999, 1998 and 1997, respectively. During September 1998,
the Company declared a two-for-one stock split effected in the form of a 100%
common stock dividend. All share and per share information has been restated to
reflect the stock dividend.
Revenue recognition. The Company recognizes revenue from sales of beverages,
dietary supplements and other products at the time of shipment of finished
goods or direct sale of merchandise. The Company generally provides allowances
for estimated returns in the period in which the sale is recognized.
Export sales. Net sales include total export sales of $10,955,000,
$9,672,000 and $8,807,000 in 1999, 1998 and 1997, respectively.
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.
20
<PAGE>
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 $2,068,000 and $1,788,000
respectively, at September 30, 1999 and 1998.
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 1999, 1998 or 1997.
Research and development costs. Research and development costs are charged
to expense when incurred. During the years ended September 30, 1999, 1998 and
1997, amounts expensed for Company-sponsored research and development
activities were $1,254,000, $1,003,000 and $790,000, 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, 1999, 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 value 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, 1999 and 1998 approximate fair
value due to their short-term maturities. The carrying value of long-term debt
at September 30, 1999 and 1998 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. The Company has two reportable segments which are
segregated by product line: beverages and dietary supplements. The Company has
slightly redefined its segments to follow changing market data. Wellness teas
have emerged as a more defined category in the specialty tea market. This has
enabled management to look at the Company's wellness tea line with the same
marketing data reports as its other beverage products. As a result of this
change, the beverages segment includes all of the Company's tea products, while
the dietary supplements segment includes all of the Company's supplement
products in capsule form. Additionally, due to the Company's experience with
its 30 count dietary supplement products over the past year, management wants
to more closely watch the performance of the new 60 count dietary supplements
line. Redefining the Company's reportable segments will allow management to
accomplish this objective. Segment information for the prior years has been
restated to conform with current year presentation. Depreciation and
amortization expense for the Company's dietary supplements segment is
immaterial. The Company's beverage products are sold in all 50 states and
approximately 50 countries, while its dietary supplement products are primarily
sold in the United States. Other includes corporate general and administrative
expense and the Company's direct retail business.
21
<PAGE>
Financial data related to the Company's reportable segments is as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net sales:
Beverages................................ $102,336 $ 79,875 $72,205
Dietary supplements (net of non-recurring
item in 1999 of $5,098)................. 4,054 18,739 3,789
Other.................................... 3,461 3,583 3,045
-------- -------- -------
Total net sales......................... $109,851 $102,197 $79,039
======== ======== =======
Operating income (loss):
Beverages................................ $ 29,185 $ 21,084 $14,559
Dietary supplements (net of non-recurring
item in 1999 of $9,105)................. (17,601) (3,971) (612)
Other.................................... (7,814)* (5,672) (4,281)
-------- -------- -------
Total operating income.................. 3,770 11,441 9,666
Interest expense.......................... 746 631 493
-------- -------- -------
Income before income taxes................ $ 3,024 $ 10,810 $ 9,173
======== ======== =======
Assets:
Beverages................................ $ 68,784 $ 57,314 $48,859
Dietary supplements...................... 4,771 19,987 3,982
Other.................................... 7,292 5,346 5,530
-------- -------- -------
Total assets............................ $ 80,847 $ 82,647 $58,371
======== ======== =======
</TABLE>
- --------
* Includes lawsuit settlement of $1,200,000 (See Notes 3 and 7)
3. Non-recurring Items
During the fourth quarter of 1999, the Company decided to cease production
of its 30 count supplements product line and focus it efforts on the new 60
count product line which utilizes a new Standardized Whole Herb technology. In
conjunction with the discontinuance of the 30 count products, the Company
decided to offer a return program to its customers. Accordingly, the Company
reversed sales and cost of sales for the estimated 30 count products still with
customers and recorded a writedown of inventory on hand and expected to be
returned. The effect of non-recurring items on net sales and cost of goods sold
for the year ended September 30, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net sales..................................................... $114,949
Estimated returns............................................. (5,098)
--------
Total net sales............................................... $109,851
========
Cost of goods sold............................................ $ 42,915
Estimated returns............................................. (2,549)
Inventory writeoff............................................ 6,556
--------
Total cost of goods sold...................................... $ 46,922
========
</TABLE>
Additionally, the Company entered into a settlement agreement relating to a
shareholder lawsuit (See Note 7) resulting in a one-time charge of $1,200,000.
