<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   Form 10-K

                                 -------------
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1998
                                  ___________

                         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

          Securities registered pursuant to Section 12(b) of the Act:
                                 Not Applicable

          Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, $.001 Par Value Per Share

  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 
                                              ___     ___

  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 the Common Stock held by
nonaffiliates of the registrant, based upon the last sales price of the Common
Stock reported on the National Association of Securities Dealers Automated
Quotation National Market System was $152,191,400 as of March 1, 1999.

  As of March 1, 1999, the registrant had outstanding 9,662,946 shares of its
common stock, $.001 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE:

  Information required by Part III (Items 10, 11, 12 and 13) is incorporated by
reference to portions of the registrant's definitive proxy statement for the
1999 Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 1998 year.

<PAGE>
 
                      HORIZON ORGANIC HOLDING CORPORATION
                                        
                           Annual Report on Form 10-K

                               December 31, 1998

                               Table of Contents

                                     
<TABLE> 
<CAPTION> 
                                                        PART I
                                                                                                              Page
<S>                                                                                                         <C>
  Item     1  Business...................................................................................       3
       
  Item     2  Properties.................................................................................      14
       
  Item     3  Legal Proceedings..........................................................................      14
       
  Item     4  Submission of Matters to a Vote of Security Holders........................................      14
       
       
                                                       PART II
       
  Item     5  Market for Registrant's Common Equity and Related Stockholder Matters......................      14
       
  Item     6  Selected Consolidated Financial Data.......................................................      16
       
  Item     7  Management's Discussion and Analysis of Financial Condition and Results of Operations......      17
       
  Item     8  Consolidated Financial Statements and Supplementary Data...................................      31
       
  Item     9  Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure...................................................................      31
       
                                                      PART III
       
  Item    10  Directors and Executive Officers of the Registrant.........................................      31
       
  Item    11  Executive Compensation.....................................................................      31
       
  Item    12  Security Ownership of Certain Beneficial Owners and Management.............................      31
       
  Item    13  Certain Relationships and Related Transactions.............................................      31
       
                                                       PART IV
       
  Item    14  Exhibits, Consolidated Financial Statement Schedule and Reports on Form 8-K................      31
 
</TABLE>

                                       2
<PAGE>
 
                                     PART I

Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.  The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, in the sections entitled
"Management's Discussion And Analysis Of Financial Condition And Results of
Operations" and "Risk Factors."


ITEM 1. BUSINESS

General

  Horizon Organic Holding Corporation ("Horizon" or the "Company") produces,
processes and markets the leading brand of certified organic fluid milk and a
full-line of refrigerated certified organic dairy products. Horizon has become
the first dairy to offer nationwide distribution of organic fluid milk by
establishing a national network of organic farm milk producers and processors
and by building a nationwide customer base. From its position as the market
leader in organic fluid milk sales, Horizon has leveraged its brand to create a
full line of refrigerated organic dairy products.

   Horizon was founded in Boulder, Colorado in 1991 and introduced its first
products, organic nonfat yogurts, in 1992. The Company introduced organic fluid
milk in 1993, and since that time it has developed and introduced a number of
new organic dairy products, including cottage cheese, hard cheese, butter and
sour cream and more recently, organic citrus juices. Since 1995, the Company has
focused its efforts on expanding and integrating a nationwide production,
processing and distribution system.

  From 1992 to 1994, the Company contracted for the supply of organic fluid milk
with CROPP, an organic dairy cooperative which during that period was located
only in Wisconsin. In 1994, the Company made a strategic decision to begin
developing its own organic milk supply. Accordingly, the Company began building
a herd of organic cows and developing its own source of organic feed, and
entered into a lease and management agreement with a subsidiary of Aurora Dairy
Corporation ("Aurora") for a dairy farm in Idaho ("Sunrise"). These facilities
became the Company's Idaho Dairy (the "Idaho Dairy") in fiscal 1997. Aurora is
controlled by Marc Peperzak, the Chairman of the Company's Board of Directors.
In fiscal 1997, in order to develop an organic farm milk supply for products
sold in the Eastern United States, the Company began developing its second
organic dairy farm in Maryland (the "Maryland Dairy"). Shipments of organic farm
milk from the Maryland Dairy began in the first quarter of 1998. Horizon sources
the remainder of its organic farm milk supply through supply arrangements with
independent dairy cooperatives and farmers throughout the United States.


Strategy

  Horizon's goal is to strengthen its position as the leading brand of organic
dairy products and to continue to drive the growth of the organic dairy market.
The key elements of Horizon's growth strategy include the following:

  Build Brand Awareness.   The Company believes that building the Horizon brand
and consumer loyalty will enable it to grow the organic dairy market and capture
the majority of that growth. The Company believes that its distinctive product
packaging, which stands out in crowded refrigerated dairy cases, is a key
element to its branding strategy. Horizon intends to build additional brand
awareness by continuing to educate consumers about the value of organic
products, conducting consumer and trade promotions and by increasing its
marketing spending as a percentage of sales. Horizon plans to focus its
marketing efforts initially in highly-developed mass markets which have
demonstrated market acceptance of organic products, such as Los Angeles, San
Francisco, Denver and New York City.

                                       3
<PAGE>
 
  Expand Organic Fluid Milk Distribution in Mass Market.   The Company has
focused its resources on penetrating conventional supermarkets with organic
fluid milk, which is a staple item for consumers with a high turnover rate for
food retailers. The Company believes that introducing organic fluid milk as its
initial product enables it to capture shelf space and gain credibility with
retailers while creating consumer awareness of the Horizon brand. As demand for
Horizon's organic fluid milk products develops in each conventional supermarket,
Horizon is then able to introduce other organic dairy products, such as yogurt,
cheese and butter.

  Extend Brand Identity.   The Company believes that it can continue to grow the
market for organic products through the introduction of additional organic dairy
and non-dairy products. The Company believes that its distinctive, brightly-
colored flying cow and earth logo appeals to a broad audience of consumers,
particularly mothers and children, and is extendible to additional organic
product categories. The Company intends to continue to build its family of
products both through the internal development of organic dairy products which
further leverage the Company's vertically-integrated production, processing and
distribution system as well as through acquisitions, licensing and co-branding
arrangements for other complementary organic products. For example, Horizon
acquired the Juniper Valley Farms brand which included new product categories
such as organic orange juice. The Company currently licenses its brand to
Glenwood Foods, L.L.C. and NuCal Foods, Inc. for use in connection with the sale
of organic eggs. In addition, the Company recently entered into its first
international trademark licensing agreement with Takanashi Milk Products, Ltd.
The three-year agreement includes provisions for the two companies to co-brand
organic dairy products for the Japanese market.  Horizon will consider other
licensing and co-branding arrangements where the Company's organic dairy
products can be used as ingredients in other organic products.

  Optimize Supply Chain Logistics.   The Company intends to continue to focus on
improving the logistics of producing and processing organic fluid milk and other
organic dairy products, including reducing the transportation costs and delivery
time for organic farm milk and finished goods. Horizon began operations with a
single source of organic farm milk located in Wisconsin and a fluid milk
processor located in Iowa which provided the Company's organic fluid milk to
customers nationwide. Horizon has improved the efficiency of its supply chain by
adding geographically-dispersed organic farm milk producers and processors.
Horizon currently sources organic farm milk from producers in six regions across
the United States and uses seven fluid milk processors.

  Increase Organic Farm Milk Supply.   Horizon believes that a strategically
located, proprietary organic farm milk supply is a significant competitive
advantage in the organic dairy market. Horizon has established a proprietary
supply through its ownership of two organic dairy farms combined with a long-
term organic farm milk supply arrangement. In addition, with the acquisition of
the Juniper Valley Farms brand, the Company acquired a significant network of
farm milk producers located in New York. The Company intends to continue to
expand its organic farm milk supply, both through supply arrangements with dairy
cooperatives and independent farmers as well as through the possible
establishment of additional Company-owned organic dairy farms.

  Optimize Use of Organic Farm Milk Components.   Horizon believes that its
ability to sell all of the components of its organic farm milk at a premium
price is a key to increasing profitability and maximizing the value of the
Horizon brand. To achieve that objective, the Company has developed a full line
of organic dairy products which use all components of organic farm milk and a
farm milk separator to capture excess butterfat, or "cream", which is then used
to make value added organic dairy products such as organic butter and cream
cheese. The separator also enables the Company to inventory for later sale the
organic premium of the components of the organic farm milk in products such as
cheese and non-fat dry milk powder.

  Enter New Distribution Channels.   Horizon believes that there is an
opportunity for growing the organic dairy market in additional distribution
channels such as food service, food ingredients and international markets. In
that regard, in 1998 Horizon entered into a technical services agreement to
assist Takanashi Milk Products, Ltd., a Japanese dairy, in establishing an
organic dairy in Japan to produce and market organic dairy products under the
Horizon brand.   That agreement was recently renegotiated as a trademark
licensing agreement.

                                       4
<PAGE>
 
Horizon Organic Dairy Standards

  Currently, there is a wide range of organic standards which are applied by a
variety of state agencies and private certification organizations. Organic
certification typically includes inspections of farm fields and operations,
processing and distribution facilities; detailed record-keeping and periodic
testing of soil and water; and review of the organic producer's comprehensive
"organic plan" which details farm practices, documents product inputs and
discusses all procedures. These procedures are designed to ensure that all
producers, processors and transporters are meeting the applicable organic food
standards. However, since some of these functions are outsourced, there is a
risk that a third party could cause the Company to lose its organic
certification with regard to some of the Company's product lots. See "Risk
Factors--Risk of Loss of Organic Certification."

  The Company believes that its organic standards meet or exceed all currently
existing and proposed governmental certification standards, as well as all
significant private organic certification standards. The farm milk which Horizon
sources from certified organic dairy farms is produced by cows which have not
been treated with antibiotics or synthetic growth hormones, such as rBGH, and
which are fed 100% organic feed. The farm milk which Horizon sources from newly-
converted, certified organic dairy farms is produced by cows which have not been
treated with antibiotics or synthetic growth hormones, and which are fed at
least 65% organic feed for the first nine of the 12 months preceding their first
milking and 100% organic feed for the 90 days preceding their first milking and
thereafter. To be certified as organic, feed must be grown on land that has been
free of synthetic fertilizers, pesticides and herbicides for at least three
years. Furthermore, Horizon's organic farm milk must be isolated from contact
with conventional milk residue throughout the production and distribution
process, from milking, through transporting, processing and packaging. All of
Horizon's third party producers, processors and milk transporters currently are
meeting the applicable organic food standards.

  In December 1997, the federal government published proposed national
regulations to standardize organic certification requirements as part of the
Organic Foods Production Act which was enacted as part of the 1990 United States
Farm Bill. This law will provide for a minimum federal standard that all organic
producers will have to follow in order to be "certified" organic, and will
include a seal to provide consumers with assurance that products sold as
"organic" meet these minimum standards. The Organic Trade Association
anticipates that the final regulations will be implemented in 1999.

  Horizon believes that the proposed regulations under the Organic Foods
Production Act, if adopted in the form initially proposed, would permit
competitors to sell fluid milk and other dairy products labeled as "organic"
which would not satisfy Horizon's internal organic standards. Horizon incurs
significant costs to produce organic products which adhere to its rigorous
standards, and competitors whose "organic" practices are not as rigorous may be
able to compete with Horizon on the basis of price by producing lower cost
"organic" milk and selling it at prices which undercut Horizon's prices. Horizon
does not intend to lower its organic standards and intends to continue to
compete on the basis of the quality and consistency of its products. There can
be no assurance that Horizon will be able to compete successfully against lower
cost competitors in any of its markets. In order to adhere to its philosophy and
maintain its rigorous standards, the Company may make operational decisions that
are inconsistent with maximizing short-term profits. However, the Company
believes that such operational decisions will result in long-term benefits to
the Company and its stockholders by maintaining the quality and reputation of
the Company's products. See "Risk Factors--Risks Related to the Implementation
of the Proposed Federal Organic Certification Regulations."

  Horizon's fluid milk and dairy products are certified organic primarily by
Quality Assurance International, Inc., an accredited international private
certification firm which performs inspection and organic certification for a
variety of companies including Smuckers Beverage (a division of The J.M. Smucker
Company) and Ventura Coastal Corp. The Company selected Quality Assurance
International to certify its organic products because the Company believes
Quality Assurance International is one of the leading accredited third-party
certification groups in the United States. See "Risk Factors--Risk of Loss of
Organic Certification."

                                       5


<PAGE>
 
Products

  Approximately 72% of Horizon's total net sales in fiscal 1998 were from sales
of organic fluid milk products. The Company's next largest product line was its
organic yogurt, which comprised approximately 10% of its total net sales and its
organic butter products which comprised approximately 6.6% of its total net
sales for the same period. The Company believes that introducing organic fluid
milk as its initial product enabled it to capture shelf space and gain
credibility with retailers while creating consumer awareness of the Horizon
brand. As demand for Horizon's organic fluid milk products develops in each
conventional supermarket, Horizon is then able to introduce other organic dairy
products, such as yogurt, cheese and butter. Although the Company anticipates
that its product mix will change over time as it introduces other organic dairy
products in accordance with this business strategy, the Company does not believe
that the product mix will change materially in the near term.

  Organic Fluid Milk Products. Horizon currently markets 21 SKUs of fluid milk
under the Horizon brand. The April 1998 acquisition of the Juniper Valley Farms
brand of organic products contributed significantly to the fluid milk product
offerings.

  The Horizon brand organic fluid milk products are made by processing organic
farm milk sourced from either the Company-owned dairy farms or other
strategically located organic farm milk producers. The Company's processors use
standard dairy industry homogenization and pasteurization methods. See "--
Production and Processing."

  The Horizon brand organic fluid milk products have distinct product packaging
consistent with the Company's trade dress theme. See "--Marketing." The
Company's sales and distribution strategy for its organic fluid milk products
includes a network of natural foods distributors, dairy distributors and direct
sales to supermarket chains. See "--Sales and Distribution."

  Other Organic Dairy and  Non-Dairy Products.   Horizon currently markets 36
SKUs of other (non-fluid milk) organic dairy products such as cheese, yogurt,
butter, sour cream, and cottage cheese. In addition, Horizon offers 9 SKUs of
the following organic non-dairy products: eggs and  citrus juices. Following
organic fluid milk, the Company's next largest product line, organic yogurt, has
declined as a percentage of total net sales as the Company has introduced
additional organic dairy products. Horizon's sales of organic yogurt products
comprised approximately 10%, 14% and 17% of its net sales in fiscal 1998, 1997
and 1996, respectively. Horizon's sales of organic butter products comprised
approximately 6.6% of its total net sales in fiscal 1998 up from 5.5% in fiscal
1997. The remainder of the Company's total net sales includes sales of its
cheeses, cottage cheese, cream cheese, sour cream and immaterial sales of non-
dairy products such as eggs and citrus juices.

    Yogurt.   Organic yogurt was the first product which the Company introduced
when it was founded. The Company currently sells 17 SKUs of organic yogurt in a
variety of flavors. Horizon is the leading brand of organic yogurt in
conventional supermarkets. Horizon's organic yogurts are made by a dairy
processor located in Wisconsin that combines the Company's organic skim milk
with an organic "yogurt base" sourced from other certified organic producers,
along with the Company's organic nonfat dry milk powder. The organic yogurt base
includes a certified organic enzyme, fruit (or other flavoring, as applicable),
and sugar. The Company's processor uses standard yogurt blending and
pasteurization methods. See "--Production and Processing." Although the Company
has chosen to use a single source for processing its organic yogurt products,
the Company believes that there are alternative sources available which the
Company could use without a material disruption to its business.

    Butter.   The Company introduced butter in 1996 and currently sells two
SKUs, salted and unsalted. Horizon's organic butters are made by a dairy
processor located in California that uses a standard churning process on the
"cream" which the Company produces at its Idaho Dairy and separates using its
farm milk separator. See "--Production and Processing." The organic cream is
mixed with an enzyme during the churning process. Although the Company has
chosen to use a single source for processing its organic butter products, the
Company believes that there are alternative sources available which the Company
could engage without a material disruption to its business. See "--Production
and Processing."

                                       6


<PAGE>
 
    Hard Cheese, Cottage Cheese, Cream Cheese and Sour Cream.   The Company
currently sells 17 SKUs of cheese and sour cream, including block cheeses and
shredded cheeses. Horizon's organic cheese is made by several dairy processors
in Wisconsin that use standard cheese processing methods. All cheese is made by
combining 3% organic fluid milk with enzymes. The specific enzyme used
determines the flavor of the cheese. The process involves curdling, followed by
drying. A longer drying process produces a harder finished cheese. For example,
cottage cheese is harvested immediately after the curdling process, prior to
drying. Hard cheddar cheese is harvested after being dried for an extended
period of time. The Company's sour cream is processed using the same method, but
with different enzymes and no drying. The Company's shredded cheeses are cut by
the dairy processor. See "--Production and Processing."

    Citrus Juices.   In September 1998, Horizon introduced a line of chilled,
not-from-concentrate, pasteurized, certified organic juices. The Company
currently sells 3 SKUs, orange juice with pulp, orange juice without pulp and
ruby red grapefruit juice. Horizon sources its organic oranges and ruby red
grapefruits from premium growers in Florida and California and then partners
with top juice processors and packers in the two states.  During production,
the juices, which are not from concentrate and  contain no added sugar or water,
are flash pasteurized. Both orange juices contain a blend of Valencia and other
orange varieties that deliver an exceptionally sweet rich taste.

  The Horizon brand dairy products each carry the Horizon brightly-colored
flying cow and earth logo and bright colors as well as, except for certain
yogurt flavors, the red, yellow and blue colors which are part of the Company's
trade dress theme. The Horizon organic citrus juice products also carry the
Horizon brightly-colored flying cow and earth logo and bright colors which are
part of the Company's trade dress theme. See "--Marketing." The Company's sales
and distribution strategy for its products involves a network of natural foods
distributors, dairy distributors and direct sales to supermarket chains. Because
of their relatively long shelf life, the Company's products are typically stored
at public warehouses located in San Francisco and Chicago and at a warehouse
located outside of New York City. See "--Sales and Distribution."

 
Marketing

  Horizon's marketing strategy is designed to continue to build awareness of the
Horizon brand and generate consumer loyalty. The Company believes that its
distinctive product packaging, which stands out in crowded refrigerated cases,
is a key element to its branding strategy. All of the Company's organic fluid
milk and other dairy products carry the Company's distinctive, brightly-colored
flying cow and earth logo. In addition, all of the Company's organic fluid milk
products and certain of the Company's other organic dairy products are packaged
using the bright red, yellow and blue colors which are part of the Company's
trade dress theme. In addition, the Company uses its packaging to carry
educational information about the value of organic products. For example, the
Company's half gallon fluid milk product packaging carried information about the
Organic Foods Production Act, including the Company's position on the Act and
the USDA's address to which consumers could send comments.

  Horizon also engages in other traditional consumer and trade marketing
activities, including public relations activities, consumer coupons, product
sampling and trade promotions. Horizon plans to increase its marketing spending
as a percentage of sales as part of its strategy to increase consumer awareness
of the Horizon brand and the value of organic products through additional
consumer-oriented marketing activities, such as consumer promotions and
advertising. Horizon plans to focus these efforts initially in highly developed
mass markets which have demonstrated market acceptance of organic products, such
as Los Angeles, San Francisco, Denver and New York City.

  Horizon's marketing strategy also includes leveraging the Company's
increasingly well-known brand by extending it to new product categories. For
example, the Company currently licenses its brand to Glenwood Foods, L.L.C. and
NuCal Foods, Inc. for use in connection with the sale of organic eggs. In
addition, the Company recently entered into its first international trademark
licensing agreement with Takanashi Milk Products, Ltd. The three-year agreement
includes provisions for the two companies to co-brand organic dairy products for
the Japanese market.  Horizon will consider other licensing and co-branding
arrangements where the Company's organic dairy products can be used as
ingredients in other organic products.

                                       7


<PAGE>
 
Sales and Distribution
 
  Horizon's sales and distribution strategy is focused on building the Horizon
brand nationwide in conventional supermarkets while maintaining its leading
position in natural foods stores. Horizon's sales and distribution strategy is
similar for both its organic fluid milk products and its other organic dairy
products. Horizon currently offers 66 SKUs of premium-priced organic products
under the Horizon brand. Horizon estimates that it is currently selling its
organic products in over 5,000 retail locations, including conventional and
natural foods supermarkets, specialty retailers and natural foods stores.
Horizon distributes its products to retailers across the United States through
natural foods distributors, dairy distributors and directly to supermarket
chains. Horizon's sales team includes regional sales managers who are
responsible for all selling activities and customer relationships as well as
managing a network of food brokers to facilitate selling and distribution to,
and in-store merchandising for, retailers. The field sales personnel work
closely with Horizon's internal customer service team to meet the daily order
and logistic needs of the Company's customers. In addition, Horizon conducts
national marketing programs with the two largest natural foods retailers, Whole
Foods Markets and Wild Oats Markets.

