Microsoft Word 10.0.5522;UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange
Act of 1934
For The Fiscal Year Ended June 30, 2003
|_| Transition Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the transition period from ______ to _______.
Commission File No. 0-22818
THE HAIN CELESTIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3240619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
58 South Service Road
Melville, New York 11747
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 730-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to Form
10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant based upon the closing price of the
registrant's stock, as quoted on the Nasdaq National Market on December 31,
2002, the last business day of the registrant's most recently completed second
fiscal quarter, was $423,030,212.
As of September 23, 2003, there were 34,251,918 shares outstanding of the
registrant's Common Stock, par value $.01 per share.
Documents Incorporated by Reference
Document Part of the Form 10-K
into which Incorporated
The Hain Celestial Group, Inc. Definitive Part III
Proxy Statement for the Annual Meeting
of Stockholders to be Held December 4, 2003
Table of Contents
Part I
Item 1. Business
Note Regarding Forward Looking Information 1
General 1
Product Overview 3
Products 4
New Product Initiatives Through Research and Development 4
Sales and Distribution 5
Marketing 5
Manufacturing Facilities 6
Suppliers of Ingredients and Packaging 6
Co-packed Product Base 7
Trademarks 7
Competition 8
Government Regulation 9
Independent Certification 10
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 11
Item 6. Selected Financial Data 12-13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements and Supplementary Data 21-46
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 47
Item 9A. Controls and Procedures 47
Part III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 47
Item 12. Security Ownership and Certain Beneficial Owners and
Management 47
Item 13. Certain Relationships and Related Transactions 47
Item 14. Principal Accountant Fees and Services 47
Part IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on 47-49
Form 8-K
Signatures 51
PART I
THE HAIN CELESTIAL GROUP, INC.
Item 1. Business.
Unless otherwise indicated, references in this Annual Report to 2003, 2002,
2001 or "fiscal" 2003, 2002, 2001 or other years refer to our fiscal year ended
June 30 of that year and references to 2004 or "fiscal" 2004 refer to our fiscal
year ending June 30, 2004.
Note Regarding Forward Looking Information
Certain statements contained in this Annual Report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1934 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, levels of activity, performance or achievements of the Company (as
defined below), or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; the ability of the Company
to implement its business and acquisition strategy; the ability to effectively
integrate its acquisitions; the ability of the Company to obtain financing for
general corporate purposes; competition; availability of key personnel; and
changes in, or the failure to comply with government regulations. As a result of
the foregoing and other factors, no assurance can be given as to the future
results, levels of activity and achievements and neither the Company nor any
person assumes responsibility for the accuracy and completeness of these
statements.
General
The Hain Celestial Group, Inc., a Delaware corporation, and its
subsidiaries (collectively, the "Company", and herein referred to as "we", "us",
and "our") manufacture, market, distribute and sell natural, organic, specialty
and snack food products under brand names which are sold as "better-for-you"
products. We are a leader in many of the top natural food categories, with such
well-known natural food brands as Celestial Seasonings(R) teas, Hain Pure
Foods(R), Westbrae(R), Westsoy(R), Rice Dream(R), Soy Dream(R), Imagine(R),
Walnut Acres Certified Organic(R), Little Bear Organic Foods(R), Bearitos(R),
Arrowhead Mills(R), Health Valley(R), Breadshop's(R), Casbah(R), Garden of
Eatin'(R), Terra Chips(R), Harry's Premium Snacks(R), Boston's(R), Gaston's(R),
Lima(R), Biomarche(R), Grains Noirs(R), Yves Veggie Cuisine(R), DeBoles(R),
Earth's Best(R), and Nile Spice(R). The Company's principal specialty product
lines include Hollywood(R) cooking oils, Estee(R) sugar-free products,
Kineret(R) kosher foods, Boston Better Snacks(R), and Alba Foods(R). Our website
can be found at www.hain-celestial.com. Our annual report on Form 10-K, quaterly
reports on Form 10-Q and current reports on Form 8-K are available, without
charge, through links from our website at
http://www.hain-celestial.com/annualreports.html, as soon as reasonably possible
after they are filed electronically with the SEC.
