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___________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
____________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
____________________
Commission File No. 000-24337
HORIZON ORGANIC HOLDING CORPORATION
(a Delaware Corporation)
I.R.S. Employer Identification Number 84-1405007
6311 Horizon Lane
Longmont, Colorado 80503
(303) 530-2711
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X. No _____.
---
As of April 30, 1999, the registrant had outstanding 9,691,644 shares of
its common stock, $.001 par value per share.
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HORIZON ORGANIC HOLDING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets...................................................... 3
Consolidated Statements of Operations............................................ 4
Consolidated Statements of Cash Flows............................................ 5
Notes to Consolidated Financial Statements....................................... 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 8- 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................. 11
SIGNATURE...................................................................................... 12
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIALS STATEMENTS
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
MARCH 31 DECEMBER 31
1999 1998
---- ----
Current Assets:
Cash and cash equivalents......................................................... $ 10,753 $ 14,384
Marketable securities............................................................. 13,376 9,923
Trade accounts receivable, net.................................................... 5,473 4,873
Inventories....................................................................... 5,472 5,466
Deferred income tax assets........................................................ 103 281
Other current assets.............................................................. 992 563
---------- ----------
Total current assets.......................................................... 36,169 35,490
Property, Equipment and Cattle
Cattle, net....................................................................... 9,744 9,725
Property and equipment, net....................................................... 15,881 15,534
---------- ----------
Total property, equipment and cattle.......................................... 25,625 25,259
Other Assets:
Intangible assets, net............................................................ 7,984 8,132
Other assets, net................................................................. 498 475
---------- ----------
Total other assets............................................................ 8,482 8,607
---------- ----------
Total Assets.................................................................. $ 70,276 $ 69,356
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable............................................................ $ 5,030 $ 4,693
Current portion of long-term debt................................................. 379 434
Other accrued expenses............................................................ 2,028 1,978
Income taxes payable.............................................................. 295 87
---------- ----------
Total current liabilities..................................................... 7,732 7,192
Long-Term Liabilities:
Long-term debt, less current portion.............................................. 4,793 4,923
Deferred income tax liabilities................................................... 1,104 1,271
---------- ----------
Total long-term liabilities..................................................... 5,897 6,194
---------- ----------
Total liabilities............................................................. 13,629 13,386
Stockholders' Equity:
Preferred stock, $.001 par value, authorized 2,000,000 shares; no shares issued
or outstanding................................................................ --- ---
Common stock, $.001 par value, authorized 30,000,000 and 8,000,000 shares, issued
and outstanding 9,691,644 and 9,656,368 shares in 1999 and 1998, respectively.... 10 10
Additional paid-in capital........................................................ 58,020 57,845
Accumulated deficit............................................................... (1,383) (1,885)
---------- ----------
Total stockholders' equity.................................................... 56,647 55,970
---------- ----------
Total Liabilities and Stockholders' Equity.................................... $ 70,276 $ 69,356
========== ==========
See accompanying notes to the unaudited consolidated financial statements.
3
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
1999 1998
---- ----
Net sales..................................................................... $ 16,423 $ 10,102
Cost of sales................................................................. 10,901 7,023
--------- ----------
Gross profit............................................................... 5,522 3,079
--------- ----------
Operating expenses:
Selling.................................................................... 3,584 2,132
General and administrative................................................. 1,284 613
--------- ----------
Total operating expenses............................................... 4,868 2,745
--------- ----------
Operating income.............................................................. 654 334
--------- ----------
Other income (expense):
Interest income (expense)............................................... 182 (492)
--------- ----------
Total other income (expense)........................................... 182 (492)
--------- ----------
Income (loss) before income taxes 836 (158)
Income tax benefit (expense).................................................. (334) 43
--------- ----------
Net income (loss)........................................................ $ 502 $ (115)
========= ==========
Income (loss) per basic and diluted share -
net income (loss) per share................................................ $ .05 $ (.02)
========= ==========
Weighted average shares outstanding, basic................................. 9,666 5,056
Weighted average shares outstanding, diluted............................... 10,099 5,056
See accompanying notes to the unaudited consolidated financial statements.