22
<PAGE>
4. Detail of Certain Balance Sheet Accounts
(in thousands)
<TABLE>
<CAPTION>
September 30,
---------------
1999 1998
------- -------
<S> <C> <C>
Inventory:
Raw materials & supplies................................. $ 7,901 $10,941
Work in process.......................................... 1,626 2,047
Finished goods........................................... 4,117 10,406
------- -------
13,644 23,394
Less inventory reserves.................................. 2,923 209
------- -------
Total.................................................. $10,721 $23,185
======= =======
Property, plant & equipment:
Land..................................................... $ 5,931 $ 5,931
Building................................................. 9,276 9,125
Machinery & equipment.................................... 20,701 15,592
Furniture & fixtures..................................... 1,134 414
------- -------
37,042 31,062
Less accumulated depreciation............................ 13,502 11,822
------- -------
Total.................................................. $23,540 $19,240
======= =======
Intangible assets:
Trademarks & copyrights.................................. $ 9,848 $ 9,848
Grocery shelf space...................................... 5,700 5,700
Manufacturing process & workforce........................ 4,879 4,879
Artwork & plates......................................... 5,762 5,362
Other.................................................... 1,570 1,570
------- -------
27,759 27,359
Less accumulated amortization............................ 15,681 14,761
------- -------
Total.................................................. $12,078 $12,598
======= =======
Other assets:
Financing fees........................................... $ 1,891 $ 1,830
Less accumulated amortization............................ 1,445 1,234
------- -------
446 596
Trade credits............................................ 3,786 --
Other.................................................... 320 418
------- -------
Total.................................................. $ 4,552 $ 1,014
======= =======
</TABLE>
23
<PAGE>
5. Long-term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------
1999 1998
------- -------
<S> <C> <C>
Revolving Credit Facility payable to banks............... $ 5,080 $ 9,000
Borrowings related to Economic Development Revenue Bonds
due in monthly installments through November 1, 2009,
interest payable monthly at variable rates.............. 5,750 6,050
Other.................................................... -- 23
------- -------
10,830 15,073
Less current portion..................................... 375 4,323
------- -------
Total.................................................. $10,455 $10,750
======= =======
</TABLE>
On November 2, 1998, the Company entered into a new three year credit
facility which includes a revolving credit loan of up to $15,000,000 (the
"Revolving Loan"), and a standby letter of credit commitment in the amount of
$6,100,000 (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 currently bear interest at rates
ranging from LIBOR plus 0.50% to the Federal Funds Rate plus .75%, subject to
increases if the Company fails to achieve certain future operating results. The
Letter of Credit Facility includes annual financing fees of 0.50%, and loans
resulting from a draw under the Letter of Credit Facility bear interest at a
rate equal to the interest rate then applicable to the Revolving Loan. The
Revolving Loan is due on November 2, 2001 and the Letter of Credit Facility
expires on November 2, 2002. The credit facility imposes certain ratio
maintenance requirements on the Company, including minimum earnings before
interest, taxes, depreciation, and amortization ("EBITDA") levels, interest
coverage, current ratio and net worth, and certain restrictive covenants
including limitations on indebtedness, liens, sales of assets, mergers and
investments. On September 30, 1999, the Company was in default of the required
EBITDA level for the year ended September 30, 1999, due to the non-recurring
items recognized during the fourth quarter. The Company subsequently received a
waiver from its debt holder.
Borrowings related to Economic Development Revenue Bonds (the "Bonds") bear
interest at a variable rate (3.80% at September 30, 1999) 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 November 2, 2002.
The aggregate annual maturities of long-term debt, during the five years
subsequent to September 30, 1999 are: 2000--$375,000; 2001--$400,000; 2002--
$5,555,000; 2003--$500,000; and 2004--$575,000.
6. Commitments
The Company leases various office and manufacturing equipment. Total rental
expense for the equipment for the years ended September 30, 1999, 1998 and 1997
was $733,000, $419,000 and $397,000, respectively. At September 30, 1999,
minimum rental commitments by year under noncancelable operating leases are:
2000--$990,000; 2001--$791,000; 2002--$658,000; and 2003--$617,000; and 2004--
$233,000.