  Horizon's distributors generally deliver the Company's products directly to
retail stores. Horizon's retail supermarket chain customers typically take
delivery of Horizon's products at the customer's distribution warehouse. In
fiscal 1998, the Company's largest account was United Natural Foods, a national
distributor which is comprised of five regional distributors who have
independent purchasing arrangements with the Company. For such period, these
five regional distributors accounted for approximately 20% of the Company's
sales.

  In June 1998, Horizon entered into agreements with Suiza Foods Corporation
("Suiza"), a leading manufacturer and distributor of fresh milk and related
dairy products. The Company believes that its relationship with Suiza will
provide it with opportunities to enhance the Company's market penetration in a
number of key markets nationally. See "--Strategic Relationships."


Competition

  The dairy business is highly competitive. It consists of a range of
competitors, including large, conventional dairies, large food companies with
well-established dairy product brands and retailers with private-labeled fluid
milk and other products which together occupy a significant portion of the
available shelf space in Horizon's target retail markets.

  The Company's principal competitors in the market for organic fluid milk vary
by region and include Organic Cow of Vermont, Inc. (a regional organic dairy
located in New England), Organic Valley/CROPP Cooperatives (which is marketed by
CROPP, a dairy cooperative located in Wisconsin which supplies the Company with
organic fluid milk), Alta Dena Certified Dairy (a regional organic dairy located
in Southern California) and Straus Family Creamery (a regional organic dairy
located in Northern California). Many of these competitors also sell other
organic dairy products in competition with Horizon on a national basis.

  The Company's principal competitors in the market for organic dairy products
also vary by region, and include the competitors who sell organic fluid milk as
well as Stonyfield Farm (a national organic and conventional dairy located in
New Hampshire), Springfield Creamery (a regional organic and conventional dairy
located in Oregon) and Brown Cow West, Inc. (a regional organic and conventional
dairy located in Northern California).  The Company's principal competitor for
organic citrus juices is Pavich Farms (a national producer and distributor of
organic produce and juice located in Terra Bella, CA) In addition, Horizon
expects increased competition from new and existing competitors in its market
and there can be no assurance that the Company will be able to compete
effectively in the future.

                                       8


<PAGE>
 
Production and Processing

  Horizon has established an extensive, vertically-integrated production,
processing and distribution system, which includes two Company-owned organic
dairy farms, relationships with strategically-located organic farm milk
producers, a Company-owned farm milk separator and a network of geographically-
dispersed dairy processors. Since 1995, Horizon has focused its resources on
improving this vertically integrated system to continuously reduce the cost of
producing, processing and transporting organic fluid milk to retail stores and
to improve product shelf life. Horizon began operations with a single source of
organic farm milk located in Wisconsin and a fluid milk processor located in
Iowa which delivered the Company's organic fluid milk to customers nationwide.
Horizon has improved the efficiency of its supply chain by adding geographically
dispersed organic farm milk producers and processors. Horizon currently sources
organic farm milk from producers in six regions across the United States and
uses five fluid milk processors.

  Organic Milk Supply.   The Company uses its organic farm milk supply in the
production of all of its organic dairy products, including its organic fluid
milk products as well as its other organic dairy products. See "--Products." The
majority of Horizon's organic farm milk is produced at the Company's Idaho
Dairy, where the Company also grows a significant amount of organic feed and
performs first stage farm milk processing. The Idaho Dairy encompasses over
3,800 acres, including almost 2,000 acres of certified organic cropland, and has
approximately 5,000 certified organic milking cows. In fiscal 1998, the Idaho
Dairy provided over 75% of Horizon's requirements for organic farm milk. The
Company uses a farm milk separator at its Idaho Dairy to capture excess
butterfat, or "cream", which is then used to make value-added organic dairy
products such as butter and cream cheese. The separator also enables the Company
to inventory for later sale the organic premium of the organic farm milk in
products such as cheese and non-fat dry milk powder.

  In 1997, Horizon completed construction of the Maryland Dairy, a strategically
located milk supply, from which Horizon supplies farm milk for products sold in
the Eastern United States. The Maryland Dairy encompasses over 450 acres, which
the Company anticipates will be able to produce certified organic feed on the
farmland in the third quarter of 2000. The Maryland Dairy began milking its
first certified organic cows in March 1998. The Company currently has a permit
to maintain 556 certified organic cows at the Maryland Dairy, while the milk
parlor is designed to milk 1,000 cows per day. The Company's ability to operate
the Maryland Dairy profitably depends, in part, on its ability to secure
operating permits for additional cows. The Company plans to apply for additional
permits over the next 12 months. The permitting process will require that the
Company make additional capital expenditures at the Maryland Dairy to
accommodate the addition of such cows. There can be no assurance that the
Company will be able to obtain the requisite permits to increase the number of
cows at the Maryland Dairy. See "Risk Factors--Risks Related to Establishing New
Organic Dairy Farms."

  The Company sources the remainder of its farm milk supply from small
independent farmers and dairy cooperatives, including CROPP, a dairy cooperative
consisting of over 100 independent dairy farmers located principally in
Wisconsin. CROPP sells organic fluid milk and other dairy products in
competition with the Company under the Organic Valley brand. In connection with
the Juniper Valley Farms brand acquisition, Horizon acquired supply agreements
with a network of certified organic dairy farmers in New York. Horizon intends
to supply products to markets in the Northeastern United States sourced from
these organic dairy farmers.

  As with most agricultural products, the supply of organic farm milk used by
the Company can be affected by a number of factors beyond the Company's control.
The Company is particularly susceptible to these factors because there are
relatively few qualified suppliers and because more than half of the Company's
current milk supply originates from the Company's dairy farms. See "Risk
Factors--Risks Related to Organic Farm Milk Cost and Supply."

  Processing.  Organic fluid milk is produced to order and must be shipped
immediately so that it arrives at retail stores with the maximum shelf life.
Deliveries of organic farm milk to dairy processors must be timed to arrive when
the dairy processors have cleaned their equipment of all conventional milk
residue. The Company's other organic dairy products have longer shelf lives and
therefore do not have the same timing requirements as the Company's organic
fluid milk products, however processors must be located within a reasonable
distance from the 

                                       9

<PAGE>
 
Company's sources of organic farm milk. To address processing logistics, Horizon
has a strategically located, nationwide network of processors who manufacture
and package the organic fluid milk and other organic dairy products for
distribution to Horizon's customers. See "--Products."

   Horizon has a national network of 17 dairy processors which process the
Company's organic farm milk into refrigerated organic fluid milk and other
organic dairy products. In addition, it has four processors which produce
organic citrus juices. The Company also uses three refrigerated warehouses where
it inventories organic dairy products. The costs associated with processing
arrangements are included in the cost of sales. These costs include the cost of
processing as well as payments which Horizon makes to processors which are then
paid into the Federal Milk Market Order System. The Company's product sales mix
affects its overall gross margin since processing costs vary by product.
Although the Company has a long-term processing agreement with Worcester
Creameries Corp. ("Worcester"), and processing and distribution agreements with
certain Suiza subsidiaries, it does not have written agreements with its other
processors.

  Transportation.   Transportation costs represent a significant portion of the
Company's cost of sales. Horizon outsources all of the inbound and outbound
transportation of organic farm milk from the producers to the processing plants
as well as the transportation of finished goods from the processing plants to
the point of distribution. Horizon continuously strives to reduce transportation
costs by strategically locating producers and processors as close as possible to
customers.


Intellectual Property Rights

  The Company's logo and product packaging are integral to the success of the
Company, and the Company intends to take action to protect against imitation of
its logo and packages and to protect its trademarks and copyrights as necessary.
The Company currently has five registered trademarks and ten trademark
applications pending. The Company's trademark registrations can be renewed
perpetually provided that the Company files an affidavit with the United States
Patent and Trademark Office between the fifth and sixth year anniversary of the
trademark registration date which states that the Company has been using the
registered trademark on a continual basis in interstate commerce; and further
provided that the Company files a renewal notice at the end of each ten year
anniversary of the trademark registration date. The Company's five trademark
registrations were obtained between 1994 and 1996 and will be able to be renewed
beginning 2004. There can be no assurance that other third parties will not
infringe or misappropriate the Company's trademarks, trade dress and other
proprietary rights.

  In addition, the Company has developed substantial trade secrets and know-how
regarding the operation of organic dairy farms and caring for livestock without
the use of antibiotics or other drugs. Horizon also has proprietary product
formulations and processes and has built up proprietary sources of organic
ingredients.  However, there can be no assurances that some or all of the trade
secrets and other know-how that Horizon considers proprietary could be
developed, could otherwise become known by others or could be deemed to be
public domain.


Government Regulation

  United States Dairy Support Program and Federal Milk Marketing Order Program.
The Company's primary raw ingredient for its organic dairy products is organic
farm milk. The wholesale price of farm milk purchased from dairy producers by
dairy processors for fluid milk bottling is determined based on a combination of
factors including supply and demand and federal and state regulations. The
federal government regulates minimum farm milk pricing through federal market
orders and price support programs, and state governments can regulate farm milk
pricing by establishing their own market order programs or by forming compacts
that establish minimum prices for farm milk. Organic milk is presently
considered to be the same as farm milk for federal and state minimum pricing
purposes. The Company pays organic dairy producers, on a current basis, amounts
significantly in excess of the minimum prices required by federal, state or
regional authorities. As a result of these regulations, the Company also must
pay "pooling charges" and "compact over-order charges" and administrative
assessments for 

                                       10
<PAGE>
 
government mandated marketing programs. These pooling, compact and
administrative assessment charges are assessed retroactively on a monthly basis,
and the pooling and compact charges are not known or predictable in advance.
Should the amount of such charges increase to levels higher than anticipated by
the Company, or should the Company become obligated to pay charges under other
state programs, like it does in New England, its business, financial conditions
and results of operations may be materially adversely affected. For 1998 and
1997, the Company paid over $750,000 and $500,000, respectively, for pooling,
compact and administrative assessment charges.

  On a monthly basis federal and state market orders determine the minimum price
processors are required to pay for farm milk. Farm milk which is used to produce
fluid milk is categorized as Class I, cultured products and ice cream as Class
II, and butter, powdered milk and hard cheese as Class III and Class III-A. The
market orders set the "basic formula price" per one hundred pounds of Class III
milk, and establish incremental increases in the price for Class I and Class II
milk. Class I differentials are based on the location of the plant while Class
II differentials are the same in all market orders. Additionally, processors pay
a "butterfat differential" based on whether the milk contains more or less than
3.5% butterfat.

  The price actually paid by processors is based on the market order price
discussed above plus administrative and handling fees and premiums that may be
shared by the cooperative or independent producer. Cooperatives also generally
provide a receiving credit to processors which is based on processing plants
receiving deliveries evenly seven days a week. Payments for the market order
price and for the Class I and butterfat differentials are coordinated through
the market order administrator, but payments for premiums and other fees charged
by the producer are made directly to the cooperative or independent producer. As
a result of this pricing mechanism, processors in the same market order areas
pay essentially the same price for farm milk, and there is rarely any shortage
in the amount of farm milk available for Class I or Class II products. Dairy
producers receive a minimum blended price for their farm milk based upon the
total "pool" of dollars paid by processors in a given geographical region and
pursuant to these regulations. This process is known as "pooling" and the
difference between the farmers' blended or uniform price and the amount actually
paid by the processor for the milk is a "pooling charge."

  The Company contracts with milk processors to process fluid milk and is
responsible through those processors for these minimum farm milk prices, pooling
charges, compact charges and administrative assessments, the costs of which are
passed through to the Company by the processors of the organic milk. As a
practical matter, however, the Company pays the organic dairy producers amounts
significantly in excess of the minimum prices required by federal, state or
regional authorities. The "pooling" of minimum price milk proceeds by these
regulatory authorities does affect the actual minimum payments received by
organic dairy producers and can affect the Company's total costs which are tied
through milk supply contracts to the underlying formula prices.

  In addition, states in New England have established, and certain other states
are in the process of attempting to form, regional milk-price compacts designed
to provide farmers within the compact states with a minimum price which will
result in higher milk prices than the federally mandated minimum prices. For
example, the Northeast Interstate Dairy Compact has resulted in farm milk prices
higher than federal order minimum prices. These charges are assessed as "compact
over-order charges." As with the federal milk market orders, these charges are
not known or predictable in advance and may increase the Company's costs.

  Federal price support programs set the price the federal government will pay
for certain products such as hard cheese and non-fat dry milk; this support
price program can influence the Class III and Class III-A prices for milk which
in turn can impact the fluid milk price which is derived from the Class III
price. The federal government is phasing out price supports through 1999, at
which time price supports will be replaced with a loan program under which loans
for specified products will be available at the reduced 1999 support price.

  The USDA has proposed new rules for the federal milk marketing order program
which have been published for public comment. The comment period expired April
30, 1998. The USDA has recently rejected a proposal to establish a temporary
price floor for farm milk. The outcome of the USDA's other proposed rules are
uncertain.

                                       11

<PAGE>
 
  Since Horizon, as a milk processor, pays significantly more than any regulated
minimum prices, management does not believe that these matters should have a
material adverse effect on the Company's business; however, neither the final
form of any new federal regulations or existence or location of state compacts,
the raw milk price level, pooling or compact charges, nor the effect of such
matters on the Company can be predicted with any certainty.

  Organic Certification.   The federal government has proposed national
regulations to standardize organic certification requirements as part of the
Organic Foods Production Act which was enacted as part of the 1990 United States
Farm Bill. The final regulations are expected to be implemented in 1999. Horizon
believes that its own long-standing rigorous standards exceed both the existing
organic certification requirements and the proposed regulations under the
Organic Foods Production Act.

  CAFO Regulations.The United States Environmental Protection Agency (EPA) and
various state environmental agencies regulate Concentrated Animal Feed
Operations (CAFOs) to ensure compliance with animal waste management
limitations. CAFOs with more than 1,000 Animal Units (AUs) or those with more
than 300 AUs discharging directly into the waters of the United States are
required to obtain a National Pollution Discharge Elimination System (NPDES)
permit. CAFOs are required to limit discharge of animal waste through lined
wastewater retention structures (i.e., lagoons) and are subject to site
investigation for analysis of compliance. Horizon management believes that those
of its farms which qualify as CAFOs are presently in compliance with CAFO
regulations. These regulations have not had a material impact on the Company's
level of capital expenditures, earnings or competitive position, but, because of
the evolving nature of such regulations, management is unable to predict the
impact such regulations may have in the foreseeable future.

  Other Environmental Regulations. The Company is subject to certain federal,
state and local environmental regulations. These laws include, but are not
limited to, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended; the Resource Conservation and Recovery Act,
as amended; the Federal Water Pollution Control Act; and their state and local
counterparts and equivalents.

  The Company maintains aboveground or underground petroleum storage tanks at
two of its facilities. These tanks are periodically inspected to determine
compliance with applicable regulations. The Company may be required to make
expenditures from time to time in order to remain in compliance with such
regulations.

  Public Health Regulations. Horizon is extensively regulated under federal,
state and local laws. Regulation at the federal, state and local levels is
subject to change. As a manufacturer and distributor of food products, the
Company is subject to the Federal Food, Drug and Cosmetic Act and regulations
promulgated thereunder by the Food and Drug Administration (FDA). This
comprehensive regulatory scheme governs manufacturing (including composition and
ingredients), labeling, packaging and food safety. The FDA regulates
manufacturing practices, including quality assurance programs, for foods through
its current good manufacturing practices and regulations. In addition, the FDA
specifies the standards of identity for certain foods, including many of the
products sold by the Company, prescribes the format and content of certain
nutrition information required to appear on food product labels and approves and
regulates claims of health benefits of food products.

  In addition, the FDA enforces the Public Health Services Act and regulations
issued thereunder, which authorize regulatory activity necessary to prevent the
introduction, transmission or spread of communicable diseases. These regulations
require, for example, pasteurization of milk and milk products. The Company and
its products are also subject to state and local regulation through such
measures as the licensing of dairy manufacturing facilities, enforcement by
state and local health agencies of state standards for the Company's products,
inspection of the Company's facilities and regulation of the Company's trade
practices in connection with the sale of dairy products.

  Each of the Company's processors maintains quality control laboratories to
test milk, other ingredients and finished products, including Horizon's
products. Product quality and freshness are essential to the successful retail
distribution of dairy and refrigerated dairy products. To monitor product
quality at its facilities, the Company maintains quality control programs to
test products during various processing and packaging stages. Each dairy

                                       12

<PAGE>
 
manufacturing facility has its own staff of technicians who monitor products to
maintain high quality formulations and to protect against contamination.

  Employee Safety Regulations. The Company is subject to certain health and
safety regulations, including regulations issued pursuant to the Occupational
Safety and Health Act of 1970, as amended (OSHA). These regulations require the
Company to comply with certain manufacturing, health and safety standards.

  Compliance with existing or new regulations may require the Company to make
significant capital expenditures and otherwise to incur higher costs, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company may be subject to
additional laws or regulations administered by the USDA or other federal, state,
foreign or local regulatory authorities, the repeal of laws or regulations, or
more stringent interpretations of current laws or regulations, from time to time
in the future. The Company cannot predict the nature of such future laws,
regulations, interpretations, or applications, nor can it predict what effect
additional government regulations or administrative orders, when and if
promulgated, would have on its business in the future. Such laws could, however,
require the reconfiguration of production, processing and transportation methods
of the Company's products, including but not limited to more onerous food
safety, labeling, and packaging requirements; increased compliance regulations
for waste management; increases in transportation costs; higher costs under the
Federal Milk Marketing Order System or similar state programs; and greater
uncertainty in production and sourcing estimates. Any or all such government
actions could have a material adverse effect on the Company's business,
financial condition and results of operations.


Acquisitions

   On April 8, 1998, the Company completed the acquisition of the Juniper Valley
Farms brand of organic dairy products from Worcester, an affiliate of Elmhurst
Dairy (a large regional conventional dairy).  In connection with the acquisition
of the Juniper Valley Farms brand, Horizon also acquired supply agreements with
a significant network of organic dairy farmers in New York and entered into a
long-term processing agreement with Worcester.  As a result of the acquisition,
the Company recognized approximately $6.3 million of goodwill and other
intangibles which are being amortized over 15 years.


Strategic Relationships

  In 1998, Horizon entered into agreements with Suiza, a leading manufacturer
and distributor of fresh milk and related dairy products. The Company believes
that its relationship with Suiza will provide it with opportunities to enhance
the Company's market penetration in a number of key markets nationally. The
Company's arrangement with Suiza includes processing and distribution agreements
with certain of Suiza's subsidiaries. Horizon's relationship with Suiza includes
five-year processing and distribution agreements with two of Suiza's
subsidiaries: Model Dairy, a fluid milk processor located in Reno, Nevada, which
currently processes organic fluid milk for Horizon; and Garelick Farms, a fluid
milk processor and distributor with several locations in the Northeastern United
States. The processing and distribution agreements generally provide that both
Model Dairy and Garelick Farms will distribute all SKUs of Horizon's organic
fluid milk products which are available for sale in their respective
territories.  The Company also moved the processing of its organic chocolate
milk and organic cottage cheese to two Suiza owned facilities in California.


Employees

  As of December 31, 1998, the Company had 136 full-time employees and two part-
time employees. Management believes that the Company's relations with its
employees are good.

                                       13

<PAGE>
 
ITEM 2. PROPERTIES

  Horizon has two production facilities, the Idaho Dairy and the Maryland Dairy.
The Idaho Dairy consists of over 3,800 acres, including 22,755 square feet of
production and office space. Horizon owns this property, which serves as
security for the Idaho Dairy loan with Farm Credit Services. The Maryland Dairy
consists of over 450 acres, including 109,059 square feet of production and
office space (including barns). Horizon owns this property which serves as
security for two notes payable with Peoples Bank of Kent County, Maryland.
Horizon also leases a 13,050 square foot facility in Longmont, Colorado for its
corporate headquarters. The Company believes that its facilities are suitable
for the Company's purposes.


ITEM 3. LEGAL PROCEEDINGS

  From time to time, the Company may become involved in or subject to various
litigation and legal proceedings incidental to the normal conduct of the
Company's business. The Company is not involved in any material legal
proceedings.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  None


                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

  The Company's Common Stock began trading publicly in the over-the-counter
market through the NASDAQ National Market under the symbol "HCOW" on July 2,
1998.   Prior to that date, there was no public market for the Common Stock.
The closing price of the Company's Common Stock as reported on the NASDAQ
National Market as of March 1, 1999 was $15.75 per share. The following table
sets forth for the periods indicated the high and low closing sale quotations
for the Common Stock as reported on the NASDAQ National Market. The prices
reported do not include retail mark-ups, markdowns or commissions.