4
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(in thousands)
(UNAUDITED)
1999 1998
---- ----
Net cash provided by operating activities....................................... $ 1,300 $ 1,642
Cash flows from investing activities:
Purchases of marketable securities, net...................................... (3,453) ---
Purchases of equipment....................................................... (688) (670)
Purchases and costs of cattle................................................ (976) (1,716)
Proceeds from equipment sales................................................ 47 45
Proceeds from cattle sales................................................... 213 183
Other, net................................................................... (56) (39)
--------- ----------
Net cash used in investing activities.................................... (4,913) (2,197)
--------- ----------
Cash flows from financing activities:
Borrowings under long-term lines of credit................................... --- 11,450
Payments on long-term lines of credit........................................ --- (10,380)
Repayments of long-term debt, other than lines of credit..................... (184) (108)
Proceeds from the exercise of warrants....................................... 137 ---
Proceeds from the exercise of options........................................ 29 ---
--------- ----------
Net cash provided by (used in) financing activities...................... (18) 962
--------- ----------
Net increase (decrease) in cash and cash equivalents............................ (3,631) 407
Cash and cash equivalents at beginning of period................................ 14,384 404
--------- ----------
Cash and cash equivalents at end of period...................................... $ 10,753 $ 811
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest..................................... $ 85 $ 458
--------- ----------
Cash paid during the period for income taxes................................. $ 115 $ ---
========= ==========
Non-cash investing and financing activities:
Common stock issued for services............................................. $ --- $ 26
========= ==========
Common stock issued to directors............................................. $ 9 $ ---
========= ==========
Additional capital lease obligations......................................... $ --- $ 50
========= ==========
See accompanying notes to the unaudited consolidated financial statements.
5
HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
Horizon Organic Holding Corporation (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally accompanying financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. In management's
opinion, all adjustments necessary for a fair presentation of the results of
operations for the periods presented have been made and are of a normal and
recurring nature. Operating results for the period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
These consolidated financial statements and accompanying notes should be
read in conjunction with the consolidated financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
2. MARKETABLE SECURITIES
Marketable securities consist of commercial paper and U.S. Treasury
securities maturing within one year. Marketable securities have been
categorized as held-to-maturity. The amortized cost basis at March 31,1999 is
as follows:
Commercial paper $ 7,429
U.S. Treasury 5,947
--------
$ 13,376
========
Gross unrealized gains on marketable securities at March 31, 1999 were not
significant.
3. RELATED PARTY TRANSACTION
In March 1999, the Company entered into a Dairy Herd Management and Supply
Agreement (the "Agreement") with Aurora Diary Corporation ("Aurora"). Under the
Agreement, Aurora will manage the Company's dairy herd, initially 1,050 head of
cattle, and oversee the organic milk production on a portion of Aurora's dairy
farm located in Longmont, Colorado (the "Longmont Dairy"). The Agreement
terminates on September 30, 2002, unless it is terminated earlier by the Company
upon Aurora's failure to perform any of its material obligations contained in
the Agreement. The Company has the option to renew the Agreement for up to an
additional 18 months. Pursuant to the Agreement, the Company will pay Aurora
the following amounts: (a) a cattle reimbursement fee in the amount of $50.00
per head of cattle for the first 1,050 head of cattle the Company purchases from
certain parties; (b) a monthly fee of $80,000 commencing October 1, 1999 through
January 31, 2000 and a minimum monthly fee of $75,000 thereafter, calculated
using a formula based on the amount of milk shipped from the Longmont Dairy; and
(c) a bonus if certain cost parameters are met. In addition, at the Company's
option, Aurora will raise heifers born to the dairy herd located at the Longmont
Dairy for a flat fee of $1.90 per day per calf. The Company has also agreed to
pay $135,000 for facility improvements necessary to permit the Longmont Dairy to
function as an organic dairy.
4. SUBSEQUENT EVENT
On April 26, 1999, the Company acquired certain intangible assets including
The Organic Cow brand name for $10.9 million. The acquisition was financed with
a cash payment at closing of $2.4 million and a $8.5 million promissory note
payable to the seller, bearing interest at 5.3%, and payable in annual
installments over 4 years.
6
5. REPORTABLE SEGMENTS
The Company has two segments of business, the marketing company and the
dairy farm operations. The marketing company is responsible for acquiring,
processing and marketing organic fluid milk, organic dairy products, and organic
non-dairy products. The dairy farm operations are responsible for producing
farm milk for use by the marketing company in the production of its products and
for sales to third parties. The dairy farms sell organic farm milk to the
marketing company at an intercompany transfer price which approximates fair
value. The following table sets forth selected segment data for the quarters
ended March 31, 1999 and 1998 (in thousands):
MARCH 31
1999 1998
------------ ------------
SALES BY SEGMENT
Marketing $ 16,423 $ 10,061
Dairy farm operations 4,754 3,792
------------ ------------
Total net sales 21,177 13,853
Intersegment sales (4,754) (3,751)
------------ ------------
Net sales $ 16,423 $ 10,102
============ ============
INCOME FROM OPERATIONS
Marketing $ 399 $ 421
Dairy farm operations 255 (87)
------------ ------------
Income from operations 654 334
Interest and other income (expense), net 182 (492)
------------ ------------
Income (loss) before income taxes $ 836 $ (158)
============ ============
6. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares outstanding
increased for potentially dilutive common shares outstanding during the period.