7. 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
24
<PAGE>
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. On September 5, 1997,
however, the court of appeals reversed the decision of the district court and
returned the case to the district court for further proceedings. The case has
been certified as a class action.
On November 4, 1999, the Company reached a settlement with the plaintiff. As
a result, the Company took a charge to earnings of $1.2 million during the
fourth quarter of 1999. The settlement is subject to completion of a definitive
settlement stipulation to be filed in the district court, court approval of the
settlement and finalization of court proceedings. The Company anticipates that
the settlement will be finalized in the spring of 2000.
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.
8. 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,
1999.
Stock-based compensation plans. At September 30, 1999, the Company has four
stock-based compensation plans. The Company applies Accounting Principles Board
Opinion No. 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," ("SFAS 123") the Company's pro forma net income and
earnings per share would have been as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C> <C>
Net income................................ As reported $2,487 $6,756 $5,664
Pro forma $ 904 $5,483 $5,153
Net income per common share--basic........ As reported $ 0.30 $ 0.82 $ 0.70
Pro forma $ 0.11 $ 0.66 $ 0.64
Net income per common share--assuming
dilution................................. As reported $ 0.28 $ 0.77 $ 0.68
Pro forma $ 0.10 $ 0.64 $ 0.63
</TABLE>
The amounts reflected in the pro forma disclosure are not indicative of
future amounts, as SFAS 123 is applicable only to options granted subsequent to
September 30, 1995. The pro forma effect will not be fully reflected until
2000.
25
<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 92,224 shares of the Company's common stock to employees. The
options generally vested over a four year period and expire ten 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
191,260 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 $4.13 per
share and half at $5.73 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 awards for up to 262,000 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 expire ten years from the grant date. During 1995,
the Company approved an increase in the number of awards that may be granted to
450,000 shares and in 1998 the Company approved a further increase of up to
1,250,000 shares which may be granted under the plan.
In 1993, the Company granted options to purchase 20,000 shares of the
Company's common stock to a director of the Company. The options vested 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 150,000 shares of the Company's
common stock for issuance upon exercise of options granted to 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.
During 1998, the Company amended this plan to provide each non-employee
director an initial grant of an option to purchase 10,000 shares and an annual
grant, commencing in 1999, of an option to purchase 4,000 shares. In addition,
non-employee directors may elect to receive their annual retainer in shares of
common stock rather than cash.
In 1997, the Company granted options to an executive officer to purchase
330,000 shares of the Company's common stock. The options were granted in
connection with the officer's employment agreement, vest over a five year
period, are exercisable at $10.75 per share 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 1999, 1998
and 1997, respectively: no estimated dividends for all years; expected
volatility of 42, 31 and 31 percent; risk-free interest rates of between 4.6
and 6.3 percent, between 5.2 and 6.0 percent and between 6.0 and 6.8 percent;
and expected lives of 6 years for all years.
Employee stock purchase plan. Under the Company's Employee Stock Purchase
Plan (the "Plan") the Company is authorized to issue up to 52,400 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 30 percent of eligible employees have
participated in the Plan in the last 3 years. Under the Plan, the Company sold
7,375, 4,740 and 5,802 shares to employees in 1999, 1998 and 1997,
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 1999, 1998 and 1997, respectively: no
estimated dividends for all years; expected volatility of 42, 31 and 31
percent; risk-free interest rates between 4.5 and 4.7 percent, 5.5 percent and
between 5.3 and 5.7 percent; and an expected life of 6 months for all years.
The weighted average fair value of those purchase rights granted in 1999, 1998
and 1997 were $4.79, $4.41 and $2.41, respectively.
26
<PAGE>
The following table summarizes the status of the Company's stock option
plans as of September 30, 1999, 1998 and 1997, and changes during the years
ending on those dates:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -----------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,106,886 $11.58 959,580 $ 9.14 512,382 $ 7.52
Granted................ 284,500 20.34 287,876 18.56 497,200 10.75
Exercised.............. (36,871) 11.05 (98,734) 8.47 (18,018) 8.03
Forfeited.............. (89,544) 17.57 (41,836) 10.81 (31,984) 8.85
--------- --------- -------
Outstanding at end of
year................... 1,264,971 13.14 1,106,886 11.58 959,580 9.14
========= ========= =======
Options exercisable at
year-end............... 633,100 $10.19 437,526 $ 7.86 374,392 $ 6.88
Weighted average fair
value of options
granted during the
year................... $ 9.66 $ 7.92 $ 4.85
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Number Weighted Avg. Weighted Avg. Number
Range of Outstanding Remaining Exercise Exercisable Weighted Avg.