Our products are sold primarily to specialty and natural food distributors
and are marketed nationally to supermarkets, natural food stores, and other
retail classes of trade including mass-market stores, drug stores, food service
channels and club stores. During 2003, 2002 and 2001, approximately 42%, 54% and
51%, respectively, of our revenues were derived from products manufactured
within our own facilities. The remaining 58%, 46% and 49% for 2003, 2002 and
2001, respectively, of our revenues were derived from products which are
produced by independent food manufacturers("co-packers")using proprietary
specifications controlled by us.
Since our formation, we have completed a number of acquisitions of
companies and brands. In the last three fiscal years, we have acquired the
following companies and brands:
On June 17, 2003, we acquired Acirca, Inc., a New York based manufacturer,
distributor and marketer of natural and organic juices, pasta sauces, soups and
salsas under the Walnut Acres Certified Organic(R) brand.
On May 14, 2003, we acquired Grains Noirs, N.V., a Belgian producer and
marketer of fresh prepared organic appetizers, salads, sandwiches and other
full-plated dishes.
On December 2, 2002, we acquired the assets and business of Imagine Foods,
Inc. ("Imagine") in the United States and the United Kingdom. Imagine is a
non-dairy beverage business specializing in aseptic and refrigerated rice and
soy milks, organic aseptic soups and broths, and organic non-dairy frozen
desserts under the Rice Dream(R), Soy Dream(R) and Imagine(R) brands.
On December 10, 2001, we acquired Lima N.V., the leading Belgian natural
and organic foods manufacturer and marketer, and its affiliated company
Biomarche, a processor and marketer of fresh organic produce.
On June 8, 2001, we acquired Yves Veggie Cuisine, Inc. and its subsidiaries
("Yves"), a Vancouver, British Columbia based company. Yves is a manufacturer,
distributor and marketer of premium soy protein meat alternative products.
On January 18, 2001, we acquired Fruit Chips B.V., a Netherlands based
company, which manufactures, distributes and markets low fat fruit, vegetable
and potato chips.
Our brand names are well recognized in the various market categories they
serve. We have acquired numerous brands since our formation (in addition to
those mentioned above) and we will seek future growth through internal expansion
as well as the acquisition of complementary brands.
Our overall mission is to be a leading marketer and seller of natural,
organic, beverage, snack and speciality food products by integrating all of our
brands under one management team and employing a uniform marketing, sales and
distribution program. Our business strategy is to capitalize on the brand equity
and the distribution previously achieved by each of our acquired product lines
and to enhance revenues by strategic introductions of new product lines that
complement existing products. This strategy has been established through the
acquisitions referred to above and the introduction of a number of new products
that complement existing product lines. We believe that by integrating our
various brand groups, we will achieve economies of scale and enhanced market
penetration. We consider the acquisition of natural, organic and speciality food
companies and product lines as an integral part of our business strategy. To
that end, we do, from time to time, review and conduct preliminary discussions
with acquisition candidates.
As of June 30, 2003, we employed a total of 1,270 full-time employees. Of
these employees, 121 were in sales, 739 in production and the remaining 410 were
management and administrative.
Product Overview
Natural and Organic Food Products
Our Hain(R), Westbrae(R), Westsoy(R), Imagine(R), Rice Dream(R), Soy
Dream(R), Walnut Acres Certified Organic(R), Little Bear(R), Bearitos(R),
Arrowhead Mills(R), Terra Chips(R), DeBoles(R), Garden of Eatin'(R), Health
Valley(R), Casbah(R), Breadshop's(R), Nile Spice(R), Earth's Best(R), Harry's
Premium Snacks(R), Lima(R), Biomarche(R) and Grains Noirs(R) businesses market
and distribute a full line of natural food products. We are a leader in many of
the top natural food categories. Natural foods are defined as foods which are
minimally processed, largely or completely free of artificial ingredients,
preservatives, and other non-naturally occurring chemicals, and are as near to
their whole natural state as possible. Many of our products are also made with
"organic" ingredients which are grown without dependence upon artificial
pesticides, chemicals or fertilizers.
Tea and Beverage Products
Our tea products are 100% natural and are made from high-quality, natural
flavors and ingredients and are generally offered in 20 and 40 count packages.