<TABLE>
<CAPTION>
                                                                                       High             Low
                                                                                   -------------  ----------------
<S>                                                                                <C>            <C>
For the Fiscal Year Ended December 31, 1998:
  Third Quarter..................................................................         $19.93            $12.75
  Fourth Quarter.................................................................         $16.25            $10.75
</TABLE>

  The Company has not declared or paid a cash dividend on its Common Stock.  The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying cash
dividends in the foreseeable future.  The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements and
financial condition of the Company.  In addition, the Company's line of credit
with U.S. Bancorp prohibit the payment of dividends.

  As of March 1, 1999, there were approximately 258 holders of record of the
Company's Common Stock.

  Since January 1, 1998, the Company has sold and issued the following
unregistered securities:

1.  On January 6, 1998, the Company issued 1,923 shares of its Common Stock at a
    cash price of $6.50 per share to a consultant in consideration for services
    rendered.

                                       14
<PAGE>
 
2.  On January 2, 1998, the Company issued 2,000 shares of its Common Stock at a
    cash price of $6.50 per share to a consultant for services rendered.

3.  On April 8, 1998, the Company issued warrants to purchase an aggregate of
    3,500 shares of Common Stock at an exercise price of $8.00 per share to a
    financial advisor.

4.  On July 8, 1998, the Company sold to Suiza 1,100,000 shares of Common Stock
    pursuant to a private placement. Suiza purchased the shares for $11.00 per
    share.

5.  On July 29, 1998, the Company issued 335 shares of Common Stock at a cash
    price of $14.876 per share to directors for services rendered.

6.  On October 29, 1998, the Company issued 410 shares of Common Stock at a cash
    price of $12.125 per share to directors for services rendered.

7.  On December 9, 1998, the Company issued 779 shares of Common Stock at a cash
    price of $5.335 for the exercise of warrants.

8.  On December 22, 1998, the Company issued 42,570 shares of Common Stock at a
    cash price of $5.335 for the exercise of warrants.

  The sales and issuances of securities in the transactions described in
paragraphs (1) through (8) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) thereof and/or Regulation D
promulgated under the Securities Act. The purchasers in each case represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof. Appropriate legends are affixed to the stock
certificates issued in such transactions. All recipients either received
adequate information about the Company or had access, through employment or
other relationships, to such information.

  A portion of the net proceeds from the initial public offering were used to
repay principal and accrued interest as follows (in thousands):

<TABLE>
<S>                                                                        <C>
Revolving line of credit                                                       $     9,310
Unsecured subordinated promissory notes                                              3,601
Senior subordinated promissory notes                                                 3,196
Non-interest bearing secured promissory note due July 8, 1998                        4,000
Term loan due July 31, 1998                                                          2,004
Other liabilities                                                                      101
                                                                               -----------
  Total                                                                        $    22,212
                                                                               ===========
</TABLE>

  In addition to the repayment of debt and other liabilities above, the Company
has used proceeds from the initial public offering for working capital
requirements and purchases of equipment.

                                       15
<PAGE>
 
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

  The selected financial data information below presents consolidated financial
information of the Company. The selected consolidated financial data should be
read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and related notes, included herein.


<TABLE>
<CAPTION>
                                                                                         Fiscal Year Ended
                                                                       -----------------------------------------------------
                                                                       Dec. 31,   Dec. 31,   Dec. 28,   Dec. 31,   Dec. 31,
                                                                         1998       1997       1996       1995       1994
                                                                       ---------  ---------  ---------  ---------  ---------
                                                                              (in thousands, except per share data)
<S>                                                                    <C>        <C>        <C>        <C>        <C>
Consolidated Statements of Operations Data:
 Net sales...........................................................   $49,360    $29,565    $15,986     $7,246     $3,436
 Cost of sales(1)....................................................    32,615     22,639     11,425      5,517      2,564
                                                                        -------    -------    -------     ------     ------
 Gross profit........................................................    16,745      6,926      4,561      1,729        872
 Selling expenses....................................................    11,007      5,656      3,270      1,620        478
 General and administrative expenses(2)..............................     3,338      2,384      1,066        633        298
                                                                        -------    -------    -------     ------     ------
 Operating income (loss).............................................     2,400     (1,114)       225       (524)        96
 Other income (expense), net(3)......................................      (825)    (1,108)      (184)      (122)         3
                                                                        -------    -------    -------     ------     ------
 Income (loss) from continuing operations before income taxes,
  minority interest and extraordinary item...........................     1,575     (2,222)        41       (646)        99
 
 Income tax benefit (expense)........................................      (675)       513        (14)        30         --
 Minority interest in loss of subsidiary(4)..........................        --        687         --         --         --
                                                                        -------    -------    -------     ------     ------
 Income (loss) from continuing operations............................       900     (1,022)        27       (616)        99
 Net income (loss) from discontinued dairy operations, net(5)........        --         --         --        107       (533)
 Extraordinary item, net of income tax(6)............................      (414)        --         --         --         --
                                                                        -------    -------    -------     ------     ------
 Net income (loss)...................................................   $   486    $(1,022)   $    27     $ (509)    $ (434)
                                                                        =======    =======    =======     ======     ======
 Net income (loss) per basic share(7)................................      $.07      $(.23)      $.01      $(.18)     $(.20)
                                                                        =======    =======    =======     ======     ======
 Net income (loss) per diluted share(7)..............................      $.06      $(.23)      $.01      $(.18)     $(.20)
                                                                        =======    =======    =======     ======     ======
 Weighted average shares outstanding:
  Basic..............................................................     7,339      4,488      3,264      2,791      2,120
  Diluted............................................................     7,742      4,488      3,283      2,791      2,120

Consolidated Balance Sheet Data:
 Cash and cash equivalents...........................................   $14,384    $   404     $  600    $     5    $    41
 Working capital (deficit)...........................................    28,298      2,935        414     (1,016)    (1,109)
 Total assets........................................................    69,356     32,737      5,232      2,414      4,259
 Long-term debt......................................................     4,923     17,960         --         --        500
 Total stockholders' equity (deficit)................................    55,970      8,886      3,264        798      1,057
</TABLE>

(1) Prior to fiscal 1997, the Company recorded its share of the losses of
    Sunrise Organic Farms, Inc. ("Sunrise") in other income (expense), net. As a
    result of the acquisition of the remainder of Sunrise in May 1997, a loss of
    $1.3 million is included in cost of sales for fiscal 1997.
(2) Includes $448,000 of expenses during fiscal 1997 relating to pre-operating
    costs associated with the Maryland Dairy.
(3) Includes the Company's share of the losses of Sunrise relating to its
    minority interest in Sunrise. The Company's shares of these losses were
    $158,000 and $85,000 for fiscal 1996 and 1995, respectively, of which
    $77,000 and $44,000, respectively, represents the Company's proportionate
    equity in losses recognized by Sunrise.

                                       16
<PAGE>
 
(4)  The results of operations of Sunrise have been included in the Company's
     consolidated statements of operations from January 1, 1997, with an
     offsetting minority interest recorded, covering the period in which Sunrise
     was not 100% owned by the Company, of $687,000 during fiscal 1997.
(5)  On May 30, 1995, the Company transferred the assets and liabilities of its
     dairy operations to Sunrise in exchange for Sunrise common stock. The
     Company's dairy operations as well as the gain on the disposal have been
     reflected as discontinued operations in the consolidated statements of
     operations in fiscal 1995 and 1994. The loss on the dairy operations in
     fiscal 1995 of $406,000 was offset by a gain on disposal of the dairy
     operations of $513,000 and in 1994 was $533,000.
(6)  The extraordinary item relates to the early extinguishment of the senior
     subordinated promissory notes and is comprised of the write off of
     unaccreted discount of $667,000.  The write off was charged to expense and
     is classified as an extraordinary item net of tax benefit of $253,000, in
     the Company's consolidated statements of operations for the year ended
     December 31, 1998.
(7)  Net income (loss) per share is computed using the weighted average number
     of common shares (basic) and common and common equivalent shares (diluted)
     outstanding during the period. See Note 2 to the Company's Consolidated
     Financial Statements.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

  This section contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in this section and in the section entitled "Risk
Factors."


Overview

  Horizon produces, processes and markets the leading brand of certified organic
fluid milk and a fullline of refrigerated certified organic dairy products.
Horizon has become the first dairy to offer nationwide distribution of organic
fluid milk by establishing a national network of organic farm milk producers and
processors and by building a nationwide customer base. From its position as the
market leader in organic fluid milk sales, Horizon has leveraged its brand to
create a full line of refrigerated organic dairy products.

  Formation and Structure of the Company.   Horizon was founded in Boulder,
Colorado in 1991 and introduced its first products, organic fat free yogurts, in
1992. The Company introduced organic fluid milk in 1993, and since that time it
has developed and introduced a number of new organic dairy products, including
cottage cheese, hard cheese, butter and sour cream. Since 1995, the Company has
focused its efforts on expanding and integrating a nationwide production,
processing and distribution system.

  From 1992 to 1994, the Company contracted for the supply of organic fluid milk
with an organic dairy cooperative which during that period was located only in
Wisconsin. In 1994, the Company made a strategic decision to begin developing
its own organic milk supply. Accordingly, the Company began building a herd of
organic cows and developing its own source of organic feed, and entered into a
lease and management agreement with Sunrise Organic Farms, Inc. ("Sunrise") a
subsidiary of Aurora Dairy Corporation ("Aurora") for a dairy farm in Idaho.
These facilities became the Company's Idaho Dairy in fiscal 1997. Aurora is
controlled by Marc Peperzak, the Chairman of the Company's Board of Directors.
In order to develop an organic farm milk supply for products sold in the Eastern
United States, in 1997, the Company began developing the Maryland Dairy.
Shipments of organic farm milk from the Maryland Dairy began in the first
quarter of 1998. In April 1998, the Company acquired the Juniper Valley Farms
brand, the leading brand of organic dairy products in the metro New York market.

  Customers, Revenue Recognition and Marketing.   Horizon's organic products are
sold in conventional and natural foods supermarkets, specialty retailers and
natural foods stores. Horizon's customers include natural foods distributors,
dairy distributors and supermarket chains. Once processed, products are either
delivered to, or picked up by the customers. Revenue is recognized at the time
of shipment or pick up. Sales to new customers are at times 

                                       17
<PAGE>
 
made on a 90-day guaranteed basis; if the customer is unable to sell all of the
Company's products during the first 90 days after it becomes a Horizon customer,
the Company buys back the excess inventory. Historically, the Company has
experienced a return rate of approximately 1% of sales under this guarantee.
Sales under this provision are not significant. Horizon engages in a range of
consumer and trade marketing activities, and in the future, plans to increase
its marketing spending as a percentage of sales.

  Internal Production of Milk.   In establishing the Idaho Dairy and the
Maryland Dairy, the Company made a substantial investment in organic dairy herds
and in converting the farmland to provide a source of organic feed. Horizon's
animal care and facility maintenance costs are significantly higher than
conventional dairies.

  The Company began converting the Idaho Dairy farm land to organic in 1994, but
due to the three-year growing requirement to be certified organic the feed grown
on the farmland was not certified as organic until 1997. The Company began
converting the Maryland Dairy to organic in 1997 and expects that it will be
certified organic beginning in 2000. From 1994 through 1996, the Company
purchased all of its organic feed from third party suppliers, and the Company
continues to purchase a majority of organic feed on the open market.

  The Company sells the feed it grows which it cannot certify as organic as
conventional feed at conventional prices. Since the prices of conventional farm
milk and feed historically have been significantly lower than organic, the
Company has experienced, and expects to continue to experience, lower gross
profit during periods when its Company-owned dairy farms are being converted to
organic.

  The cost of farm milk from the Idaho Dairy and the Maryland Dairy is
significantly influenced by the Company's ability to operate these dairy farms
at capacity. The Idaho Dairy achieved milking capacity in December 1997. During
1998, the Company's Maryland Dairy achieved permitted milking capacity (556
head). However, the Company's ability to operate the Maryland Dairy at maximum
capacity (1,000 head) will depend, in part, on its ability to secure operating
permits for additional cows. In Maryland, the Company must obtain a Waste Water
Discharge Permit from the Maryland Department of Environment. The permitting
process will require that the Company make additional capital expenditures at
the Maryland Dairy to accommodate the addition of such cows. There can be no
assurance that the Company will be able to obtain the requisite permits to
increase the number of cows at the Maryland Dairy.

  The Company follows generally accepted accounting principles for farm
accounting. Cows are depreciated using the straight-line method over five years
commencing with their first milking. The capitalized cost of each cow is based
on the purchase price plus pre-production costs. The Idaho Dairy and the
Maryland Dairy sell organic farm milk to Horizon at an inter-company transfer
price which the Company believes approximates fair value. All inter-company
sales have been eliminated in the Company's consolidated financial statements.

  Purchase of Organic Milk from Third Party Producers.   In order to augment its
internal supply of organic farm milk, the Company contracts with various organic
farmers and cooperatives throughout the United States. Except for one contract
which extends through December 2002, these contracts are generally for twelve to
twenty-four months and are renewable upon agreement by the Company and the
producer. All production contracts require that the Company purchase minimum
quantities of organic farm milk. If the Company cannot use the minimum amount as
organic fluid milk or other organic products, the Company sells the organic milk
as conventional milk and records the difference between the Company's purchase
price and the conventional price in cost of sales. See "Risk Factors--Risks
Associated with Conventional Dairy Prices " and "--Possibility of Adverse
Effects Resulting from United States Dairy Support Program and Federal Milk
Marketing Order Program."

  The prices which the Company pays some of its third party producers are based
on a fixed mark-up from the price for conventional farm milk. Changes in the
price of conventional farm milk and the availability of organic farm milk
directly affect the Company's cost of organic farm milk. See "Risk Factors--
Risks Associated with Conventional Dairy Prices " and "--Possibility of Adverse
Effects Resulting from United States Dairy Support Program and Federal Milk
Marketing Order Program."

                                       18
<PAGE>
 
  Milk Processing.  Horizon has a national network of 17 dairy processors which
process the Company's organic farm milk into refrigerated organic fluid milk and
other organic dairy products. In addition, it has four processors which produce
organic citrus juices. The Company also uses three refrigerated warehouses where
it inventories organic dairy products.  The costs associated with processing
arrangements are included in the cost of sales. These costs include the cost of
processing as well as payments which Horizon makes to processors which are then
paid into the Federal Milk Market Order System. The Company's product sales mix
affects its overall gross margin since processing costs vary by product.
Although the Company has a long-term processing agreement with Worcester and
processing and distribution agreements with certain Suiza subsidiaries, it does
not have written agreements with its other processors.

  Sales.   Horizon's sales of organic fluid milk products comprised
approximately 72% of its total net sales with $35.6 million, $20.8 million and
$12.3 million in sales in fiscal 1998, 1997 and 1996, respectively. The
Company's next largest product line, its organic yogurt products, has been
declining as a percentage of total net sales as the Company has introduced
additional organic dairy products. Horizon's sales of organic yogurt products
comprised approximately 10%, 14% and 17% of its net sales with $5.1 million,
$4.0 million and $2.7 million in sales in fiscal 1998, 1997 and 1996,
respectively. Horizon's sales of organic butter products comprised approximately
7% of its total net sales with $3.3 million, $1.7 million and $671,000 in fiscal
1998, 1997 and 1996, respectively. The remainder of the Company's total net
sales includes sales of its cheeses, cottage cheese, cream cheese, sour cream
and sales of non-dairy products such as eggs and citrus juices which were
introduced at the end of 1998. Although the Company anticipates that its product
mix will change over time as it introduces other organic dairy products in
accordance with its business strategy, the Company does not believe that the
product mix will change significantly in the near term. See "Business--
Products."

  Government Regulation of Milk Pricing.   The Federal Milk Market Order System
was developed to ensure the availability of farm milk for certain products such
as fluid milk and to provide minimum prices for farm milk regardless of how the
farm milk is actually used (i.e., whether it is used for a high value product
like fluid milk or a lower value product like non-fat dry milk powder). The
processor is responsible for paying fees to the Federal Milk Market Order
System. Dairy processors pass through these "pooling" charges to dairies, like
the Company, through their prices for processing farm milk. These payments are
determined by the Federal Milk Market Order System Administrators on a monthly
basis, are billed to the Company in the month after they are determined, are
generally related to conventional farm milk prices and can vary materially from
period to period.

  In addition, states in New England have established, and certain other states
are in the process of attempting to form, regional milk price compacts designed
to provide farmers within the compact states with a minimum price which will
result in higher milk prices than the federally mandated minimum prices. For
example, the Northeast Interstate Dairy Compact has resulted in farm milk prices
higher than federal order minimum prices. These charges are assessed as "compact
over-order charges." As with the federal milk market orders, these charges are
not known or predictable in advance and may increase the Company's costs. For
fiscal 1998 and 1997, the Company paid over $750,000 and $500,000, respectively,
for pooling, compact and administrative assessment charges. See "Risk Factors--
Possibility of Adverse Effects Resulting from United States Dairy Support
Program and Federal Milk Marketing Order Program."

  Acquisition of Juniper Valley Farms Brand.   On April 8, 1998, the Company
completed the acquisition of the Juniper Valley Farms brand of organic dairy
products from Worcester. As a result of the acquisition, the Company recognized
approximately $6.3 million of intangibles which are being amortized over 15
years.


Comparison of Fiscal Years Ended December 31, 1998 and December 31, 1997

  Net Sales.   Net sales includes product sales, royalties and consulting
revenue, less returns and allowances. Net sales increased 67% to $49.4 million
in 1998 from $29.6 million in 1997.  This increase was primarily due to the
addition of new retail accounts, including conventional supermarket chains;
increased sales to existing accounts; the introduction of several new products,
including organic chocolate milk, cottage cheese and orange juice; a price
increase; and sales generated under the Juniper Valley Brand.

                                       19

<PAGE>
 
  Gross Profit.   Gross profit consists of net sales, less cost of sales (which
includes the cost of raw materials, processing fees, inbound freight, pooling
charges, losses of organic premiums and net operating income or loss from farm
operations). Gross profit increased 142% to $16.7 million in fiscal 1998 from
$6.9 million in fiscal 1997. As a percentage of sales, gross profit increased to
33.9% in fiscal 1998 from 23.4% in fiscal 1997. This increase is due primarily
to the Company reaching capacity and completing organic conversion at the
Company's Idaho Dairy which contributed income versus losses for the comparable
period in 1997.  In addition, the Company continues to experience the benefits
from enhancing its national network of processors and distributors and record
high conventional prices in the last half of 1998.

  Selling Expenses.   Selling expenses include direct selling, marketing and
distribution costs. Selling expenses increased 95% to $11.0 million in fiscal
1998 from $5.7 million in fiscal 1997. As a percentage of sales, selling
expenses increased to 22.3% in fiscal 1998 from 19.1% in fiscal 1997, primarily
due to increased levels of marketing expenses, including hiring additional
marketing personnel as well as increased costs for new distribution.

  General and Administrative Expenses. General and administrative expenses
include operations and corporate support, and increased 40% to $3.3 million in
fiscal 1998 from $2.4 million in fiscal 1997. This increase is attributable to
the hiring of additional operations personnel, increased costs associated with
becoming a public company and increased amortization of intangible assets offset
by the elimination of pre-operating costs associated with the Maryland Dairy. As
a percentage of sales, general and administrative expenses decreased to 6.8% in
fiscal 1998 from 8.1% in fiscal 1997, due to increased leverage of general and
administrative expenses over a larger sales base.

  Other (Income) Expense, Net.  Other (income) expense, net decreased to
$825,000 in fiscal 1998 from $1.1 million in fiscal 1997.  This decrease is
primarily attributable to higher levels of indebtedness incurred to acquire the
remaining interest in the Idaho Dairy, to finance the acquisition and
development of the Company's organic dairy farm in Maryland and to finance the
acquisition of the Juniper Valley Farms brand offset by reduced interest due to
the repayment of indebtedness and interest earnings in the third and fourth
quarter of 1998.

  Minority Interest in Loss of Subsidiary.  Minority interest in loss of
subsidiary includes the minority stockholders' share of the losses from
operations of the Idaho Dairy for the period prior to the Company's acquisition
of the remainder of Sunrise Organic Farms, Inc. in the second quarter of fiscal
1997. Minority interest in loss of subsidiary was $687,000for the year ended
December 31, 1997.  In 1998 the operations of the Idaho Dairy are reflected in
the Company's Consolidated Financial Statements.

  Extraordinary Item.  The extraordinary item relates to the early
extinguishment of the senior subordinated promissory notes and is comprised of
the write off of unaccreted discount of $667,000.  The write off was charged to
expense and is classified as an extraordinary item net of tax benefit of
$253,000 in the accompanying Consolidated Statements of Operations.


Comparison of Fiscal Years Ended December 31, 1997 and December 28, 1996

  Net Sales.   Net sales increased 85% to $29.6 million in fiscal 1997 from
$16.0 million in fiscal 1996. This increase was primarily due to: development of
new retail accounts, particularly as a result of the Company's expansion into
conventional supermarkets; increased sales to existing accounts; and the
introduction of several new products including hard cheeses, cottage cheese,
eggs and new SKUs of yogurt and fluid milk. Also included in the increase was
$879,000 from the sale of conventional milk from the Idaho Dairy prior to the
conversion to 100% organic.