Exercise Prices at 9/30/99 Contractual Life Price at 9/30/99 Exercise Price
- --------------- ----------- ---------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.00-$ 6.00........... 191,260 31.8 years $ 4.93 191,260 $ 4.93
$ 6.01-$ 9.00........... 20,688 5.2 years $ 7.60 19,520 $ 7.58
$ 9.01-$12.00........... 567,377 7.1 years $10.62 304,877 $10.52
$12.01-$16.00........... 40,899 1.8 years $14.76 23,837 $14.98
$16.01-$20.00........... 374,747 8.0 years $18.97 83,506 $18.81
$20.01-$24.00........... 40,000 5.0 years $22.25 10,100 $22.12
$24.01-$30.00........... 30,000 9.4 years $29.85 --
--------- -------
$ 4.00-$30.00........... 1,264,971 6.4 years $13.14 633,100 $10.19
========= =======
</TABLE>
9. Income Taxes
The components of income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Federal:
Current....................................... $ 3,440 $3,366 $3,201
Deferred...................................... (2,997) 133 (150)
------- ------ ------
443 3,499 3,051
State:
Current....................................... 539 535 477
Deferred...................................... (445) 20 (19)
------- ------ ------
94 555 458
------- ------ ------
Total........................................... $ 537 $4,054 $3,509
======= ====== ======
</TABLE>
27
<PAGE>
The Company's income tax expense in 1999, 1998 and 1997 differed from the
federal statutory provision as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Income tax at statutory rates.................... $1,028 $3,675 $3,119
State income taxes, net of federal benefit....... 62 366 302
Charitable contribution benefit.................. (582) -- --
Other............................................ 29 13 88
------ ------ ------
Total............................................ $ 537 $4,054 $3,509
====== ====== ======
</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>
1999 1998
------ ------
<S> <C> <C>
Current deferred tax assets:
Accruals................................................ $ 739 $ 615
Reserves................................................ 2,578 134
Capitalized costs....................................... 100 61
Charitable contribution carryforward.................... 935
Prepayments............................................. (891) (717)
------ ------
Current deferred tax assets, net.......................... $3,461 $ 93
====== ======
Noncurrent deferred tax assets:
Amortization............................................ $3,051 $2,833
Depreciation............................................ (433) (443)
Valuation allowance..................................... (2,327) (2,173)
------ ------
Noncurrent deferred tax assets, net....................... $ 291 $ 217
====== ======
</TABLE>
At September 30, 1999, 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 1999 was $154,000.
10. 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 $560,000, $349,000 and $334,000 for
1999, 1998 and 1997, respectively.
During 1989, the Company formed an employee stock ownership plan covering
all employees. The Company's contributions for 1999, 1998 and 1997 were $90,000
for each of the three years. The plan held 52,595 shares of the Company's
common stock at September 30, 1999.
11. Related Party Transactions
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 associated with the executive's
28
<PAGE>
relocation. The loan was payable upon the earlier of, the sale of executive's
former home, or 18 months after the purchase of a new home. The loan was paid
in full during 1998.
During 1998, the Company, pursuant to an employment agreement, provided a
key employee with an interest free loan of $280,000 associated with the
employee's relocation. The loan was payable upon the earlier of, the sale of
the employee's former home, or five months. The loan was paid in full in 1999.
During 1999, an executive officer of the Company borrowed approximately
$3.0 million, from a bank, in connection with the purchase and construction of
certain real estate. The Company guaranteed the repayment of up to $1.0
million of the loan, plus all interest, lender's costs, expenses and
attorney's fees incurred in connection with any future collection of the loan.
The guaranty will terminate when the loan has been repaid in full, which under
the terms of the loan is expected to occur by the summer of 2001.
12. Quarterly Financial Data (Unaudited):
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 Quarters Ended (after non-
recurring items)
----------------------------------
Sept.