The dilutive effect of stock options, warrants, and their equivalents is
calculated using the treasury stock method. The following table sets forth the
calculation of earnings (loss) per share for the quarters ended March 31, 1999
and 1998 (in thousands, except per share amounts):
MARCH 31
1999 1998
Net income (loss) $ 502 $ (115)
Common and common equivalent shares outstanding:
Historical common shares outstanding at beginning of period 9,656 5,052
Weighted average common equivalent shares issued during period 10 4
------------ -----------
Weighted average common shares issued - basic 9,666 5,056
Weighted average common equivalent shares outstanding during period 433 --
------------ -----------
Weighted average common shares issued - diluted 10,099 5,056
============ ===========
Earnings (loss) per basic and diluted share -
net income (loss) per share $ .05 $ (.02)
============ ===========
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This following discussion and analysis should be read in conjunction with
the Company's unaudited consolidated financial statements and accompanying notes
included herein and the Company's Annual Report on Form 10-K for the fiscal year
ended December 31,1998. Except for the historical information contained herein,
the discussion in this Quarterly Report on Form 10-Q contains certain forward-
looking statements that involve risks and uncertainties. Future events may
differ materially from those discussed herein, due to a number of factors,
including uncertainties related to the charges the Company has to pay as a
result of government regulation. These factors are more fully discussed in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, under the headings "Risk Factors - Possibility of Adverse Effects
Resulting from United States Dairy Support Program and Federal Milk Market Order
Program." In addition, the Company's results could also be affected by a number
of other risks and uncertainties which are more fully discussed under the
headings "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Sales. Net sales for the three months ended March 31, 1999 were $16.4
million, an increase of $6.3 million, or 63%, from $10.1 million for the
comparable period in 1998. This increase was primarily due to increased sales to
existing accounts as the result of increased distribution, continued development
of conventional grocery food channels, and the introduction of several new
products, including organic citrus juices.
Gross Profit. Gross profit for the three months ended March 31, 1999 was
$5.5 million, an increase of $2.4 million, or 79%, from $3.1 million for the
comparable period in 1998. As a percentage of net sales, gross profit increased
to 33.6% from 30.5%. This increase is due to continued improvements in
operations at the Company's organic dairy farm in Southern Idaho (the "Idaho
Dairy") which contributed income versus a loss for the comparable period in
1998. This increase was partially offset by higher than normal charges under the
Federal Milk Market Order Program during the first quarter of 1999.
Selling Expenses. Selling expenses for the three months ended March 31,
1999 were $3.6 million, an increase of $1.5 million, or 68%, from $2.1 million
for the comparable period in 1998. As a percentage of net sales, selling
expenses was essentially flat at 21.8% versus 21.1% for the comparable period in
1998. The increase in selling expenses was primarily due to increased levels of
marketing expenditures as well as increased costs for expanded distribution.
General and Administrative Expenses. General and administrative expenses
for the three months ended March 31, 1999 were $1.3 million, an increase of $.7
million, or 109%, from $.6 million during the comparable period in 1998. As a
percentage of net sales, general and administrative expenses increased to 7.8%
from 6.1%. This increase is primarily due to increased amortization of
intangible assets and increased costs associated with becoming a public company
and the buildup of corporate infrastructure to support the Company's growth.
Other Income (Expense), Net. Other income (expense), net for the three
months ended March 31, 1999 was income of $.2 million compared to an expense of
$.5 million during the comparable period in 1998. This change is primarily
attributable to the reduction in interest expense due to the repayment of $22
million of indebtedness during the third quarter of 1998 combined with earnings
from investments in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash Provided by Operations. Cash provided by operations during the three
months ended March 31, 1999 was $1.3 million, a decrease of $.3 million from
cash provided by operations of $1.6 million during the comparable period in
1998. The decrease in cash provided by operations was due primarily to reduced
losses and increased non-cash charges associated with depreciation and
amortization and the loss on disposal of cattle combined with an increase in
accounts payable. These increases were offset by increases in trade accounts
receivable and prepaid and other assets combined with a decrease in other
accrued expenses.