  Gross Profit.   Gross profit increased 52% to $6.9 million in fiscal 1997 from
$4.6 million in fiscal 1996. As a percentage of sales, gross profit decreased to
23.4% in fiscal 1997 from 28.5% in fiscal 1996. Gross profit on organic fluid
milk and other organic dairy products remained relatively flat as a percentage
of sales but was offset by the consolidation of the Idaho Dairy operations. The
operations of the Idaho Dairy in fiscal 1997 reflect the costs associated with
expanding the Idaho Dairy to capacity and completing its conversion to organic
(including costs associated with culling conventional cows and sourcing organic
feed). In addition, the Company recognized losses 

                                       20
<PAGE>
 
of organic premiums of $73,000 in fiscal 1996. In fiscal 1997, the Company also
completed the transition of the Idaho Dairy to 100% organic, which included the
disposition of the balance of the conventional cows. The loss associated with
the disposition of conventional cows was $310,000 and was booked as an expense
in fiscal 1997.

  Selling Expenses.   Selling expenses increased 73% to $5.7 million in fiscal
1997 from $3.3 million in fiscal 1996. As a percentage of sales, selling
expenses decreased to 19.1% in fiscal 1997 from 20.4% in fiscal 1996 primarily
due to increased leverage of selling expenses over a larger sales base,
partially offset by the increased costs associated with expanding into
conventional supermarkets.

  General and Administrative Expenses.   General and administrative expenses
increased 124% to $2.4 million in fiscal 1997 from $1.1 million in fiscal 1996.
As a percentage of sales, general and administrative expenses increased to 8.1%
in fiscal 1997 from 6.7% in fiscal 1996 primarily due to $448,000 in pre-
operating costs associated with the Maryland Dairy.

  Other Income (Expense), Net.   Other income (expense), net increased to $1.1
million in fiscal 1997 from $184,000 in fiscal 1996 primarily as a result of
increased indebtedness related to both the purchase of Sunrise and a debt
financing. Other expense included $158,000 loss in fiscal 1996 as a result of
the Company's ownership of a minority interest in Sunrise. A similar expense did
not occur in fiscal 1997 because the Company's acquisition of the remainder of
Sunrise resulted in the consolidation of those operations with the Company's,
beginning January 1, 1997.

  Minority Interest in Loss of Subsidiary.   The Company recognized Sunrise as
an investment during fiscal 1996 due to its less than 50% ownership during that
year. The minority interest in loss of subsidiary was $687,000 in fiscal 1997 to
recognize minority stockholders' proportionate share of losses prior to 100%
ownership by the Company in May 1997.


Liquidity and Capital Resources

  Horizon's primary sources of capital have been cash flows from operations,
trade payables, bank indebtedness and the sale of debt and equity securities.
Primary uses of cash have been the financing of the Idaho Dairy and Maryland
Dairy operations and acquisitions of brand names and distribution networks. The
following table presents a summary of the Company's cash flows for fiscal 1998,
1997 and 1996:

<TABLE>
<CAPTION>
                                                                                        Fiscal Year
                                                                  --------------------------------------------------------
                                                                       1998                 1997                 1996
                                                                  ---------------      ---------------      ---------------
                                                                                      (in thousands)
<S>                                                               <C>                  <C>                  <C>
Net cash provided by (used in) operating activities.............       $  3,667             $   (257)            $   (477)
Net cash used in investing activities...........................        (19,249)             (10,003)              (1,191)
Net cash provided by financing activities.......................         29,562               10,064                2,263
                                                                ---------------      ---------------      ---------------
Net increase (decrease) in cash and cash equivalents............       $ 13,980             $   (196)            $    595
                                                                ===============      ===============      ===============
</TABLE> 
  Net cash provided by operations increased from a negative $257,000 in fiscal
year 1997 to a positive $3.7 million in fiscal year 1998. This increase is
primarily attributable to non-cash charges associated with depreciation and
amortization and the disposal of cattle combined with an increase in trade
accounts payable and other accrued expenses and the collection of trade accounts
receivable, all of which were offset by purchases of inventories.

  Net cash used in investing activities was $19.2 million, $10.0 million and
$1.2 million in fiscal 1998, 1997 and 1996, respectively.  The expenditures in
1998 related primarily to the net investment in marketable securities, the
acquisition of the Juniper Valley brand and expenditures related to the purchase
of property and equipment at the Maryland Dairy and the purchases and costs of
raising cattle at the Maryland Dairy and the Idaho Dairy.  The expenditures in
fiscal 1997 and 1996 related primarily to the investment in and acquisition of
Sunrise and purchases of equipment.

                                       21
<PAGE>
 
  Net cash provided by financing activities was $29.6 million, $10.1 million and
$2.3 million in fiscal 1998, 1997 and 1996, respectively.  The increase in
fiscal 1998 is primarily due to the Company receiving net proceeds of $46.3
million from the sale of common stock through an initial public offering and a
concurrent placement, offset by the repayment of indebtedness. In fiscal 1997,
the Company received net proceeds of $4.3 million (net of treasury stock
acquired) from the sale of common stock and $6.0 million (net of repayments)
from the proceeds of the issuance of long-term debt and the restructuring of the
Company's credit lines, most of which relate to the acquisition of Sunrise.  In
fiscal 1996, the Company received net proceeds of $2.3 million from the sale of
Common Stock, and $775,000 from the issuance of bridge notes resulting in a net
increase in borrowings, net of repayment of debt, of $22,000.

  On July 8, 1998, with the proceeds from the initial public offering, the
Company repaid principal and accrued interest on: the $4.0 million non-interest
bearing secured promissory note due July 8, 1998; the $2.0 million term loan due
July 31, 1998; $9.3 million outstanding on a revolving line of credit; $3.6
million in unsecured subordinated promissory notes; and $3.1 million of senior
subordinated promissory notes. In addition to the repayment of this debt and
related liabilities, the Company has used proceeds from the initial public
offering for working capital requirements and purchases of equipment.

  On October 14, 1998 the Company amended the terms of its revolving line of
credit with U. S. Bancorp. The amended line of credit provides for an aggregate
principal amount of up to $20.0 million, bearing interest at U. S. Bancorp's
announced reference rate less .25% and has a final maturity on June 30, 2000.
The revolving line of credit agreement includes certain financial and other
covenants including, limitations on indebtedness, liens, capital expenditures,
sales of assets, mergers, investments and dividends, At December 31, 1998, the
Company had no amounts outstanding under the line of credit.

  In fiscal 1998, the Company refinanced its Note and Loan Agreement with Farm
Credit Services in an aggregate principal amount of $4.3 million with a final
maturity of July 1, 2010. As a result, the interest rate was reduced from 7.5%
to 6.5% and the stockholder guarantees were removed.  The Note and Loan
Agreement contains certain financial and other covenants including, limitations
on the sale or encumbering of the Maryland Dairy assets. At December 31, 1998,
the Company owed $3.7 million under the Note and Loan Agreement.

    Company management believes that cash and cash equivalents, funds generated
from operations and availability under the line of credit will be sufficient to
meet the Company's foreseeable operating and capital expenditure needs.


Recent Accounting Pronouncements

  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (Statement No. 133), effective for fiscal years beginning
after June 15, 1999.  Statement No. 133 establishes accounting and reporting
standards for derivative instruments and requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company has not yet
adopted Statement No. 133. The Company believes the accounting and reporting
standards required by this statement will not be significant. The Company will
comply with the accounting and reporting requirements under this statement when
required.


Year 2000 Compliance

  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 98 is recognized as the
year 1998).  When the year 2000 occurs, these systems could interpret the year
as 1900 versus 2000, which in turn, 

                                       22

<PAGE>
 
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 its
corporate headquarters.  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 April 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 45 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 get all systems Year
2000 compliant.

  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 May 1999.


Risk Factors

  This Report contains forward-looking statements which involve risks and
uncertainties.  The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Report.
 
  Risks Related to Organic Farm Milk Cost and Supply.   More than half of the
Company's current milk supply originates at its Idaho Dairy and Maryland Dairy.
The balance of the Company's farm milk is sourced from third parties. The
Company cannot maintain any significant inventory of its farm milk or fluid milk
finished goods because they are perishable and have a short shelf life. In the
event that production at or transportation from the Idaho Dairy or the Maryland
Dairy were interrupted by fire, floods or other natural disasters, disease, work
stoppages, regulatory actions or other causes, the Company would be unable to
continue to produce its products at such facilities. An interruption in
operations due to any of the foregoing could materially and adversely affect the
Company's business, financial condition and results of operations.

                                       23

<PAGE>
 
  As with most agricultural products, the supply of the organic farm milk used
by the Company can be affected by a number of factors beyond the Company's
control, including various livestock diseases and other acts of nature. The
Company is particularly susceptible to these factors because there are
relatively few qualified suppliers and because of the long lead time required to
convert conventional dairy farms to organic. Should the Company be unable to
obtain a sufficient supply of organic milk from its existing suppliers, it may
be difficult to procure alternative sources of supply. The inability of the
Company to procure sufficient quantities of organic milk on acceptable terms
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Production and Processing."

  Risks Related to Organic Feed Cost and Supply.   The Company requires a
substantial amount of organic feed to supply the Idaho Dairy and the Maryland
Dairy, which together produce more than half of the Company's organic farm milk
requirements. The cost of organic feed accounts for a material portion of the
Company's cost of production. Although the Company produces a significant
portion of its organic feed requirements at the Idaho Dairy, the Company
currently purchases the majority of its organic feed requirements from third
party organic farms and expects to continue to do so in the future. As with most
agricultural products, the cost and supply of the organic feed used by the
Company can be affected by a number of factors beyond the Company's control,
including various adverse weather conditions, various plant diseases, pests and
other acts of nature. In addition, because of the three-year lead time required
to convert conventional farms to organic, alternative sources of supply may not
be immediately available. To be certified as organic, feed must be grown on land
that has been free of synthetic fertilizers, pesticides and herbicides for at
least three years. The inability of the Company to procure sufficient quantities
of organic feed on acceptable terms would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Production and Processing."

  Risks Associated with Conventional Dairy Prices.   In order to augment its
internal supply of organic farm milk, the Company contracts with various organic
farmers and cooperatives throughout the United States. The prices which the
Company pays some of its third party producers are based on a fixed mark-up from
the price for conventional farm milk.  All production contracts require that the
Company purchase minimum quantities of organic farm milk. If the Company cannot
use the minimum amount as organic fluid milk or other organic products, the
Company sells the organic milk as conventional milk and records the difference
between the Company's purchase price and the conventional price in cost of
sales. Changes in the price of conventional farm milk directly affect the
Company's cost of organic farm milk. To the extent that conventional prices
increase or decrease due to external factors, e.g., availability, regulation,
the Company's results of operations may be materially impacted.

  Risks Related to the Implementation of the Proposed Federal Organic
Certification Regulations.   Currently, there is a wide range of organic
standards which are applied by a variety of state agencies and private
certification organizations. In December 1997, the federal government published
proposed national regulations to standardize organic certification requirements
as part of the Organic Foods Production Act of 1990 (the "Organic Foods
Production Act") which was enacted as part of the 1990 United States Farm Bill.
Horizon believes that these regulations, if adopted in their initially proposed
form, would permit competitors to sell fluid milk and other dairy products
labeled "organic" which would not satisfy Horizon's own organic standards.
Horizon incurs significant costs to produce organic products that adhere to its
rigorous standards, and competitors whose "organic" practices are not as
rigorous may be able to compete with Horizon on the basis of price by producing
lower cost "organic" milk. Horizon does not intend to lower its organic
standards and intends to continue to compete on the basis of the quality and
consistency of its products. There can be no assurance that Horizon will be able
to compete successfully against lower cost competitors in any of its markets,
and the failure to compete successfully could have a material adverse effect on
the Company's business, financial condition and results of operations. In order
to adhere to its philosophy and maintain its rigorous standards, the Company may
make operational decisions that are inconsistent with maximizing short term
profits, which may result in a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Competition" and "Business--Horizon Organic Dairy Standards."

  Risks Related to Difficulties of Managing Growth.   To date, the Company has
experienced substantial growth in its revenues, operations and employee base,
and has undergone substantial changes in its business that 

                                       24

<PAGE>
 
have placed significant demands on the Company's management, working capital and
financial and management control systems. The Company's growth also may place a
significant strain on the Company's management, working capital, financial and
management control systems and its supply, production and distribution systems.
There can be no assurance that the Company's existing systems or that any new
systems it acquires will be adequate to meet the Company's future needs. In
addition, any future growth also will impose significant added responsibilities
on senior management, including the need to identify, recruit and integrate new
members of management. There can be no assurance that such additional qualified
management will be identified and retained by the Company. To the extent that
the Company is unable to manage its growth effectively, or is unable to attract
and retain additional qualified management, the Company's business, financial
condition and results of operations may be materially adversely affected. The
Company's results of operations also will be adversely affected if revenues do
not increase sufficiently to compensate for the increase in operating expenses
resulting from any expansion. See "Business--Sales and Distribution," and "--
Production and Processing."

  Risks Associated with Changes in Consumer Preferences.   The market for
organic food products, including the Company's products, is subject to changing
consumer trends, demands and preferences. Trends within the organic and natural
foods industry are constantly evolving, and the failure of the Company to
anticipate, identify or react to changes in these trends could lead to, among
other things, reduced demand and price reductions, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's success depends, in part, on its ability to anticipate
the tastes and dietary habits of consumers and to offer products that appeal to
their preferences on a timely and affordable basis. The Company believes that
its growth to date has been due, in large part, to increased awareness as to
food safety issues and a growing consumer preference for a healthy lifestyle.
All of the Company's current and planned future products are organic. The
Company's business, financial condition and results of operations would be
materially adversely affected if consumer interest in organic foods were to
decline.

  Risks Associated with Trade and Consumer Acceptance in Distribution Channels.
The Company's growth will depend on its ability to continue to expand its
distribution in conventional supermarkets without significant impact on other
current channels. The conventional supermarket channel of distribution has
presented, and will continue to present, competitive and marketing challenges,
risks and marketing and distribution costs that are different from those faced
by the Company in the natural foods market. In addition, the Company's expansion
in the conventional supermarket channel of distribution will require it to
attract consumers in broader demographic and geographic markets. There can be no
assurance that the Company will be successful in attracting consumers in new
distribution channels or in other demographic and geographic markets. The
inability to achieve trade and consumer acceptance in new markets could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, premium-priced products, such as the
Company's, are sensitive to national and regional economic conditions, and
demand for products supplied by the Company may be adversely affected from time
to time by economic downturns.

  Risks Related to Internal Growth Strategy and Possible Acquisitions.   The
Company's continued growth depends in part upon its ability to expand into new
geographic areas, either through internal growth or by acquisition. There can be
no assurance that the Company will be successful in such expansion or that such
expansion can be accomplished on a profitable basis. The Company's ability to
increase net sales of its existing business and the net sales of any
subsequently acquired businesses will be affected by various factors, including
demand for its products, the availability of farm milk, the cost of expanding
and upgrading its facilities, managing its supply and distribution logistics,
the Company's ability to expand the range of products offered to customers, its
success in implementing strategies necessary to attract new customers and
attract and retain necessary personnel and its ability to obtain necessary
financing. Many of these factors are beyond the Company's control, and there can
be no assurance that the Company's operating and internal growth strategies will
be successful or that the Company will be able to generate cash flows adequate
for its operations and sufficient to support internal growth.

  The Company may seek to expand its operations through future acquisitions of
organic dairies, processing facilities or other complementary businesses or
operations. There can be no assurance that the Company will be able to identify
or acquire additional businesses, or to successfully integrate and profitably
manage acquired businesses. In addition, increased competition for acquisition
candidates may develop, in which event there may be fewer 

                                       25

<PAGE>
 
acquisition opportunities available to the Company as well as higher acquisition
prices. Further, acquisitions involve a number of special risks, including
possible adverse effects on the Company's operating results, diversion of
management's attention, risks related to having adequate corporate and financial
controls and procedures to manage and monitor the Company's operations as they
expand, risks associated with unanticipated events or liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly in the fiscal quarters immediately following
the consummation of such transactions. Customer dissatisfaction or performance
problems at a single acquired company could also have an adverse effect on the
reputation of the Company. There also can be no assurance that businesses
acquired in the future will achieve anticipated revenues and earnings. In
addition, margins may be negatively impacted to the extent that margins on
acquired product lines are lower than Horizon's average margins. There can be no
assurance that acquisitions can be consummated on acceptable terms, that any
acquired companies can be integrated successfully into the Company's operations,
or that any such acquisitions will not have a material adverse effect on the
Company's business, financial condition or results of operations. See 
"Business--Acquisitions."
 
  Risks Related to the Company's Relationship with Suiza Foods Corporation.
Horizon's relationship with Suiza includes five-year processing and distribution
agreements with Model Dairy and Garelick Farms. Horizon and Suiza intend to
enter into additional agreements pursuant to which Suiza and its affiliates will
process and/or distribute Horizon organic fluid milk and other Horizon organic
dairy products from some of Suiza's 46 dairy processing facilities located
across the United States and Puerto Rico. There can be no assurance that Horizon
will be able to enter into such additional processing and distribution
agreements with Suiza and its subsidiaries on favorable terms, if at all. The
processing and distribution agreements also will require that the organic fluid
milk processors distribute all SKUs of the Company's organic fluid milk which
are available in their respective territories. However, there can be no
assurance that Suiza or its subsidiaries who undertake the distribution of
Horizon products will be successful in increasing market penetration and sales
of Horizon products in their territories. In addition, the Company is unable to
predict what effect, if any, its relationship with Suiza will have on its
existing relationships with processors and distributors, some of whom may be
affiliated with Suiza's competitors.

  Pursuant to the Stockholder Agreement with the Company and the Major
Stockholder Agreement with certain of the Company's principal stockholders,
Suiza will have certain preemptive rights, registration rights, board of
directors representation rights, rights of first negotiation to acquire the
Company and rights of first refusal on certain transfers.  Such provisions could
interfere with the Company's ability to raise additional capital or enter into
business combinations or strategic alliances with other business entities. The
Stockholder Agreement contains a variety of provisions designed to delay, deter
or prevent a hostile takeover of the Company by Suiza arising out of Suiza's
stock ownership position, including standstill provisions and transfer
restrictions. These negotiated provisions are, however, subject to various
exceptions and time limitations, and there can be no assurance that these
provisions would prevent Suiza from participating in a takeover attempt of the
Company, or facilitating a third-party takeover attempt at some time in the
future.

  Possibility of Adverse Effects Resulting from United States Dairy Support
Program and Federal Milk Marketing Order Program.   The federal government
regulates minimum farm milk pricing through federal market orders and price
support programs, and state governments can regulate farm milk pricing by
establishing their own market order programs or by forming compacts that
establish minimum prices for farm milk. In addition, several states in New
England have established, and certain other states are in the process of
attempting to form, regional milk price compacts designed to ensure that cheaper
milk from other regions does not undercut local producers' prices. As a result
of these regulations, the Company must pay "pooling charges" and "compact over-
order charges" under the support programs and administrative assessments for
government mandated marketing programs. These pooling, compact and
administrative assessment charges are assessed retroactively on a monthly basis
and are not known or predictable in advance. Should the amount of such charges
increase to levels higher than anticipated by the Company, or should the Company
become obligated to pay charges under other state programs, as it does in New
England, its business, financial condition and results of operations may be
materially adversely affected. For fiscal 1998 and 1997, the Company paid over
$750,000 and $500,000, respectively, for pooling, compact and administrative
assessment charges. See "Business--Government Regulation--United States Dairy
Support Program and Federal Milk Marketing Order Program."

                                       26
<PAGE>
 
  The USDA is currently considering several proposed regulations in an attempt
to reform the federal milk marketing order system. The final form of any new
federal regulations or existence or location of state compacts nor the effect of
such matters on the Company can be predicted with any certainty. The
implementation of new federal or state regulations, or the creation of new
regional milk price compacts, could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Government Regulation."

  Possibility of Adverse Effects Due to Public Health, Safety and Environmental
Regulations.   Horizon is extensively regulated under federal, state and local
laws. Regulation at the federal, state and local levels is subject to change.
Compliance with existing or new regulations may require the Company to make
significant capital expenditures and otherwise to incur higher costs, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company may be subject to
additional laws or regulations administered by the USDA or other federal, state,
foreign or local regulatory authorities, the repeal of laws or regulations, or
more stringent interpretations of current laws or regulations, from time to time
in the future. The Company cannot predict the nature of such future laws,
regulations, interpretations, or applications, nor can it predict what effect
additional government regulations or administrative orders, when and if
promulgated, would have on its business in the future. Such laws could, however,
require the reconfiguration of production, processing and transportation methods
of the Company's products, including, but not limited to, more onerous food
safety, labeling and packaging requirements; increased compliance regulations
for waste management; increases in transportation costs; higher costs under the
Federal Milk Marketing Order System or similar state programs; and greater
uncertainty in production and sourcing estimates. Any or all such government
actions could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."