30 June 30 Mar. 31 Dec. 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
Case sales................................ 1,194 1,229 1,733 1,896
Net sales................................. $19,876 $20,737 $31,576 $37,662
Gross profit.............................. 5,321 12,705 21,244 23,659
Operating income.......................... (7,061) 2,054 4,367 4,410
Net income................................ (3,933) 1,202 2,613 2,605
Net income per share--basic............... $ (0.47) $ 0.14 $ 0.31 $ 0.31
Net income per share--assuming dilution... (0.47) 0.14 0.29 0.30
Net sales as a percent of annual net
sales.................................... 18.1% 18.9% 28.7% 34.3%
<CAPTION>
1998 Quarters Ended
----------------------------------
Sept.
30 June 30 Mar. 31 Dec. 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
Case sales................................ 1,120 857 1,611 1,491
Net sales................................. $23,073 $19,395 $32,329 $27,400
Gross profit.............................. 14,586 12,573 21,131 17,269
Operating income.......................... 1,782 355 5,549 3,755
Net income................................ 1,053 124 3,341 2,238
Net income per share--basic............... $ 0.13 $ 0.02 $ 0.40 $ 0.28
Net income per share--assuming dilution... 0.12 0.01 0.38 0.26
Net sales as a percent of annual net
sales.................................... 22.6% 19.0% 31.6% 26.8%
</TABLE>
29
<PAGE>
ITEM 9.--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
<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 2000 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 2000 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 2000 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 2000 Annual
Meeting of Stockholders is incorporated herein by reference.
31
<PAGE>
PART IV
ITEM 14.--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) 1. Index to Financial Statements
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report......................................... 14
Consolidated Income Statements for the years ended September 30,
1999, 1998 and 1997................................................. 15
Consolidated Balance Sheets at September 30, 1999 and 1998........... 16
Consolidated Statements of Cash Flows for the years ended September
30, 1999, 1998 and 1997............................................. 17
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999, 1998 and 1997................................... 18
Notes to Consolidated Financial Statements........................... 19-28
Quarterly Financial Data (Unaudited)................................. 28
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, 1999, 1998 and 1997............................................ 32
</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.
32
<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.
(e) 3.2 Bylaws of Registrant.
(a) 4.1 Common Stock certificate.
(e) 4.2 Rights Agreement dated as of July 19, 1993 between Registrant and
Harris Trust and Savings Bank, as Rights agent, as amended and
restated November 11, 1998.
(a) 10.1 Incentive and Non-Qualified Stock Option Plan of Registrant as
Successor to Celestial Holdings, Inc. adopted February 26, 1991.
(d) 10.2 1993 Long-Term Incentive Plan of Registrant adopted June 7, 1993, as
amended.
(d) 10.3 1994 Non-Employee Director Compensation Plan adopted August 4, 1994,
as amended.
(a) 10.4 Loan Agreement dated as of December 1, 1989 between Registrant and
Colorado Housing and Finance Authority.
(b) 10.5 Employment Agreement dated February 15, 1994 between Registrant and
Marie A. Gambon.
(c) 10.6 Employment Agreement dated June 16, 1997 between Registrant and
Stephen B. Hughes.
(c) 10.7 Executive Agreement dated June 16, 1997 between Registrant and Mo
Siegel.
(c) 10.8 Stock Option Agreement dated June 16, 1997 between Registrant and
Stephen B. Hughes.
(c) 10.9 Option Agreement dated June 13, 1997 between Registrant and Mo
Siegel.
(e) 10.10 Employment Agreement dated November 7, 1997 between Registrant and
William Atchinson.
(e) 10.11 Employment Agreement dated March 2, 1998 between Registrant and
Richard Karl.
(e) 10.12 Credit Agreement dated as of November 2, 1998, among Registrant and
KeyBank National Association.
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>
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 Annual Report on Form
10-K for the year ended September 30, 1994.
(c) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
(d) Incorporated by reference to the Registrant's Proxy Statement in
connection with the 1998 Annual Meeting of Stockholders, filed with
the Securities and Exchange Commission on January 13, 1998.
(e) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended September 30, 1998.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the quarter ended September 30, 1999.
33
<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, 1999 to be signed on its behalf by the
undersigned, thereunto duly authorized.
CELESTIAL SEASONINGS, INC.