8
Cash Used in Investing Activities. Cash used in investing activities
during the three months ended March 31, 1999 totaled $4.9 million, as compared
to $2.2 million for the comparable period in 1998. The increase was primarily
due to investments in marketable securities offset by reduced costs associated
with the purchases and costs of raising cattle at the Company's dairy farms
during the first quarter of 1999.
Cash Provided by Financing Activities. Cash used in financing activities
during the three months ended March 31, 1999 totaled $18,000, as compared to
$962,000 provided by financing activities for the comparable period in 1998.
This decrease is primarily due to the Company not utilizing its line of credit
in the first quarter of 1999.
Company management believes that cash and cash equivalents, funds generated
from operations and the availability under the line of credit will be sufficient
to meet the Company's foreseeable operating and capital expenditure needs.
Long-term Debt. The Company has a revolving line of credit with U.S. Bank
with a maximum borrowing capacity of $20 million, interest at prime less .25%,
secured by substantially all the assets of the Company, due June 30, 2000. The
revolving line of credit contains certain covenants that, among other things,
limit the Company's ability to incur additional debt, create liens, pay
dividends or enter into certain other transactions, and which require the
Company to meet certain financial provisions. There were no amounts outstanding
under the line of credit at March 31, 1999.
Year 2000. The Year 2000 issue refers to the fact that certain management
information systems use two digit data fields which recognize dates using the
assumption that the first two digits are "19 " (i.e., the number 99 is
recognized as the year 1999). When the year 2000 occurs, these systems could
interpret the year as 1900 versus 2000, which in turn, could result in system
failures or miscalculations causing disruptions of operations of the Company and
its suppliers and customers.
To address this issue, the Company has established a cross-functional team
from across the organization under the sponsorship of the Chief Financial
Officer. This team is implementing a multi-phase plan that includes;
inventorying computer systems, software and equipment to assess the impact of
the Year 2000; contacting third-party suppliers to ascertain their state of
readiness and or compliance; developing solution plans related to upgrading,
modifying or replacing affected systems; testing and certifying results; and
developing contingency plans as necessary.
The Company has completed its initial evaluation of computer systems at the
corporate location. The evaluation revealed that the Company's network hardware
and operating systems, e-mail system, and accounting software are the major
resources that are affected by the Year 2000 issue. While these systems will
need to be either replaced or upgraded, the identified systems and or programs
are primarily "off the shelf" products with Year 2000 versions currently
available. The Company expects to have these systems fully compliant by June
1999. The Company is scheduled to complete its evaluation of the computer
systems at the Idaho Dairy and the Maryland Dairy by May 1999 with full
compliance expected by September 1999.
The Company relies heavily on third-party suppliers for many products and
services. As part of its Year 2000 plan, the Company has contacted its
significant suppliers to determine the extent to which the systems of such
suppliers are Year 2000 compliant. In addition, the Company is assessing the
extent to which it could be affected by the failure of such third parties to be
Year 2000 compliant. To date approximately fifty percent of the entities
contacted have responded with the majority of the respondents in some phase of
addressing Year 2000 issues. The Company will continue to contact its
significant suppliers in an effort to minimize any potential Year 2000
compliance impact, however, it is not possible to guarantee their compliance.
The total cost expended to date for the Year 2000 plan has been minimal.
The Company anticipates spending approximately $100,000 to make all systems Year
2000 compliant.
9
Management believes that it has an effective program in place to adequately
address the Year 2000 issue in a timely manner. Nevertheless, failure of third
parties upon whom the Company's business relies could result in disruption of
the Company's supply of product, late, missed or unapplied payments, temporary
disruptions in order processing and other general problems related to daily
operations. In addition, disruptions in the economy generally resulting from
Year 2000 issues could also adversely affect the Company. Although, the Company
believes its Year 2000 plan will adequately address the Company's internal
issues, the overall risks associated with the Year 2000 issue cannot be fully
identified until the Company receives more responses from significant suppliers.
Accordingly, the amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
The Company expects to develop and implement, where necessary, a
contingency plan by the end of July 1999.
10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit 27 Financial Data Schedule
REPORTS ON FORM 8-K
There were no reports on Form 8-K for the three month period ended March
31, 1999.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HORIZON ORGANIC HOLDING CORPORATION
Date: May 13, 1999 /s/ Don J. Gaidano
-------------------------------------------------------
Don J. Gaidano
Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Assistant Secretary
(principal financial and accounting officer of the
Company)
12