  Risks Associated With Dependence on Key Personnel.   The Company's future
prospects depend to a significant extent upon the continued service of Marcus
Peperzak, its Chairman, Barnet Feinblum, its Chief Executive Officer, Mark
Retzloff, its Senior Vice President of Corporate Development, and, until his
currently scheduled retirement, Paul Repetto, its Senior Vice President of
Marketing. The loss of any of such key executives (in Mr. Repetto's case, prior
to his currently scheduled retirement) could have a material adverse effect on
the Company's business, financial condition or results of operations.
Furthermore, the Company's continued growth depends on its ability to identify,
recruit and retain key management personnel. The competition for such employees
is intense, and there can be no assurance the Company will be successful in such
efforts. The Company is also dependent on its ability to continue to attract,
retain and motivate its sourcing, production, distribution, sales, marketing and
other personnel, of which there can be no assurance.

  Competition.   The dairy business is highly competitive. It consists of a
range of competitors, including large, conventional dairies, large food
companies with well-established dairy product brands and retailers with private-
label fluid milk and other dairy products, which together occupy a significant
portion of the available shelf space in Horizon's target retail markets. Most of
these competitors have greater financial, operational and marketing resources
than Horizon. Horizon believes that the proposed regulations under the Organic
Foods Production Act, if adopted in the form initially proposed, would permit
competitors to sell fluid milk and other dairy products labeled as "organic,"
which would not satisfy Horizon's own organic standards. Competitors that
produce "organic" products to less rigorous standards may have lower production
costs than Horizon and thus be able to undercut Horizon's prices.

  The Company's principal competitors in the market for organic fluid milk vary
by region and include Organic Cow of Vermont, Inc. (a regional organic dairy
affiliated with H.P. Hood and located in New England), Organic Valley/CROPP
Cooperatives (which is marketed by Coulee Region Organic Produce Pool, a
Wisconsin agricultural cooperative ("CROPP")), a dairy cooperative located in
Wisconsin which supplies the Company with organic fluid milk), Alta Dena
Certified Dairy (a regional dairy located in Southern California) and Straus
Family Creamery (a regional organic dairy located in Northern California). Many
of these competitors also sell other organic dairy products in competition with
Horizon on a national basis.

                                       27

<PAGE>
 
  The Company's principal competitors in the market for organic dairy products
also vary by region, and include the competitors who sell organic fluid milk as
well as Stonyfield Farm (a national organic and conventional dairy located in
New Hampshire which sells yogurt and frozen desserts), Springfield Creamery (a
regional organic and conventional dairy located in Oregon which sells yogurt)
and Brown Cow West, Inc. (a regional organic and conventional dairy located in
Northern California which sells yogurt). The Company's principal competitor for
organic citrus juices is Pavich Farms (a national producer and distributor of
organic produce and juice located in Terra Bella, CA)  In addition, Horizon
expects increased competition from both new and existing competitors in its
markets and there can be no assurance that the Company will be able to compete
effectively in the future. See "--Risks Related to the Implementation of the
Proposed Federal Organic Certification Regulations" and "Business--Competition."

  Risks Related to Establishing New Organic Dairy Farms. The Company recently
undertook two major expansions in its organic dairy farming activities by
acquiring the remainder of the Idaho Dairy and converting it to 100% organic and
by acquiring a large conventional dairy farm in Maryland and converting it into
the organic Maryland Dairy. The Company did not operate a dairy prior to the
1997 acquisition of the Idaho Dairy; however, it had previously owned organic
cows and had held a substantial equity interest in a dairy farm since 1995. The
Company estimates that it has incurred costs of approximately $1.9 million
related to converting the Idaho Dairy and the Maryland Dairy to organic.
Although the Company has begun to generate operating income at the Idaho Dairy,
there can be no assurance that the Company will realize an increase in
production capacity as a result of this expansion, or that future revenues from
milk produced at either the Idaho Dairy or the Maryland Dairy will be sufficient
to recover the Company's investment in the expansion. In addition, the Company
may in the future incur significant environmental clean-up costs in converting
conventional dairies to organic operations. There can be no assurance that the
Company will be able to adjust its production capacity to reflect future changes
in demand for its products or that any future additions to, expansions of, or
new organic facilities will be completed on schedule and within budget. Any
significant delay or cost overrun in the construction or acquisition of new or
expanded organic dairy facilities could have a material adverse effect on the
Company's business, financial condition and results of operations.

  Expansion of dairy operations may be limited or slowed by state and local
regulations. For example, the Company's Maryland Dairy is currently milking its
permitted capacity of 556 cows per day although its milking capacity is 1,000
cows per day. The Company's ability to operate the Maryland Dairy profitably
depends, in part, on its ability to secure operating permits for additional
cows. The Company plans to apply for additional permits over the next 12 months.
The permitting process will require that the Company make additional capital
expenditures at the Maryland Dairy to accommodate the addition of such cows.
There can be no assurance that the Company will be able to obtain the requisite
permits to increase the number of cows at the Maryland Dairy in a timely manner,
if at all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Production and Processing."

  Risks Associated with Perishable Products.   Although the Company's products
are pasteurized, they are perishable and contain certain naturally occurring
microorganisms. As a result, the Company's dairy products must be transported in
a timely and efficient manner within a precise temperature range and the Company
is always subject to risk of spoilage or contamination of its dairy products. In
addition, food producers, such as the Company, may be subject to claims for
damages if contaminated food causes injury to consumers. See "--Product
Liability Risks" and "--Risk of Adverse Publicity."

  The Company is able to hold farm milk or fluid milk finished goods inventory
for only a limited period of time and must sell its products in a timely manner
or risk having to write the inventory off as outdated. Therefore, the Company's
results of operations are highly dependent on its ability to accurately forecast
its near term sales in order to adjust processing accordingly. For example, the
Company must make an estimate of the approximate mix of fat free, reduced fat
and 2% milk, cheese, butter and other products to process from each lot of farm
milk. Forecasting product demand has been difficult, and the Company expects it
to be an ongoing challenge. Failure to accurately forecast product demand could
result in the Company either being unable to meet higher than anticipated demand
or producing excess inventory that cannot be sold at a profit or at all. In
addition, many retail customers expect to be able to return any products that
are not sold by their expiration date. There can be no assurance that excess

                                       28

<PAGE>
 
production or product returns will not have a material adverse effect on the
Company's business, financial condition or results of operations. See "Business-
-Production and Processing."

  Product Liability Risks.   The Company has from time to time received
complaints from consumers regarding ill effects allegedly caused by its
products. While such claims have not resulted in any material liability to date,
there can be no assurance that future claims will not be made or that any such
claim will not result in adverse publicity for the Company or monetary damages,
either of which could materially and adversely affect the Company's business,
financial condition and results of operations. The Company has an umbrella
insurance policy and carries product liability insurance. The Company's umbrella
insurance policy supplements the underlying general liability and product
liability insurance. There can be no assurance that this insurance will be
adequate to protect the Company against product liability claims, or that such
insurance will continue to be available to the Company on reasonable terms. A
product recall or a product liability judgment against the Company (regardless
of whether it is covered by insurance) could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Production and Processing."

  Risk of Adverse Publicity.   The Company is highly dependent upon consumers'
perception of the safety, quality, and possible dietary benefits of its
products. As a result, substantial negative publicity concerning organic
products, one or more of the Company's products, or other organic foods similar
to the Company's products could lead to a loss of consumer confidence in the
Company's products, removal of the Company's products from retailers' shelves
and reduced sales and prices of the Company's products. Any of these events
could have a material adverse effect on the Company's business, financial
condition or results of operations.

  Risk of Loss of Organic Certification.   Horizon relies on its organic
certification to differentiate its products. The Company has built its brand
image on the basis that its organic products are high quality, healthy,
environmentally responsible and animal-friendly. In order to claim that its
fluid milk and other dairy products are organic, Horizon must be able to
demonstrate that all of the farm milk, processing and transportation steps
involved in the production of the finished goods are certified organic. The
organic status of the Company's products is currently certified by Quality
Assurance International, Oregon Tilth Certified Organic, Organic Growers and
Buyers Association and the Organic Crop Improvement Association. Organic
certification typically includes inspections of farm fields and operations,
processing and distribution facilities; detailed record keeping and periodic
testing of soil and water; and review of the organic producer's comprehensive
"organic plan" which details farm practices, documents product inputs and
discusses all procedures. These procedures are designed to ensure that all
producers, processors and transporters are meeting the applicable organic food
standards. Since Horizon outsources to third parties a significant amount of the
production, substantially all of the processing and all of the transportation of
its organic products, there is a risk that a third party in this supply and
distribution chain could cause the Company to lose its organic certification
with regard to some of the Company's product lots. If Horizon or any of these
third parties lose their organic certification with regard to any particular
product lot consumers could lose confidence in the Company's products which
could adversely impact the integrity of the Company's brand. Such a loss could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Horizon Organic Dairy Standards", "--
Sales and Distribution" and "--Production and Processing."

  Risks Associated with Possible Increases in Transportation Costs.
Transportation costs have in the past and are expected in the future to
represent a significant portion of Horizon's costs of sales. As a result, the
Company's results of operations are especially sensitive to transportation
costs. Transportation costs include the cost of transporting organic feed to the
Company-owned dairy farms, the cost of transporting organic farm milk from the
Company-owned dairy farms and other producers to processing plants, and the cost
of transporting finished products from the processors to the distributors and
retailers. Because of the Company's national pricing policy, the Company bears
the risk of unanticipated increases in the cost of transporting finished
products to the Company's distributors and retailers. The cost of transportation
has in the past, and is expected in the future, to be volatile, as a result of
many factors that the Company cannot control. For example, transportation costs
have in the past, and may in the future, be subject to significant upward
pressure as a result of labor disturbances or the cost of petroleum products
such as diesel fuel. Petroleum product prices continue to be subject to
unpredictable economic, political and market factors, and the price and
availability of diesel fuel continue to be unpredictable. Significant increases
in diesel fuel costs could have a material adverse effect on the Company's
business, financial condition and results of 

                                       29


<PAGE>
 
operations. The Company relies on third parties for all of its transportation
needs. A local, regional or national labor disturbance affecting the Company's
third party transportation providers could disrupt the Company's ability to
supply products. Should such a labor disturbance occur, there can be no
assurance that the Company would be able to secure suitable alternative
transportation services on terms acceptable to the Company, if at all.
Accordingly, a labor disturbance affecting local, regional or national
transportation providers could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Sales
and Distribution" and "--Production and Processing."

  Possible Adverse Effect Due to Future Capital Requirements.   In the future,
the Company may require significant amounts of additional capital to fund the
internal expansion of its operations, the acquisition of other businesses and
its working capital requirements. The exact amount of the Company's future
capital requirements will depend upon many factors, including the cost, timing
and extent of any upgrade or expansion of its operations, the Company's ability
to penetrate new markets, regulatory changes, the status of competing
businesses, the magnitude of potential acquisitions and the Company's results of
operations. Variances in these and other factors could cause material changes in
the Company's actual capital requirements. The sale of additional equity
securities or convertible securities would result in dilution to existing
stockholders, and the incurrence of additional indebtedness could subject the
Company to additional or more restrictive financial covenants. There can be no
assurance that additional financing will be available on acceptable terms or at
all. To the extent unplanned expenditures arise or the Company's estimates of
its capital requirements prove to be inaccurate, the Company may require such
additional financing sooner than anticipated and in amounts greater than current
expectations. If such funds are not available or are available on terms that the
Company views as unfavorable, the Company may be required to limit or abandon
certain of its expansion strategies. The delay or abandonment of some or all of
the Company's development and expansion plans or the incurrence by the Company
of additional debt could have a material adverse effect on the business,
financial condition and results of operations of the Company and on the market
price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

  Risks Associated With Customer Concentration.   In fiscal 1998, the Company's
largest account was United Natural Foods, which accounted for approximately 20%
of the Company's sales. United Natural Foods is a national distributor comprised
of five regional distributors which have independent purchasing arrangements
with the Company. There can be no assurance that United Natural Foods will not
adopt uniform buying practices and that sales to these accounts will not
decrease or that this customer will not choose to replace the Company's products
with those of competitors. The loss of these accounts or any significant
decrease in the volume of products purchased by these customers or any other
large customer would materially and adversely affect the Company's business,
financial condition and results of operations. Continuity of customer
relationships is important, and events that impact the Company's customers, such
as labor disputes, may have an adverse impact on the Company's results of
operations. See "Business--Sales and Distribution."

  Risks Associated With Reliance on Intellectual Property Rights.   The
Company's product packaging and merchandising designs are integral to the
success of the Company, and the Company intends to take action to protect
against imitation of its products and packages and to protect its trademarks and
copyrights as necessary. The Company currently has five registered trademarks
and ten trademark applications pending. There can be no assurance that other
third parties will not infringe or misappropriate the Company's trademarks,
trade dress and other proprietary rights.

  In addition, Horizon has developed substantial trade secrets and know-how
regarding the operation of organic dairy farms and caring for livestock without
the use of antibiotics or other drugs. However, there can be no assurance that
some or all of the trade secrets and other know-how that Horizon considers
proprietary will not be independently developed, will not otherwise become known
by others or will not be deemed to be in the public domain.

  Risks Associated with International Markets.  The Company recently entered
into its first international agreement for the co-branding of its organic dairy
products.  To date, the Company has not recorded material international sales.
There can be no assurance that the Company will be successful in attracting
consumers in 

                                       30
<PAGE>
 
foreign demographic and geographic markets. There may not be a demand in foreign
countries with respect to the Company's existing products and new products, if
any, that the Company may offer in the future. In addition, the Company is
subject to the normal risks of conducting business internationally, which
include unexpected changes in regulatory requirements, imposition of government
controls, political and economic instabilities, export license requirements,
foreign exchange risks, tariffs and other barriers, and potentially adverse tax
consequences. In addition, the laws of certain foreign countries may not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. Other risks inherent in the Company's international business include
greater difficulties in accounts receivable collection, the potential of
protective trade activities or laws and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that these factors will not
have a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.

                                       31
<PAGE>
 
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The consolidated financial statements and related notes thereto required by
this item are listed and set forth herein beginning on page F-1.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

  None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Incorporated by reference to the section of the Company's 1999 Definitive
Proxy Statement anticipated to be filed with the Securities and Exchange
Commission within 120 days of December 31, 1998 entitled "Proposal 1 - Election
of Directors" and the section entitled "Management."


ITEM 11. EXECUTIVE COMPENSATION

  Incorporated by reference to the section of the Company's 1999 Definitive
Proxy Statement anticipated to be filed with the Securities and Exchange
Commission within 120 days of December 31, 1998 entitled "Executive
Compensation."


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  Incorporated by reference to the section of the Company's 1999 Definitive
Proxy Statement anticipated to be filed with the Securities and Exchange
Commission within 120 days of December 31, 1998 entitled "Security Ownership of
Certain Beneficial Owners and Management."


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Incorporated by reference to the section of the Company's 1999 Definitive
Proxy Statement anticipated to be filed with the Securities and Exchange
Commission within 120 days of December 31, 1998 entitled "Certain Relationships
and Related Transactions."


                                    PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
         FORM 8-K

   (a)  The following documents are filed as part of this Annual Report on Form
        10-K.

      1.  Consolidated Financial Statements: The consolidated financial
      statements of Horizon Organic Holding Corporation are included as Appendix
      F of this report.  See Index to Consolidated Financial Statements on page
      F-1.

                                       32
<PAGE>
 
      2.  Financial Statement Schedules:   Financial statement schedules are not
      applicable for the year ended December 31, 1998, and have therefore been
      omitted or the information is presented in the consolidated financial
      statements or related notes.
 
      3.  Exhibits.
 
Exhibits

<TABLE>
<CAPTION>
             Exhibit
             Number                    Description of Document                                      
             -------                   -----------------------
                                                                                                                        
           <C>      <S>
              3.1+  Amended and Restated Certificate of Incorporation.
              3.2+  Amended and Restated Bylaws of the Company.
              4.1+  Reference is made to Exhibits 3.1 and 3.2.
              4.2+  Specimen stock certificate representing shares of Common Stock of the Company.
             10.1+* 1998 Equity Incentive Plan.
             10.2+* Form of Company's Stock Option Agreement.
             10.3+* 1998 Employee Stock Purchase Plan.
             10.4+  Form of Indemnity Agreement.
             10.5+  Form of Warrant to Purchase Common Stock.
             10.6+  Warrant to Purchase Common Stock issued to McCabe Mintz & Co.
             10.7+  Loan and Security Agreement, dated July 15, 1997, among FBS Ag Credit, Inc., the Company,
                    Horizon Organic Dairy, Inc. ("HOD"), Horizon Organic Dairy, Maryland Farm, Inc., and
                    Horizon Organic Dairy, Idaho Farm, Inc., as amended by the First Amendment to Loan and
                    Security Agreement dated March 23, 1998, as amended by the Second Amendment to the Loan
                    And Security Agreement dated April 6, 1998.
             10.8+  Restatement, Amendment and Assumption Agreement, dated as of March 20, 1997 among Farm
                    Credit Services, Sunrise, HOD, Marcus B. Peperzak and Farm Credit Bank of Wichita and the
                    Modification to Note and Loan Agreement dated June 23, 1995 and addressed in the
                    Restatement, Amendment and Assumption Agreement dated March 20, 1997 pertaining to Farm
                    Credit Bank of Wichita Loan 2371719.
             10.9+  Asset Purchase Agreement, dated as of April 8, 1998, between the Company and Worcester
                    Creameries Corp.
            10.10+  Amended Executive Employment Agreement, effective January 1, 1998, between the Company
                    and Barnet Feinblum.
            10.11+  Amended Executive Employment Agreement, effective January 1, 1998, between the Company
                    and Mark A. Retzloff.
            10.12+  Amended Executive Employment Agreement, effective January 1, 1998, between the Company
                    and Paul Repetto.
            10.13+  Office Lease for Horizon Building, dated October 10, 1996, between HOD and MUM II, LLC,
                    as amended by the Addendum to Lease and Second Addendum to Lease, dated October 10, 1996
                    and Third Addendum to Lease, dated March 31, 1997.
            10.14+  Stock Purchase Agreement, dated as of June 5, 1998, between the Company and Suiza Foods
                    Corporation ("Suiza").
            10.15+  Stockholder Agreement, dated as of June 5, 1998, between the Company and Suiza.
           10.16++  Loan and Security Agreement, dated July 15, 1997, among FBS Ag Credit, Inc., the Company,
                    Horizon Organic Dairy, Inc. ("HOD"), Horizon Organic Dairy, Maryland Farm, Inc., and
                    Horizon Organic Dairy, Idaho Farm, Inc., as amended by the First Amendment to Loan and
                    Security Agreement dated March 23, 1998, as amended by the Second Amendment to the Loan
                    And Security Agreement dated April 6, 1998, as amended by the Third Amendment to Loan and Security
                    Agreement dated October 14, 1998.
             21.1+  Statement re: subsidiaries of the Company.
              23.1  Consent of KPMG LLP.
              23.2  Consent of Eide Helmeke PLLP.
              24.1  Power of Attorney.   Reference is made to the signature page contained herein.
              27.1  Financial Data Schedule.
 
</TABLE> 

                                       33
<PAGE>
<TABLE> 
<CAPTION> 

<S>                 <C>  
     Exhibit Number                                  Description of Document
     --------------                                  -----------------------
          99.1+++*  Form of Incentive Stock Option Agreement between the Company and Marc Peperzak.
          99.2+++*  Form of Non-Qualified Stock Option Agreement dated January 10, 1998.
          99.3+++*  Stock Option Agreement between the Company and Barnet M. Feinblum dated June 1, 1995.
          99.4+++*  Stock Option Agreement between the Company and Barnet M. Feinblum dated June 1, 1995.
          99.5+++*  Form of Stock Option Agreement dated May 15, 1995.
</TABLE>

Exhibits identified above are incorporated by reference as follows:
+Incorporated by reference to the Registrant's Registration Statement on Form S-
1 No. 333-51465.
++Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
+++Incorporated by reference to the Registrant's Registration Statement on Form
S-8, No. 333-64905.
* Indicates each management contract or compensatory plan or arrangement
  required to be filed as an exhibit to this Form 10-K.

(b)  Reports on Form 8-K

     None.

                                       34
<PAGE>
 
                                   SIGNATURES
                                        
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the __ day of
March, 1999.