/s/ David I. Rosenthal
By: _________________________________
David I. Rosenthal
Senior Director of Finance
Date: December 22, 1999
Pursuant to the requirements of the Securities Act of 1934, this Annual
Report on Form 10-K for the year ended September 30, 1999 has been signed below
by the following persons, on behalf of the Registrant and in the capacities
indicated on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mo Siegel Chairman December 17,
______________________________________ 1999
Mo Siegel
/s/ Stephen B. Hughes President, Chief Executive December 17,
______________________________________ Officer and Director 1999
Stephen B. Hughes
/s/ Ronald V. Davis Director December 17,
______________________________________ 1999
Ronald V. Davis
/s/ Marina Hahn Director December 17,
______________________________________ 1999
Marina Hahn
/s/ John D. Howard Director December 17,
______________________________________ 1999
John D. Howard
/s/ James P. Kelley Director December 17,
______________________________________ 1999
James P. Kelley
/s/ Leonard Lieberman Director December 17,
______________________________________ 1999
Leonard Lieberman
/s/ Gregg A. Ostrander Director December 17,
______________________________________ 1999
Gregg A. Ostrander
/s/ David I. Rosenthal Senior Director of Finance December 17,
______________________________________ (Principal Financial and 1999
David I. Rosenthal Accounting Officer)
</TABLE>
34
<PAGE>
SCHEDULE II
Celestial Seasonings, Inc.
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Classification Beginning of Year Expenses Write-offs End of Year
- -------------- ----------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
For the year ended
September 30, 1997:
Allowance for doubtful
accounts................ $148 $ 17 $ -- $ 165
Inventory reserves....... 231 372 (265) 338
For the year ended
September 30, 1998:
Allowance for doubtful
accounts................ 165 398 (29) 534
Inventory reserves....... 338 468 (597) 209
For the year ended
September 30, 1999:
Allowance for doubtful
accounts................ 534 249 (56) 727
Inventory reserves....... 209 973 (349) 833
Inventory reserves--
product return program.. -- 4,007 (1,917) 2,090
Allowance for sales
returns--product return
program................. -- 5,098 (1,390) 3,708
</TABLE>
35
<PAGE>
MANAGEMENT'S STATEMENT OF RESPONSIBILITIES
The accompanying consolidated financial statements of Celestial Seasonings,
Inc. and subsidiaries (the "Company") are prepared by the Company's management
in conformity with generally accepted accounting principles. Management is
responsible for the fairness of the financial statements, which include
estimates based on judgment.
The Company maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
the purposes of preparing financial statements, and that assets are properly
safeguarded and recorded. Underlying the concept of reasonable assurance is the
premise that the cost of control should not be disproportionate to the benefits
expected to be derived from control. The Company's internal control system is
reviewed by the independent auditors in connection with their audit of the
Company's consolidated financial statements.
The Audit Committee of the Board of Directors meets periodically with
management and the independent auditors to discuss the annual audit, internal
control and financial reporting matters. The independent auditors have direct
access to the Audit Committee.
Stephen B. Hughes
President and Chief Executive Officer
David I. Rosenthal
Senior Director of Finance
36
<PAGE>
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, 1999 and
1998, and for each of the three years in the period ended September 30, 1999,
and have issued our report thereon dated November 3, 1999; such consolidated
financial statements and report are included in your 1999 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, 1999
1
<PAGE>
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 Form
S-8 of our reports dated November 3, 1999 appearing in this Annual Report on
Form 10-K of Celestial Seasonings, Inc. for the year ended September 30, 1999.
Deloitte & Touche LLP
Denver, Colorado
December 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CELESTIAL
SEASONINGS INC.'S FORM 10-K FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 637
<SECURITIES> 0
<RECEIVABLES> 17,612
<ALLOWANCES> (727)
<INVENTORY> 10,721
<CURRENT-ASSETS> 34,796
<PP&E> 37,042
<DEPRECIATION> (13,502)
<TOTAL-ASSETS> 80,847
<CURRENT-LIABILITIES> 15,904
<BONDS> 10,455
0
0
<COMMON> 84
<OTHER-SE> 54,404
<TOTAL-LIABILITY-AND-EQUITY> 80,847
<SALES> 114,949
<TOTAL-REVENUES> 109,851
<CGS> 42,915
<TOTAL-COSTS> 46,922
<OTHER-EXPENSES> 59,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 746
<INCOME-PRETAX> 3,024
<INCOME-TAX> 537
<INCOME-CONTINUING> 2,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,487
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.28
</TABLE>