                                          Horizon Organic Holding Corporation  
                                                                               
                                          By:  /s/ Barnet M. Feinblum          
                                              -----------------------          
                                          Barnet M. Feinblum                   
                                          President and Chief Executive Officer 


                               POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Barnet M. Feinblum and Don J. Gaidano, or any of
them, his or her attorney-in-fact, each with the power of substitution, for him
or her in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connections
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
<S>                                           <C>                                                <C> 
               Signature                                            Title                               Date
---------------------------------------       -------------------------------------------------  ------------------

/s/ Marcus B. Peperzak                        Chairman of the Board of Directors                   March 30, 1999
---------------------------------------
    Marcus B. Peperzak
 
 
/s/ Barnet M. Feinblum                        President, Chief Executive Officer, Director         March 30, 1999
---------------------------------------           (Principal Executive Officer) 
    Barnet M. Feinblum                            
 
 
/s/ Don J. Gaidano                            Vice President, Finance & Administration             March 30, 1999
---------------------------------------          Chief Financial Officer, and Treasurer   
    Don J. Gaidano                            (Principal Financial and Accounting Officer) 
                                              
</TABLE>

<PAGE>
 
<TABLE>
<CAPTION>
<S>                                           <C>                                                <C>
               Signature                                            Title                               Date
---------------------------------------       -------------------------------------------------  ------------------

 
/s/ Paul B. Repetto                           Senior Vice President, Marketing,                    March 30, 1999
---------------------------------------         Director
    Paul B. Repetto                               
 
 
/s/ Mark A. Retzloff                          Senior Vice President, Corporate Development,        March 30, 1999
---------------------------------------         Director
    Mark A. Retzloff                              
 
 
/s/ Thomas D. McCloskey, Jr.                  Director                                             March 30, 1999
---------------------------------------
    Thomas D. McCloskey, Jr.
 
 
/s/ J. Thomas Clark                           Director                                             March 30, 1999
---------------------------------------
    J. Thomas Clark
 
 
/s/ Clark R. Mandigo II                       Director                                             March 30, 1999
---------------------------------------
    Clark R. Mandigo II
 
 
/s/ Richard L. Robinson                       Director                                             March 30, 1999
---------------------------------------
    Richard L. Robinson
 
 
/s/ G. Irwin Gordon                           Director                                             March 30, 1999
---------------------------------------
    G. Irwin Gordon
</TABLE>

<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES


                  Index to Consolidated Financial Statements


                                                   Page
 
 
Independent Auditors' Report                       F-2
 
Consolidated Balance Sheets                        F-3
 
Consolidated Statements of Operations              F-4
 
Consolidated Statements of Stockholders' Equity    F-5
 
Consolidated Statements of Cash Flows              F-6
 
Notes to Consolidated Financial Statements         F-8
 

                                      F-1
<PAGE>
 
                         Independent Auditors' Report
                                        

The Board of Directors
Horizon Organic Holding Corporation:

We have audited the consolidated balance sheets of Horizon Organic Holding
Corporation and subsidiaries (Company) as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1998 and 1997 and the 52 weeks ended
December 28, 1996.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion in these consolidated financial statements based on our audits.  We did
not audit the financial statements of Sunrise Organic Farms, Inc. (Aurora Dairy
Corporation of Idaho, Inc.) (Sunrise) a 26.825 percent owned investee company as
of December 28, 1996.  The Company recognized a loss from Sunrise of $158,000
for the 52 weeks ended December 28, 1996, of which $77,000, represented the
Company's proportionate equity in loss recognized by Sunrise.  The financial
statements of Sunrise were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Sunrise, is based solely on the report of the other auditors.

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, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Horizon Organic Holding Corporation
and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997
and the 52 weeks ended December 28, 1996, in conformity with generally accepted
accounting principles.


/s/ KPMG LLP
-----------------
KPMG LLP
Boulder, Colorado
January 26, 1999

                                      F-2
<PAGE>
                         HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                                      Consolidated Balance Sheets
                                                                     
                                 (in thousands, except share amounts)
                                                                     
                                      December 31, 1998 and 1997
<TABLE> 
<CAPTION>                                                            
                                                                                1998            1997
                                                                           --------------   -------------
                                    Assets
<S>                                                                        <C>              <C> 
Current assets:                                                                                
    Cash and cash equivalents                                              $       14,384             404
    Marketable securities                                                           9,923              --
    Trade accounts receivable, less allowance for doubtful                                     
         accounts of  $101 in 1998 and $49 in 1997                                  4,873           2,393
    Inventories                                                                     5,466           4,870
    Deferred tax assets                                                               281              55
    Prepaid and other current assets                                                  563             292
                                                                              -----------     ----------- 
               Total current assets                                                35,490           8,014
                                                                              -----------     ----------- 
Property, equipment, and cattle:                                                               
    Cattle, net                                                                     9,725           7,652
    Property and equipment, net                                                    15,534          14,238
                                                                              -----------     ----------- 
               Total property, equipment and cattle                                25,259          21,890
                                                                              -----------     ----------- 
Other assets:                                                                                  
    Note receivable from Aurora Dairy Corporation                                      --             250
    Intangible assets, net of accumulated amortization of $467 in                              
         1998 and $102 in 1997                                                      8,132           2,205
    Other assets, net                                                                 475             378
                                                                              -----------     ----------- 
               Total other assets                                                   8,607           2,833
                                                                              -----------     ----------- 
               Total assets                                                   $    69,356          32,737
                                                                              ===========     ===========
                                                                                                                   
                            Liabilities and Stockholders' Equity (Deficit)                     
                                                                                                                   
Current liabilities:                                                                           
    Trade accounts payable                                                    $     4,693           3,841
    Current portion of long term debt                                                 434             553
    Other accrued expenses                                                          1,978             685
    Income taxes payable                                                               87              --
                                                                              -----------     ----------- 
               Total current liabilities                                            7,192           5,079
                                                                              -----------     ----------- 
Long term liabilities:                                                                         
    Long term debt, less current portion                                            4,923          17,960
    Deferred income tax liabilities                                                 1,271             812
                                                                              -----------     ----------- 
               Total long term liabilities                                          6,194          18,772
                                                                              -----------     ----------- 
               Total liabilities                                                   13,386          23,851
                                                                              -----------     ----------- 
Stockholders' equity (deficit):                                                                
    Preferred stock, $.001 par value, authorized 5,000,000 and                                 
         2,000,000 shares in 1998 and 1997, respectively;                                      
         no shares issued or outstanding                                               --              --       
    Common stock, $.001 par value; authorized 30,000,000 and                                   
         8,000,000 shares in 1998 and 1997, respectively;                                      
         issued 9,656,368 and 5,172,418 shares and outstanding                                 
         9,656,368 and 5,052,418 shares in 1998 and 1997,                                      
         respectively                                                                  10               5
    Additional paid in capital                                                     57,845          11,834
    Accumulated deficit                                                            (1,885)         (2,371)
    Treasury stock, 120,000 shares in 1997, at cost                                    --            (582)
                                                                              -----------     ----------- 
               Total stockholders' equity                                          55,970           8,886
                                                                              -----------     ----------- 
               Total liabilities and stockholders' equity                     $    69,356          32,737
                                                                              ===========     ===========
</TABLE> 

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
                                                             
        HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

               Consolidated Statements of Operations

              (in thousands, except per share amounts)



  Years ended December 31, 1998 and 1997 and 52 Weeks ended December 28, 1996
<TABLE> 
<CAPTION>                                                                                                                         
                                                                            1998             1997            1996
                                                                        -------------    ------------    -------------
<S>                                                                     <C>              <C>             <C> 
Net sales                                                               $      49,360          29,565           15,986
Cost of sales                                                                  32,615          22,639           11,425
                                                                        -------------    ------------    -------------
            Gross profit                                                       16,745           6,926            4,561
                                                                        -------------    ------------    -------------
Operating expenses:                                                                                    
      Selling                                                                  11,007           5,656            3,270
      General and administrative                                                3,338           2,384            1,066
                                                                        -------------    ------------    -------------
            Total operating expenses                                           14,345           8,040            4,336
                                                                        -------------    ------------    -------------
            Operating income (loss)                                             2,400          (1,114)             225
                                                                        -------------    ------------    -------------
Other income (expense):                                                                                
      Equity in loss of Sunrise Organic Farms, Inc.                               --              --              (158)
      Interest income                                                             636              53               68
      Interest expense, net of interest capitalized of $330                                            
         in 1997                                                               (1,394)         (1,126)             (94)
      Other, net                                                                  (67)            (35)             --
                                                                        -------------    ------------    -------------
               Total other expense                                               (825)         (1,108)            (184)
                                                                        -------------    ------------    -------------
               Income (loss) before income taxes,                                                      
                  minority interest and extraordinary item                      1,575          (2,222)              41
Income tax benefit (expense)                                                     (675)            513              (14)
Minority interest in loss of subsidiary                                           --              687              --
                                                                        -------------    ------------    -------------
               Income (loss) before extraordinary item                            900          (1,022)              27
Extraordinary item loss on early extinguishment of debt,                                               
    net of income tax benefit of $253                                            (414)            --               --
                                                                        -------------    ------------    -------------
               Net income (loss)                                        $         486          (1,022)              27
                                                                        =============    ============    =============
Net income (loss) per basic share:                                                                     
    Income (loss) before extraordinary item                             $         .12            (.23)             .01
    Extraordinary item                                                           (.05)            --               --
                                                                        -------------    ------------    -------------
    Net income (loss) per share                                         $         .07            (.23)             .01
                                                                        =============    ============    =============
Net income (loss) per diluted share:                                                                   
    Income (loss) before extraordinary item                             $         .11            (.23)             .01
    Extraordinary item                                                           (.05)            --               --
                                                                        -------------    ------------    -------------
    Net income (loss) per share                                         $         .06            (.23)             .01
                                                                        =============    ============    =============
Weighted average shares outstanding:                                                                   
      Basic                                                                     7,339           4,488            3,264
      Diluted                                                                   7,742           4,488            3,283
</TABLE> 



         See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
      
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES
      
                Consolidated Statements of Stockholders' Equity
      
                     (in thousands, except share amounts)
      
  Years ended December 31, 1998 and 1997 and 52 Weeks ended December 28, 1996
      

<TABLE> 
<CAPTION> 
                                                               Common stock                  Common stock
                                                        ---------------------------    ---------------------------- 
                                                           Shares         Amount         Shares           Amount
                                                        ------------   ------------    ------------    ------------ 
<S>                                                     <C>            <C>             <C>             <C> 
Balance at January 1, 1996                                 2,872,300   $        287              --    $         --     
    Issuance of common stock upon conversion                                                                          
      of certain director bridge loans                        55,212              6              --              --     
    Issuance of common stock for cash, net of                                                                           
      offering costs                                         721,188             72              --              --     
    Net income                                                    --             --              --              --     
                                                        ------------   ------------    ------------    ------------ 
Balance at December 28, 1996                               3,648,700            365              --              --     
    Exercise of employee stock options                        15,300              1              --              --     
    Issuance of common stock for cash, net of                                                                           
      offering costs                                              --             --         855,423               1     
    Acquisition of common stock                                   --             --        (120,000)             --     
    Issuance of common stock for senior subordinated                                                                    
      notes payable                                               --             --         155,000              --     
    Exchange of subsidiary stock for common stock         (3,664,000)          (366)      3,664,000               4     
    Exercise of employee stock options                            --             --           7,750              --     
    Common stock issued for acquisition                           --             --         490,245              --     
    Net loss                                                      --             --              --              --     
                                                        ------------   ------------    ------------    ------------ 
Balance at December 31, 1997                                      --             --       5,052,418               5     
    Issuance of common stock for services                         --             --           3,923              --     
    Issuance of common stock for cash, net of                                                                           
      offering costs                                              --             --       4,550,000               5     
    Retirement of Treasury Stock                                  --             --              --              --     
    Issuance of common stock for director services                --             --             745              --     
    Exercise of warrants                                          --             --          43,349              --     
    Issuance of common stock under ESPP                           --             --           5,933              --     
    Net income                                                    --             --              --              --     
                                                        ------------   ------------    ------------    ------------
Balance at December 31, 1998                                      --   $         --       9,656,368    $         10     
                                                        ============   ============    ============    ============

                                                         Additional                                       Total
                                                          paid-in      Accumulated       Treasury      stockholders'
                                                          capital        deficit          stock           equity
                                                        ------------   ------------    ------------    ------------- 
Balance at January 1, 1996                                     1,887         (1,376)             --              798
    Issuance of common stock upon conversion                                                               
      of certain director bridge loans                           172             --              --              178
    Issuance of common stock for cash, net of                                                              
      offering costs                                           2,189             --              --            2,261
    Net income                                                    --             27              --               27
                                                        ------------   ------------    ------------    ------------- 
Balance at December 28, 1996                                   4,248         (1,349)             --            3,264
    Exercise of employee stock options                            50             --              --               51
    Issuance of common stock for cash, net of                                                              
      offering costs                                           4,005             --              --            4,006
    Acquisition of common stock                                   --             --            (582)            (582)
    Issuance of common stock for senior subordinated                                                       
      notes payable                                              752             --              --              752
    Exchange of subsidiary stock for common stock                362             --              --               --
    Exercise of employee stock options                            39             --              --               39
    Common stock issued for acquisition                        2,378             --              --            2,378
    Net loss                                                      --         (1,022)             --           (1,022)
                                                        ------------   ------------    ------------    ------------- 
Balance at December 31, 1997                                  11,834         (2,371)           (582)           8,886
    Issuance of common stock for services                         25             --              --               25
    Issuance of common stock for cash, net of                                                              
      offering costs                                          46,271             --              --           46,276
    Retirement of Treasury Stock                                (582)            --             582               --
    Issuance of common stock for director services                10             --              --               10
    Exercise of warrants                                         231             --              --              231
    Issuance of common stock under ESPP                           56             --              --               56
    Net income                                                    --            486              --              486
                                                        ------------   ------------    ------------    ------------- 
Balance at December 31, 1998                                  57,845         (1,885)             --           55,970
                                                        ============   ============    ============    ============= 
</TABLE> 

See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                                (in thousands)

  Years ended December 31, 1998 and 1997 and 52 Weeks ended December 28, 1996
<TABLE> 
<CAPTION> 

                                                                                1998          1997          1996
                                                                           ------------    ----------    ----------
<S>                                                                     <C>              <C>           <C> 
Cash flows from operating activities:
    Net income (loss)                                                      $        486        (1,022)           27
    Adjustments to reconcile net income (loss) to net cash
       from operating activities:
       Provision for doubtful accounts                                               52             7            19
       Depreciation and amortization                                              2,727         1,150            56
       Equity in loss of Sunrise Organic Farms, Inc.                                 --           509           158
       Interest receivable from Sunrise Organic Farms, Inc.                          --            --           (39)
       Loss on sale of cattle and equipment                                       1,509         1,006            --
       Accretion on senior subordinated notes payable and
         non-interest bearing note payable                                          148            44            --
       Deferred income taxes                                                        233          (513)           --
       Noncash payments for Director services                                        10            --            --
       Minority interest in loss of subsidiary                                       --          (687)           --
       Change in operating assets and liabilities:
            Trade accounts receivable                                            (2,532)          523          (634)
            Inventories                                                            (525)       (2,690)         (537)
            Prepaid and other current assets                                       (244)         (220)          (35)
            Trade accounts payable                                                  852         1,996             2
            Payable to affiliates                                                    --          (513)          251
            Other accrued expenses                                                  864           167           241
            Income taxes payable                                                     87           (14)           14
                                                                           ------------    ----------    ----------
               Net cash provided by (used in) operating activities                3,667          (257)         (477)
                                                                           ------------    ----------    ----------

Cash flows from investing activities:
    Purchase of marketable securities, net                                       (9,923)           --            --
    Payments for acquisitions, net of cash acquired.                                 --        (3,566)           --
    Payments for certain assets of Juniper Valley Farms                          (2,140)           --            --
    Investment in Sunrise Organic Farms, Inc.                                        --            --          (350)
    Advance to Sunrise Organic Farms, Inc.                                           --            --          (650)
    Purchases of property and equipment                                          (2,432)       (3,472)         (145)
    Proceeds from equipment sales                                                   246            66             1
    Purchases of cattle, including interest capitalized of $330
       in 1997                                                                   (5,506)       (3,595)           --
    Proceeds from cattle sales                                                      716           279            --
    Other assets                                                                   (210)          285           (47)
                                                                           ------------    ----------    ----------
            Net cash used in investing activities                               (19,249)      (10,003)       (1,191)
                                                                           ------------    ----------    ----------
</TABLE> 

                                      F-6
<PAGE>
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                                (in thousands)

  Years ended December 31, 1998 and 1997 and 52 Weeks ended December 28, 1996
<TABLE> 
<CAPTION> 
                                                                                    1998           1997            1996
                                                                                -----------    -----------      -----------
<S>                                                                        <C>                 <C>              <C> 
Cash flows from financing activities:
    Increase (decrease) in book overdrafts                                  $            --           (642)            149
    Net change in long-term line of credit                                           (6,953)           493            (174)
    Repayments of term loan                                                          (4,000)          (244)           (131)
    Proceeds from long-term debt, other than line of credit                             500          6,881              --
    Repayments of long-term debt, other than line of credit                          (6,797)          (440)             --
    Loan to Aurora Dairy Corporation                                                    250           (250)             --
    Proceeds from director bridge loans                                                  --             --             775
    Repayments of director bridge loans                                                  --             --            (597)
    Proceeds from issuance of common stock, net                                      46,276          4,848           2,261
    Payments to acquire treasury stock                                                   --           (582)             --
    Proceeds from exercise of warrants                                                  231             --              --
    Proceeds from issuance of common stock under ESPP                                    55             --              --
    Loan origination costs                                                               --             --             (20)
                                                                                -----------    -----------      -----------
                  Net cash provided by financing activities                          29,562         10,064           2,263
                                                                                -----------    -----------      -----------
                  Net increase (decrease) in cash and cash equivalents               13,980           (196)            595
Cash and cash equivalents at beginning of year                                          404            600               5
                                                                                -----------    -----------      -----------
Cash and cash equivalents at end of year                                    $        14,384            404             600
                                                                                ===========    ===========      ===========
Supplemental disclosure of cash flow information:
    Cash paid during the year for interest, net of amount
      capitalized of $330, in 1997                                          $         1,430          1,024              97
                                                                                ===========    ===========      ===========
    Cash paid during the year for income taxes                              $           101             31              --
                                                                                ===========    ===========      ===========
    Noncash investing and financing activities:
      Additional capital lease obligations                                  $            49             88              --
                                                                                ===========    ===========      ===========
      Common stock issued for services                                      $            25             --              --
                                                                                ===========    ===========      ===========
      Common stock issued to outside directors                              $            10             --              --
                                                                                ===========    ===========      ===========
      The Company purchased the remaining 73.175% of
         common stock of Sunrise Organic Farms, Inc.
         In connection with this acquisition, assets acquired
         and liabilities assumed were as follows:
            Fair value of assets acquired                                   $            --         23,751              --
            Cash paid for common stock                                                   --         (3,566)             --
            Company stock issued for common stock                                        --         (2,378)             --
                                                                                -----------    -----------      -----------
                  Liabilities assumed                                       $            --         17,807              --
                                                                                ===========    ===========      ===========
Issuance of common stock upon conversion of debt -
    director bridge loans                                                   $            --             --             178


See accompanying notes to consolidated financial statements.
</TABLE> 


                                      F-7
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


(1) Basis of Presentation and Description of Business

    Horizon Organic Holding Corporation (Company) produces and markets organic
    milk and other organic dairy products which are sold to natural food stores
    and supermarkets nationwide.

    The Company was established in October 1991 and, prior to May 1997, was
    involved only in the marketing of organic milk and other organic dairy
    products except for a portion of 1994 and 1995 in which the Company produced
    conventional milk through a dairy operation which was disposed of May 31,
    1995. In March 1997, the Company acquired and began producing organic milk
    through a dairy operation located in Idaho from which the Company had
    previously purchased milk. In 1997, in order to develop an organic farm milk
    supply for products sold in the Eastern United States, the Company began
    developing its second organic dairy farm in Maryland (the "Maryland Dairy").
    Shipments of organic farm milk from the Maryland Dairy began in the first
    quarter of 1998. Horizon sources the remainder of its organic farm milk
    supply through supply arrangements with independent dairy cooperatives and
    farmers throughout the United States.

    On June 30, 1997, the Company changed its fiscal year to a December 31 year
    end.  Accordingly, the accompanying consolidated financial statements are
    presented for the years ended December 31, 1998 and 1997 and the 52 weeks
    ended December 28, 1996.

(2) Summary of Significant Accounting Policies

    (a) Principles of Consolidation

        Prior to 1997, the Company consisted of one entity, Horizon Organic
        Dairy, Inc. For the years ended December 31, 1998 and 1997, the
        consolidated financial statements include the accounts of all
        subsidiaries including Horizon Organic Dairy, Inc.; Horizon Organic
        Dairy, Idaho Farm, Inc.; and Horizon Organic Dairy, Maryland Farm, Inc.
        All significant intercompany balances and transactions have been
        eliminated in consolidation.

    (b) Cash and Cash Equivalents

        The Company considers all highly liquid investments and securities with
        original maturities of three months or less at the time of purchase to
        be cash equivalents.

                                                                     (Continued)

                                      F-8
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


  (c)  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 and are recorded at amortized cost which
       approximates cost.  Marketable securities at December 31, 1998 are as
       follows (in thousands):


                Commercial paper                         $           5,966
                U.S. Treasury                                        3,957
                                                             ------------- 
                                                         $           9,923
                                                             =============

  (d)  Inventories
 
       Inventories are stated at the lower of cost (average cost or first-in,
       first-out method) or market.

  (e)  Property, Equipment and Cattle

       Property, equipment and cattle are carried at cost. Property (other than
       land) is depreciated using accelerated methods over the estimated useful
       lives which range from 13 to 27 years.  Equipment and cattle are
       depreciated using an accelerated method over the estimated useful lives
       which range from three to seven years.

       The cost of cattle includes preproduction costs incurred from the time
       cattle arrive at the dairy until they enter the milking herd.

  (f)  Other Assets

       Other assets consist principally of loan origination fees and artwork and
       plates.  The cost of artwork and plates is amortized using the straight-
       line method over three years. Loan origination fees are amortized using
       the interest method over the term of the respective loan.  Accumulated
       amortization of loan origination fees, organization costs and artwork at
       December 31, 1998 and 1997 totaled $196,000 and $103,000, respectively.

  (g)  Revenue Recognition

       Net sales are recognized at the time of shipment, and provisions are made
       for allowances, returns and guarantees. Sales to new customers are at
       times made on a 90-day guarantee basis; if the customer is unable to sell
       all of the Company's products during the first 90 days after it becomes a
       customer, the Company issues a credit for unsold inventory.  Estimated
       returns are recognized as a reduction to accounts receivable.  The
       reserve for returns and guarantees at December 31, 1998 and 1997 was
       $70,000 and $65,000, respectively.

                                                                     (Continued)

                                      F-9
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


  (h)  Advertising Costs

       Advertising costs are expensed in the year incurred.  Advertising costs,
       which are included in selling expenses, totaled $301,000, $33,000 and
       $51,000 during 1998, 1997, and 1996, respectively.

  (i)  Income Taxes

       Income taxes are accounted for under the asset and liability method.
       Deferred tax assets and liabilities are recognized for the future tax
       consequences attributable to differences between the financial statement
       carrying amounts of existing assets and liabilities and their respective
       tax bases and operating loss and tax credit carryforwards.  Deferred tax
       assets and liabilities are measured using enacted tax rates expected to
       apply to taxable income in the years in which those temporary differences
       are expected to be recovered or settled.  The effect on deferred tax
       assets and liabilities of a change in tax rates is recognized in
       operations in the period that includes the enactment date.

  (j)  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.

  (k)  Stock Option Plan and Stock Option Agreements

       Prior to January 1, 1996, the Company accounted for its stock option plan
       and stock option agreements in accordance with the provisions of
       Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
       Issued to Employees, and related interpretations.  As such, compensation
       expense was recorded on the date of grant only if the current market
       price of the underlying stock exceeded the exercise price.  On January 1,
       1996, the Company adopted Statement of Financial Accounting Standards No.
       123 (SFAS No. 123), Accounting for Stock-Based Compensation, which
       permits entities to recognize as expense over the vesting period the fair
       value of all stock-based awards on the date of grant.  Alternatively,
       SFAS No. 123 also allows entities to continue to apply the provisions of
       APB Opinion No. 25 and provide pro forma net income disclosures for
       employee stock option grants made in 1995 and thereafter as if the fair-
       value-based method defined in SFAS No. 123 had been applied.  The Company
       has elected to continue to apply the provisions of APB Opinion No. 25 and
       provide the pro forma disclosures required by SFAS No. 123.

                                                                     (Continued)

                                      F-10
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


  (l)  Intangibles and Long-Lived Assets

       The excess of purchase price over fair value of net assets acquired, is
       amortized on a straight-line basis over the expected period to be
       benefited of 15 years.  The Company reviews long-lived assets and certain
       identifiable intangibles for impairment whenever events or changes in
       circumstances indicate that the carrying amount of an asset may not be
       recoverable.  Recoverability of assets to be held and used is measured by
       a comparison of the carrying amount of an asset to future undiscounted
       net cash flows (without interest costs) expected to be generated by the
       asset.  If such assets are considered to be impaired, the impairment to
       be recognized is measured by the amount by which the carrying amount of
       the assets exceed the fair value of the assets.  Assets to be disposed of
       are reported at the lower of the carrying amount or fair value less costs
       to sell.  The Company has recorded no impairment losses.

  (m)  Employee Benefit Plan

       The Company adopted a defined contribution retirement plan (Plan) during
       1997 under which eligible employees may elect to defer current
       compensation by up to certain statutorily prescribed annual limits and
       contribute such amount to the Plan.  The Plan provides for the Company to
       match an employee's contribution in an amount up to 3% of such employee's
       compensation.  The Company contributed $58,000 and $33,000 to the Plan
       for the year ended December 31, 1998 and 1997, respectively.

  (n)  Significant Customers

       The Company has a distributor which is comprised of five regional
       distributors who have independent purchasing arrangements with the
       Company.  Net sales to these regional distributors, individually, is less
       than 10% of total net sales.

  (o)  Use of Estimates

       The preparation of consolidated 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 disclosure of contingent assets and liabilities at the
       date of the consolidated financial statements and the reported amounts of
       sales and expenses during the reporting period.  Actual results could
       differ significantly from those estimates.

  (p)  Reclassifications

       Certain reclassifications have been made to the 1997 and 1996 financial
       statements to conform with the 1998 presentation.

                                                                     (Continued)

                                      F-11
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


(3) Acquisition of Sunrise Organic Farms, Inc.

    At December 28, 1996, the Company owned a 26.825% interest in Sunrise
    Organic Farms, Inc. (Sunrise). The remaining interest in Sunrise was owned
    by certain stockholders and directors of the Company. The Company accounted
    for its investment in Sunrise using the equity method.

    Consistent with a 1995 option agreement with Sunrise, on March 20, 1997 the
    Company entered into an agreement with Sunrise to acquire the remaining
    73.175% (293,694 shares) of Sunrise's issued and outstanding common stock.
    The purchase took place in two separate closings. At the first closing on
    March 20, 1997, the Company purchased 176,216 shares of Sunrise common stock
    at $20.24 per share for an aggregate purchase price of $3,566,514. Payment
    was made with subordinated promissory term notes. At the second closing on
    May 29, 1997, the Sunrise stockholders assigned their remaining 117,478
    shares of common stock in Sunrise valued at $20.24 per share to the Company
    in exchange for $2,377,688 of the Company's common stock based on the
    estimated fair value of the common stock as negotiated between Sunrise and
    the Company. Also, at the second closing, the Sunrise stockholders received,
    on a pro rata basis, warrants to acquire 69,118 shares of the Company's
    common stock at an exercise price of approximately $5.335 or 110% of the per
    share purchase price paid by the investors in the private placement for the
    Company's stock of $4.85 per share. These warrants expire in March 1999.

    The acquisition has been accounted for by the purchase method and the
    results of operations of Sunrise have been included in the Company's
    consolidated financial statements from January 1, 1997, with a corresponding
    minority interest recorded for Sunrise's proportionate share of losses for
    the period from January 1, 1997 through May 31, 1997. The excess of the
    purchase price over the fair value of the net identifiable assets acquired
    of $2,306,736 has been recorded as goodwill.

    The following unaudited pro forma financial information presents the
    combined results of operations of the Company and Sunrise as if the
    acquisition had occurred at the beginning of 1997 and 1996, after giving
    effect to certain adjustments, including amortization of goodwill,
    additional depreciation expense, increased interest expense on debt related
    to the acquisition, and related income tax effects. The pro forma financial
    information does not necessarily reflect the results of operations that
    would have occurred had the Company and Sunrise constituted a single entity
    during such periods.


<TABLE>
<CAPTION>
                                                          Year ended                   52 Weeks ended
                                                      December 31, 1997              December 28, 1996
                                                 -------------------------      -------------------------
                                                                         (unaudited)
                                                                   (dollars in thousands)
<S>                                            <C> <C>                            <C>
Net sales                                      $                    29,565                         21,921
                                                 =========================      =========================
Net loss                                       $                    (1,974)                          (741)
                                                 =========================      =========================
Net loss per basic and diluted share           $                      (.44)                          (.23)
                                                 =========================      =========================  
                                               
</TABLE>
                                                                     (Continued)

                                      F-12
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996

(4) Purchase of Certain Assets of Juniper Valley Farms

    On April 8, 1998, the Company acquired certain assets including inventory
    and the Juniper Valley Farms brand name for $6,000,000. The acquisition was
    financed with two notes payable; $2,000,000 term loan payable to a bank,
    bearing interest at prime plus 2% and a $4,000,000 non-interest bearing
    secured promissory note. The notes were paid in July 1998. The Company also
    issued a warrant exercisable for 3,500 shares of common stock with an
    exercise price of $8.00 per share which expires April 8, 2000. Intangible
    assets of $5,824,000 and costs associated with the transaction of $570,000
    are being amortized on a straight-line basis over 15 years. The non-interest
    bearing note was recorded at its estimated present value which was
    discounted at 10.5%.
 
(5) Inventories

    Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
                                                                    December 31,           December 31,
                                                                        1998                   1997
                                                                ------------------     ------------------
<S>                                                           <C>                       <C>
Grain and feed                                                $              3,365                  3,662
Crops growing, fertilizer and other                                            438                    325
Finished goods                                                               1,409                    820
Raw materials                                                                  254                     63
                                                                ------------------     ------------------
                                                              $              5,466                  4,870
                                                                ==================     ==================
</TABLE>

(6) Investment in and Advances to Sunrise Organic Farms, Inc.

    The Company's share of Sunrise's undistributed losses prior to the 1997
    acquisition totaled $77,000 (26.825%) for the 52 weeks ended December 28,
    1996. The losses recognized by the Company include the amounts stated above
    and amortization of intangible assets recognized by the Company in excess of
    the Company's proportionate share of Sunrise's net assets as reflected in
    Sunrise's financial statements.

    In June 1996, the Company advanced $650,000 to Sunrise under the terms of a
    note receivable. The note bore interest at a rate of 12.5%. The note was due
    and payable in full upon the earlier of December 31, 1999 or upon any
    occurrence of an event of default, as defined. Interest was payable monthly,
    commencing April 30, 1997, unless Sunrise's audited results did not show a
    profit. The note receivable was eliminated through the purchase of Sunrise.


                                                                     (Continued)

                                      F-13
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996

 (7) Property and Equipment

     Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    December 31,           December 31,
                                                                        1998                   1997
                                                                -----------------      -----------------
<S>                                                           <C>                    <C>
Land and water rights                                         $             2,799                  2,799
Dairies and feedlot                                                        10,034                  8,600
Rolling stock, vehicles and farm equipment                                  1,781                  1,373
Cream separator                                                               622                     --
Employee housing                                                              930                    930
Intermediate crop life                                                         23                     50
Office equipment and other                                                    817                    477
                                                                -----------------      -----------------
                                                                           17,006                 14,780
   Less accumulated depreciation                                           (1,472)                  (542)
                                                                -----------------      -----------------  
   Total property and equipment                               $            15,534                 14,238
                                                                =================      =================
</TABLE>

 (8)  Cattle
 
      Cattle consists of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                                   December 31,           December 31,
                                                                       1998                   1997
                                                               -----------------      -----------------
<S>                                                           <C>                    <C>
Number of head-milking cows                                                5,551                  4,566
Number of head-replacement heifers                                         2,999                  1,949
                                                               -----------------      -----------------  
  Total cattle                                                             8,550                  6,515
                                                               =================      =================
 
Cost-milking cows                                             $            8,408                  6,568
Cost-replacement heifers                                                   2,589                  1,511
                                                               -----------------      -----------------
                                                                          10,997                  8,079
  Less accumulated depreciation                                           (1,272)                  (427)
                                                               -----------------      ----------------- 
                                                              $            9,725                  7,652
                                                               =================      =================
</TABLE>

   The Company has reflected its investment in cattle at cost. Cattle are
   depreciated using the straight-line method over 5 years to an estimated
   salvage value of $325 per head.

                                                                     (Continued)

                                      F-14
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996
 
 (9) Long-Term Debt
   
     Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                              1998             1997
                                                                         -----------      -----------
<S>                                                                     <C>              <C>
Subordinated notes payable with interest at prime (8.5% at December
 31, 1997) plus 1%                                                      $         --            3,566
Senior subordinated notes payable with interest at 11%                            --            2,392
Note payable to Farm Credit Services with interest at 6.5%, payable
 in monthly installments with the unpaid balance due July 1, 2010              3,673            3,851
Revolving line of credit with U.S. Bank with maximum borrowing of 
 $20,000,000 with interest at prime (7.75% at December 31, 1998),
 less .25% secured by substantially all assets of
 the Company, due June 30, 2000                                                   --            6,953
Note payable to 44 Exchange Services with interest at 8%, secured by
 certain property                                                                 --              100
Note payable to Peoples Bank of Kent County, Maryland with interest
 at 9%, payable in monthly installments with the unpaid balance due
 October 27, 2002, secured by certain property                                   687              700
Notes payable to Peoples Bank of Kent County, Maryland with interest
 at 8.25% for the first three years, payable in monthly installments
 with the unpaid balance due April 15, 2018, secured by certain
 property                                                                        493               --
Obligations under capital leases with terms from two to five years
 with imputed interest rates ranging from 7.04% to 10.89% secured by
 related equipment                                                               504              951
                                                                         -----------      -----------
    Total long-term debt                                                       5,357           18,513
Less current portion                                                            (434)            (553)
                                                                         -----------      -----------
    Long-term debt, excluding current portion                           $      4,923           17,960
                                                                         ===========      ===========
</TABLE>


   On May 29, 1997, in connection with the senior subordinated notes (Notes) due
   May 29, 2003, the Company issued 155,000 shares of its $.001 par value common
   stock.  Accordingly, the Company recorded the $3,100,000 face amount notes
   net of $752,000 which was accreted using the interest method over the term of
   the Notes. Interest expense of $41,000 and $44,000 was recorded in 1998 and
   1997, respectively in connection with this transaction.  The extraordinary
   item relates to the early extinguishment of the Notes and represents the
   write-off of the unaccreted discount of $667,000.  The write-off was charged
   to expense and is classified as an extraordinary item net of tax benefit of
   $253,000 in the accompanying Consolidated Statements of Operations for the
   year ended December 31, 1998.

                                                                     (Continued)

                                      F-15
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


   In April 1998, the Company entered into a $500,000 note payable to Peoples
   Bank of Kent County, Maryland bearing interest at 8.25% and payable in
   monthly installments with the unpaid balance due April 15, 2018.  The note
   holder has the right to demand repayment of principal and interest in full at
   any time on or after April 15, 2001.  The note is secured by specific
   property.

   In January 1, 1999 the interest rates on the two notes payable to Peoples
   Bank of Kent County, Maryland were reduced to prime, currently 7.75%

   In October 1998, the Company refinanced its Note Payable with Farm Credit
   Services.  As a result, the interest rate was reduced from 7.79% to 6.5% and
   the stockholder guarantees were removed.

   The revolving line of credit and notes payable contain certain covenants
   that, among other things, limit the Company's ability to incur additional
   debt, create liens, pay dividends or enter into certain other transactions,
   and which require the Company to meet certain financial provisions.

   Aggregate maturities of long-term debt are as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                                                            <C> 
December 31:
    1999                                                                        $           434
    2000                                                                                    374
    2001                                                                                    372
    2002                                                                                    992
    2003                                                                                    338
    Thereafter                                                                            2,847
                                                                                ---------------
       Total                                                                    $         5,357
                                                                                ===============
</TABLE>

                                                                     (Continued)

                                      F-16
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996
 
 (10) Income Taxes

      Income tax (expense) benefit attributable to income (loss) consists of (in
      thousands):

<TABLE>
<CAPTION>
                                                                     Current          Deferred           Total
                                                                 -------------     ------------     ------------
<S>                                                           <C>                   <C>              <C> 
Year ended December 31, 1998:
 U.S. Federal                                                  $          (372)            (196)            (568)
 State                                                                     (70)             (37)            (107)
                                                                 -------------     ------------     ------------
                                                               $          (442)            (233)            (675)
                                                                 =============     ============     ============
Year ended December 31, 1997:
 U.S. Federal                                                  $            --              452              452
 State                                                                      --               61               61
                                                                 -------------     ------------     ------------ 
                                                               $            --              513              513
                                                                 =============     ============     ============
52 weeks ended December 28, 1996:
 U.S. Federal                                                  $           (11)              --              (11)
 State                                                                      (3)              --               (3)
                                                                 -------------     ------------     ------------ 
                                                               $           (14)              --              (14)
                                                                 =============     ============     ============
</TABLE>

   Income tax (expense) benefit attributable to income (loss) differed from the
   amounts computed by applying the U.S. federal income tax rate of 34% to
   pretax income (loss) as a result of the following (in thousands):

<TABLE>
<CAPTION>
                                                        December 31,          December 31,          December 28,
                                                            1998                  1997                  1996
                                                    -----------------     -----------------     -----------------
<S>                                               <C>                     <C>                   <C>
Computed "expected" tax (expense) benefit         $              (536)                  755                   (14)
(Increase) reduction in income taxes
 resulting from:
State and local income taxes, net of
  federal benefit                                                 (70)                   40                    (2)
Permanent differences                                             (69)                  (60)                   (6)
Change in valuation allowance                                      --                   122                    (2)
1997 pre-acquisition losses purchased                              --                  (348)                   --
Other, net                                                         --                     4                    10
                                                    -----------------     -----------------     ----------------- 
                                                  $              (675)                  513                   (14)
                                                    =================     =================     =================
</TABLE>


                                                                     (Continued)

                                      F-17
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


   The tax effects of temporary differences that give rise to significant
   portions of deferred tax assets and liabilities are presented below (in
   thousands):


<TABLE>
<CAPTION>
                                                                      December 31            December 31,
                                                                          1998                   1997
                                                                  -----------------      -----------------
<S>                                                            <C>                       <C> 
Deferred tax assets:
  Equipment and cattle depreciation                             $               183                    169
  Net operating loss carryforwards                                              727                    987
  Write off of intangibles in purchase accounting                                83                     94
  Start-up costs capitalized for tax                                            136                    170
  Other, net                                                                     85                     51
                                                                  -----------------      -----------------
  Net deferred tax assets                                                     1,214                  1,471
Deferred tax liabilities:
  Property, equipment and cattle                                             (2,204)                (2,228)
                                                                  -----------------      -----------------
  Net deferred tax liabilities                                                 (990)                  (757)
  Less current net deferred tax assets                                         (281)                   (55)
                                                                  -----------------      -----------------
Long term deferred income tax liabilities                       $            (1,271)                  (812)
                                                                  =================      =================
</TABLE>

   In assessing the realizability of deferred tax assets, management considers
   whether it is more likely than not that some portion or all of the deferred
   tax assets will not be realized.  The ultimate realization of deferred tax
   assets is dependent upon the generation of future taxable income during
   periods in which those temporary differences become deductible.  Management
   considers projected future taxable income and tax planning strategies in
   making this assessment.  Based upon management's projections of future
   taxable income and future taxable income generated from the reversal of
   deferred tax liabilities over the periods in which the deferred tax assets
   are deductible, management believes it is more likely than not that the
   Company will realize the benefits of these deductible differences,
   accordingly, there is no valuation allowance in 1998 or 1997.

   At December 31, 1998, the Company has net operating loss carryforwards for
   U.S. federal income tax purposes of $1,914,000 which are available to offset
   future federal taxable income and expire in the following years (in
   thousands):

<TABLE>
<S>                                                                               <C>
2011                                                                               $    1,316
2012                                                                                      598
                                                                                     -------- 
       Total                                                                       $    1,914
                                                                                     ========
</TABLE>
                                                                                
 (11) Stockholders' Equity

      The Company completed a private offering (Offering) of its $.10 par value
      common stock during July 1996 for $2.5 million. The Offering consisted of
      776,400 shares of common stock at $3.22 per share. The Company received
      proceeds of $2,322,000 which was reduced by net offering costs of $61,000
      for 721,188 of the shares in the Offering. The remaining 55,212 shares,
      also at $3.22 per share, extinguished $178,000 of director bridge loans.
      The proceeds were used to: 1) expand the Company's product line to include
      cream cheese and other dairy products; 2) advance funds to 

                                                                     (Continued)

                                      F-18
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996

   Sunrise totaling $650,000; 3) repay $597,000 of director bridge loans; and 4)
   provide working capital. The Company repaid $597,000 of the $775,000 director
   bridge loans in cash.

   The Company completed a private offering (Second Offering) of its $.001 par
   value common stock on May 29, 1997.  The Second Offering consisted of 855,423
   shares of common stock at approximately $4.85 per share.  Simultaneously, the
   Company exchanged all the common stock of Horizon Organic Dairy, Inc. for
   common stock of the Company so that only the Company's common stock was
   outstanding as of May 29, 1997.  The Company received proceeds of $4,149,000
   which was reduced by offering costs of $143,000.  Also on May 29, 1997, the
   Company acquired 120,000 shares of its $.001 par value common stock at $4.85
   per share.

   On May 29, 1997, the Company issued 155,000 shares of its $.001 par value
   common stock in connection with the issuance of the senior subordinated notes
   payable due May 29, 2003 (note 9).

   In connection with the acquisition of Sunrise, the Company issued 490,245
   shares of its $.001 par value common stock at an estimated value of
   $2,378,000 for common stock of Sunrise.

   On July 2, 1998, the Company completed its initial public offering selling
   3,450,000 shares of Common Stock at an initial public offering price of
   $11.00 per share.  Concurrently, the Company sold 1,100,000 shares of Common
   Stock to Suiza Foods Corporation in a private placement at a price of $11.00
   per share.  The Company received proceeds of $50,050,000 which was reduced by
   offering costs of $3,774,000 from these offerings.  A portion of the net
   proceeds from the initial public offering was used to repay principal and
   accrued interest as follows (in thousands):

<TABLE>
<S>                                                                <C>
Revolving line of credit                                              $     9,310
Unsecured subordinated promissory notes                                     3,601
Senior subordinated promissory notes                                        3,196
Non-interest bearing secured promissory
 note due July 8, 1998                                                      4,000
Term loan due July 31, 1998                                                 2,004
Other liabilities                                                             101
                                                                      ----------- 
   Total                                                              $    22,212
                                                                      ===========
</TABLE>

   In addition to the repayment of debt and other liabilities above, the Company
   has used proceeds from the initial public offering for working capital
   requirements and purchases of equipment.

   In December 1998, two warrants were exercised to purchase an aggregate of
   43,349 shares of the Company's common stock for approximately $231,000.  The
   warrants had exercise prices of $5.335 per share.

   In April 1998, the Company retired its 120,000 shares of treasury stock.

                                                                     (Continued)

                                      F-19
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


(12) Earnings Per Share

<TABLE>
<CAPTION>
 
(In thousands, except per share amounts)                               1998            1997            1996
                                                                  -----------     -----------      -----------
<S>                                                             <C>             <C>               <C>
Income (loss) before extraordinary item                         $         900   $      (1,022)     $        27
Extraordinary item, net of income tax benefit                            (414)             --               --
Net income (loss)                                                         486          (1,022)              27
 
Common and common equivalent shares outstanding:
  Historical common shares outstanding at beginning of
   period                                                               5,052           3,648            2,872
  Weighted average common equivalent shares issued during
   period                                                               2,287             840              392
  Weighted average common shares issued - basic                         7,339           4,488            3,264
  Weighted average common equivalent shares issued during
   period                                                                 403              --               19
  Weighted average common shares issued - diluted                       7,742           4,488            3,283
 
Earnings (loss) per basic share:
  Income (loss) per share                                       $        0.12           (0.23)            0.01
  Extraordinary item per share                                          (0.05)             --               --
                                                                  -----------     -----------      -----------
  Net income (loss) per share                                            0.07           (0.23)            0.01
                                                                  ===========     ===========      ===========
 
Earnings (loss) per diluted share:
  Income (loss) per share                                       $        0.11           (0.23)            0.01
  Extraordinary item per share                                          (0.05)             --               --
                                                                  -----------     -----------      -----------
  Net income (loss) per share                                            0.06           (0.23)            0.01
                                                                  ===========     ===========      ===========
</TABLE>
 

(13) Stock Option Plan and Stock Option Agreements

     In October 1995, the Company reserved 250,000 shares of its common stock
     for an incentive stock option plan (Plan) it implemented for key employees.
     In December 1997 the Company reserved an additional 500,000 shares for the
     Plan. Options are granted at the discretion of the Board of Directors with
     an exercise price equal to the stock's estimated fair value at date of
     grant.

     In 1996, 113,943 shares were granted by the Board. 70,000 qualified shares
     were granted to employees that fully vest in five years, 25% per year
     beginning one year after the grant date and expire in 2001. 25,000
     nonqualified shares were granted to directors and vest in five years, 25%
     per year beginning one year after grant date and expire in 2001. 2,143
     nonqualified shares were granted to an outside consultant that vested
     immediately and expire in 1999. 16,800 qualified shares were granted to
     employees that vested immediately and expire in 1997.

                                                                     (Continued)

                                      F-20
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


   In fiscal 1997 a total of 214,125 shares were granted by the Board.  4,000
   nonqualified shares were granted to outside agents that vested immediately
   and expire in 2000.  5,250 nonqualified shares were granted to outside agents
   that fully vest in 5 years, 25% per year beginning one year after the grant
   date and expire in 2002.  168,875 qualified shares were granted to employees
   that fully vest in five years, 25% per year beginning one year after grant
   date and expire in 2002.  9,000 qualified shares were granted to employees
   that fully vested on November 1, 1997 and expired on November 30, 1997.
   27,000 nonqualified shares were granted to directors that fully vest in five
   years, or 25% per year beginning one year after grant date and expire in
   2002.

   In fiscal 1998 a total of 66,250 shares were granted by the Board. 1,000
   nonqualified shares were granted to outside agents that fully vest in five
   years, or 25% per year beginning one year after grant date and expire in
   2003. 62,250 qualified shares were granted to employees that fully vest in
   five years, 25% per year beginning one year after grant date and expire in
   2003.  3,000 nonqualified shares were granted to a director that fully vest
   in five years, or 25% per year beginning one year after grant date and expire
   in 2003.

   The per share weighted-average fair value of stock options granted during
   1998, 1997 and 1996 was $2.82, $1.12 and $0.70, respectively, on the date of
   grant using the Black Scholes option-pricing volatility model with the
   following weighted-average assumptions: 1998--no expected dividend yield,
   expected volatility of 50% for options granted after July 2, 1998, risk-free
   interest rates ranging from 4.17% to 5.69% depending on the life of the
   option, and expected option lives of 4.5 years, 1997--no expected dividend
   yield, risk-free interest rates ranging from 5.78% to 5.80% depending on the
   life of the option, and expected option lives ranging from 3 to 4 years,
   1996--no expected dividend yield, risk-free interest rates ranging from 5.44%
   to 6.73% depending on the life of the option, and expected option lives
   ranging from 3 to 5 years.

   The Company applies the principles in APB Opinion No. 25 in accounting for
   its Plan and stock  option agreements and, accordingly, no compensation cost
   has been recognized for its stock options in the accompanying consolidated
   financial statements. Had the Company determined compensation cost based on
   the fair value at the grant date for its stock options under SFAS No. 123,
   the Company's net income would have been reduced, or net loss increased, to
   the pro forma amounts indicated below (in thousands):

<TABLE>
<CAPTION>
                                                         1998             1997            1996
                                                     -----------     -----------      -----------
<S>                                               <C>               <C>              <C>
Net income (loss), as reported                     $         486          (1,022)              27
                                                     ===========     ===========      ===========
Net income (loss), pro forma                       $         463          (1,037)              14
                                                     ===========     ===========      ===========
</TABLE>

   The above pro forma disclosures are not necessarily representative of the
   effect on the reported net income (loss) for future periods because options
   vest over several years and additional awards are made each year.

                                                                     (Continued)

                                      F-21
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996

   Stock option activity during the years indicated was as follows:
<TABLE>
<CAPTION>
                                                                                                   Weighted
                                                                                                   average
                                                     Number of               Range of              exercise
                                                      shares             exercise prices            price
                                                ----------------      --------------------     --------------
<S>                                               <C>                   <C>                      <C>
Balance at December 31, 1995                             245,000             $ 1.25--$2.10             $ 1.78
 Granted                                                 113,943             $ 2.00--$3.50             $ 3.29
 Canceled                                                 (5,000)            $        2.00             $ 2.00
                                                ----------------
Balance at December 28, 1996                             353,943             $ 1.25--$3.50             $ 2.53
 Granted                                                 214,125             $ 4.85--$6.50             $ 5.60
 Exercised                                               (23,050)            $ 3.38--$5.05             $ 3.94
 Canceled                                                 (4,750)            $ 3.38--$5.05             $ 4.52
                                                ----------------
Balance at December 31, 1997                             540,268             $ 1.25--$6.50             $ 3.28
 Granted                                                  66,250             $6.50--$14.88             $10.08
 Cancelled                                                (7,750)            $6.50--$12.75             $12.55
                                                ----------------
Balance at December 31, 1998                             598,768             $1.25--$14.88             $ 3.91
                                                ================
Number of options exercisable at
 December 31, 1998                                       337,862             $ 1.25--$6.50             $ 2.57
</TABLE>

<TABLE>
<CAPTION>
                                                          Weighted
                                                           average             Number              Weighted
                                                          remaining        exercisable at           average
                                       Number            contractual        December 31,           exercise
              Exercise price         outstanding            life                1998                 price
            -----------------    -----------------   -----------------   -----------------    -----------------
<S>                                <C>                 <C>                 <C>              <C>
            $            1.25               90,000                 5.2              90,000  $              1.25
                   2.00--2.10              155,000                 2.3             150,000                 2.09
                   3.22--3.50               92,143                 2.7              47,143                 3.35
                   4.85--6.50              230,375                 4.4              29,750                 4.85
                 11.00--14.88               31,250                 4.6                  --                   --
                                 -----------------                       -----------------    -----------------
                                           598,768                 3.7             316,893  $              2.30
                                 =================   =================   =================    =================
</TABLE>

      Canceled options are a result of employee terminations and forfeitures.
 
(14)  Leases

      The Company has noncancelable operating leases, primarily for office space
      and office equipment, expiring at various dates from 1999 to 2007. These
      leases generally require the Company to pay all executory costs such as
      maintenance and insurance. Rent expense totaled, $278,000 in 1998,
      $151,000 in 1997 and $57,000 in 1996.


                                                                     (Continued)

                                      F-22
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


   Future minimum lease payments under noncancelable operating and capital
   leases (with initial or remaining lease terms in excess of one year) as of
   December 31, 1998 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         Capital             Operating
                                                                          Leases              Leases
                                                                    ---------------      ---------------
<S>                                                               <C>                  <C>  
Year ended December 31:
     1999                                                         $             221                  341
     2000                                                                       133                  320
     2001                                                                       104                  265
     2002                                                                        77                  185
     Thereafter                                                                  45                  181
                                                                    ---------------      ---------------
        Total minimum lease payments                                            580    $           1,292
                                                                                         ===============
Less amounts representing interest                                              (76)
                                                                    ---------------
     Present value of minimum capital lease   payments                          504
Less current portion                                                           (188)
                                                                    --------------- 
Capital lease obligations, less current portion                   $             316
                                                                    ===============
</TABLE>

(15) Fair Value of Financial Instruments

     The carrying amounts of cash and cash equivalents, marketable securities,
     trade accounts receivable, other current assets, other assets, trade
     accounts payable and other accrued expenses approximate fair value because
     of the short maturity of these instruments.

     The carrying amounts of long-term debt approximates fair value because the
     interest rates are variable at market rates or because the rates are based
     on currently offered rates by lending institutions for similar debt
     instruments of comparable maturities.

(16) Related Party Transactions

     The Company subleased a portion of its office to a company controlled by a
     director and stockholder of the Company. The term of the sublease runs from
     October 1, 1997 through December 31, 1998. Rental income under the
     agreement was approximately $1,900 per month.

     A director and stockholder of the Company owns a ranch at which the Company
     periodically stores and feeds the Company's cattle for $1.60 per day, per
     cow.  The Company incurred expenses of approximately $62,000 and $155,000
     under this informal agreement in 1998 and 1997, respectively.

     One of the Company's milk processors is controlled by a director of the
     Company.  Payments to this processor for milk processing were $1,049,000,
     $660,000 and $286,000 during 1998, 1997 and 1996, respectively.

                                                                     (Continued)

                                      F-23
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


     The Company has relied in part on loans from related parties to fund its
     capital needs. These loans bore interest rates consistent with market rates
     of interest had the Company obtained these loans from independent third
     parties. No amounts under these loans were due as of December 31, 1998.
     Amounts due to related parties under these loans as of December 31, 1997
     were $6,667,000.

     The Company paid fees to one of its directors for the guarantee of certain
     debt at one percent of the amount guaranteed. The Company paid
     approximately $29,000 and $55,000 to this director in connection with
     guarantee fees in 1998 and 1997, respectively. The guarantees were released
     in 1998.

     The Company paid management fees to a company controlled by one of its
     directors for management of its dairy operations. The Company paid
     approximately $210,000 in management fees in 1997. The agreement terminated
     in November 1997.

(17) Purchase Commitments

     The Company contracts with various organic farmers and cooperatives
     throughout the United States for organic farm milk. Except for one contract
     which extends through 2002, these contracts are for twelve to twenty-four
     months and are renewable upon agreement by the Company and the producer.
     All production contracts require that the Company purchase minimum
     quantities of organic farm milk. If the Company cannot use the minimum
     amount as organic fluid milk or other organic products, the Company sells
     the organic milk as conventional milk and records the difference in the
     Company's purchase price and the conventional price in cost of sales.

(18) Employee Stock Purchase Plan

     In April 1998, the Board adopted the 1998 Employee Stock Purchase Plan (the
     Purchase Plan), to provide employees of the Company with an opportunity to
     purchase common stock through payroll deductions. Under the Purchase Plan,
     250,000 shares of common stock have been reserved for issuance. The
     Purchase Plan is intended to qualify as an employee stock purchase plan
     within the meaning of Section 423 of the Internal Revenue Code. The Board
     may authorize participation by eligible employees, including officers, in
     periodic offerings following the adoption of the Purchase Plan. A new
     offering period begins every six months. The Board authorized an offering
     commencing July 2, 1998 and ending December 31, 1998, with sequential six-
     month offerings thereafter.

     Employees are eligible to participate in the Purchase Plan if they have
     been employed by the Company for at least three months preceding the
     beginning of the offering and work at least twenty hours per week and at
     least five months per calendar year. Employees can have up to 10% of their
     earnings withheld pursuant to the Purchase Plan and applied on specific
     purchase dates (currently the last day of each authorized offering) to the
     purchase of shares of common stock. The price of common stock purchased
     under the Purchase Plan will be equal to 85% of the lower of the fair value
     of the common stock on the commencement date of each offering or the
     relevant purchase date. Employees may end their participation in the
     offering at any time during the offering, and 

                                                                     (Continued)

                                      F-24
<PAGE>
 
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

               December 31, 1998 and 1997 and December 28, 1996


   participation ends automatically on termination of employment. Holders of
   five percent or more of the Company's outstanding common stock are not
   eligible to participate in the Purchase Plan.

   In the event of certain changes in control, the Company and the Board have
   discretion to provide that each right to purchase common stock will be
   assumed or an equivalent right substituted by the successor corporation, or
   the Board may shorten an offering and provide for all sums collected by
   payroll deductions to be applied to purchase stock immediately prior to the
   change in control.  The Purchase Plan may be terminated at the Board's
   discretion.

   At December 31, 1998 the Company issued 5,933 shares of common stock under
   this Purchase Plan.

                                      F-25
<PAGE>
                 HORIZON ORGANIC CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

         December 31, 1998 and December 31, 1997 and December 28, 1996


(19)  Quarterly Results (unaudited)

      The following table sets forth selected quarterly unaudited financial
      information for the fiscal years ended December 31, 1998 and 1997 (in
      thousands except per share amounts):
<TABLE> 
<CAPTION> 
                                                                                   Year ended December 31, 1998
                                                                   --------------------------------------------------------------
                                                                           1st Qtr         2nd Qtr        3rd Qtr       4th Qtr
                                                                   -------------------  -------------  ------------   -----------
<S>                                                                <C>                  <C>            <C>            <C> 
Net sales                                                          $       10,102          11,793         12,762           14,703

Gross profit                                                                3,079           3,753          4,607            5,306

Total operating expenses                                                    2,745           3,193          3,873            4,534

Operating income                                                              334             560            734              772

Other income (expense)                                                       (492)           (676)           140              203

Income (loss) before income taxes and      
  extraordinary item                                                         (158)           (116)           874              975

Income tax benefit (expense)                                                   43              23           (352)            (389)

Income (loss) before extraordinary item                                      (115)            (93)           522              586

Extraordinary item, net                                                        --              --           (414)              --

Net income (loss)                                                            (115)            (93)           108              586

Net income (loss) per share, basic                                           (.02)           (.02)           .01              .06
Net income (loss) per share, diluted                                         (.02)           (.02)           .01              .06

Weighted average shares outstanding - basic                                 5,056           5,056          9,557            9,611
Weighted average shares outstanding - diluted                               5,056           5,056         10,046           10,052

<CAPTION> 
                                                                                        Year ended December 31, 1997
                                                                   --------------------------------------------------------------
                                                                           1st Qtr         2nd Qtr        3rd Qtr       4th Qtr
                                                                   -------------------  -------------  ------------   -----------
<S>                                                                <C>                  <C>            <C>            <C> 
Net sales                                                          $        6,134           6,740          7,648            9,043

Gross profit                                                                1,021           1,471          1,998            2,436

Total operating expenses                                                    1,546           1,792          2,222            2,480

Operating loss                                                               (525)           (321)          (224)             (44)

Other income (expense)                                                       (153)           (226)          (345)            (384)

Income (loss) before income taxes and minority
    interest                                                                 (678)           (547)          (569)            (428)

Income tax benefit                                                             64             155            147              147

Loss before minority interest                                                (614)           (392)          (422)            (281)
Minority interest                                                             571             116             --               --

Net loss                                                                      (43)           (276)          (422)            (281)

Net income (loss) per share, basic and diluted                               (.01)           (.07)          (.08)            (.06)

Weighted average shares outstanding - basic and diluted                     3,659           4,165          5,045            5,047
</TABLE> 
                                                                     (Continued)
                                     F-26

<PAGE>
             HORIZON ORGANIC HOLDING CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements 
                                            
         December 31, 1998 and December 31, 1997 and December 26, 1996


(20)  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 selcted segment
      data for the fiscal years ended December31, 1998 and 1997 (in thousands):

<TABLE> 
<CAPTION> 
                                                                       Year ended December 31, 1998
                                               -----------------------------------------------------------------------------
                                                                Dairy Farm
                                                  Marketing     Operations       Subtotal      Eliminations        Total
                                               --------------  -------------  --------------  --------------  --------------
<S>                                            <C>             <C>            <C>             <C>             <C> 
Net sales - external customers                 $       49,255            105          49,360                          49,360
Net sales - internal                                      --          16,848          16,848         (16,848)            --
                                               --------------  -------------  --------------  --------------  --------------
        Total net sales                                49,255         16,953          66,208         (16,848)         49,360
                                               ==============  =============  ==============  ==============  ==============
Depreciation and amortization                  $          591          2,136           2,727                           2,727
Loss on sale of cattle and equipment                        2          1,507           1,509                           1,509
Interest income                                         2,222             18           2,240          (1,604)            636
Interest expense                                       (1,027)        (1,971)         (2,998)          1,604          (1,394)
                                               --------------  -------------  --------------  --------------  --------------
        Net interest income (expense)                   1,195         (1,953)           (758)                           (758)
                                               ==============  =============  ==============  ==============  ==============
Income tax expense                             $         (675)           --             (675)                           (675)
Extraordinary item, net of tax                           (414)           --             (414)                           (414)
Net income (loss)                                       2,093         (1,607)            486                             486
Segment assets                                         66,187         32,268          98,455         (29,099)         69,356
                                                                                                                            
                                                                                                                            
                                                                       Year ended December 31, 1997
                                               -----------------------------------------------------------------------------
                                                                Dairy Farm
                                                  Marketing     Operations       Subtotal      Eliminations        Total
                                               --------------  -------------  --------------  --------------  --------------
Net sales - external customers                 $       28,684            881          29,565                          29,565
Net sales - internal                                      --           9,529           9,529          (9,529)            --
                                               --------------  -------------  --------------  --------------  --------------
        Total net sales                                28,684         10,410          39,094          (9,529)         29,565
                                               ==============  =============  ==============  ==============  ==============
Depreciation and amortization                  $          174            976           1,150                           1,150
Loss on sale of cattle and equipment                       (1)         1,007           1,006                           1,006
Interest income                                           700            --              700            (647)             53
Interest expense                                         (750)        (1,023)         (1,773)            647          (1,126)
                                               --------------  -------------  --------------  --------------  --------------
        Net interest income (expense)                     (50)        (1,023)         (1,073)                         (1,073)
                                               ==============  =============  ==============  ==============  ==============
Income tax benefit                             $          513            --              513                             513
Minority interest                                         --             687             687                             687
Net income (loss)                                       1,109         (2,131)         (1,022)                         (1,022)
Segment assets                                         26,462         29,058          55,520         (22,783)         32,737
</TABLE> 

                                     F-27