We are the leading specialty tea in North America and are sold in grocery,
natural foods and other retail stores. We develop flavorful, unique blends with
attractive, colorful and thought-provoking packaging. Our products include herb
teas such as Sleepytime(R), Lemon Zinger(R), Peppermint, Chamomile, Mandarin
Orange Spice(R), Cinnamon Apple Spice, Red Zinger(R), Raspberry Zinger(R),
Tension Tamer(R), Country Peach Passion(R) and Wild Berry Zinger(R), a line of
green teas, a line of wellness teas, a line of organic teas, and a line of
specialty black teas. We also offer Cool Brew and aseptic iced teas, natural
ciders and a line of Teahouse Lattes and Chais.
Snack Food Products
We manufacture, market and sell a variety of potato and vegetable chips,
organic tortilla style chips, pretzels, popcorn and potato chips under the Terra
Chips(R), Garden of Eatin'(R), Little Bear(R), Boston's Popcorn(R) and Harry's
Premium Snacks(R) names.
Meat Alternative Products
We manufacture, distribute and market a full line of soy protein meat
alternative products under the Yves brand name including such well known
products as The Good Dog(R), The Good Lunch(R) and The Good Slice(R), among
others. Meat alternative products provide consumers with an alternative product
containing the health benefits of soy but without the health concerns associated
with traditional meat products.
Medically-Directed and Weight Management Products
Our Estee(R) and Featherweight(R) businesses market and distribute a full
line of sugar-free, fructose sweetened and low sodium products targeted towards
diabetic and health conscious consumers and persons on medically-restricted
diets.
Specialty Cooking Oil Products
Our Hollywood(R) business markets a line of specialty cooking oils that are
enhanced with Vitamin E to maintain freshness and quality. The Hollywood product
line also includes carrot juice, mayonnaise and margarine. Hollywood products
are primarily sold directly to supermarkets and other mass market merchandisers.
Kosher Food Products
Our Kineret(R) business markets and distributes a line of frozen and dry
kosher food products. Kosher foods are products that are prepared in a manner
consistent with Kosher dietary laws.
Products
Our natural and organic food product lines consist of approximately 1,300
branded items and include non-dairy drinks (soy and rice milk), popcorn cakes,
cookies, crackers, flour and baking mixes, hot and cold cereals, pasta, baby
food, condiments, cooking oils, granolas, granola bars, cereal bars, canned and
instant soups, chilis, packaged grain, nut butters and nutritional oils, juices,
frozen desserts, as well as other food products. Non-dairy drinks accounted for
approximately 16% of total net sales in 2003, 12% in 2002 and 14% in 2001.
Our beverage and tea products include over 70 flavors of tea made from 100%
natural ingredients. The types of teas offered include herb, red (rooibos),
honeybush, white, green, mate and chai. Our teas are offered both with and
without caffeine. We also offer organic teas, iced teas and aseptic
ready-to-drink teas. Recent beverage introductions include Natural Ciders and
Tea House Lattes and Chais, available in several flavors. Tea beverages
accounted for approximately 20% of total net sales in 2003 and 21% in 2002 and
24% in 2001.
Yves meat alternative products consist of approximately 40 items including
meat alternative choices among veggie burgers, veggie wieners, veggie slices,
veggie entrees and veggie ground round.
Terra Chips(R) natural food products consist of approximately 60 items
comprised of varieties of potato chips, potato sticks (known as Frites(R)),
sweet potato chips and other vegetable chips.
Garden of Eatin'(R) natural food products substantially consist of a
variety of organic tortilla chip products.
Boston Popcorn and Harry's products consist of approximately 20 varieties
of popcorn, potato chips, tortilla chips and other snack food items.
Hollywood products consist of safflower, canola, and peanut oils, and
carrot juice. Hollywood cooking oils are enhanced with Vitamin E.
Estee products consist of sugar-free and fructose sweetened food products.
Kineret(R) offers a line of kosher frozen food products under the
Kineret(R) and Kosherific(R) labels. The Kineret(R) products include fish
products, potato pancakes, blintzes, challah bread, pastry dough, dry grocery
products for Passover and assorted other food products.
We continuously evaluate our existing products for taste, nutritional value
and cost and make improvements where possible. We will discontinue products or
stock keeping units when sales of those items do not warrant further production.
New Product Initiatives Through Research and Development
We consider research and development of new products to be a significant
part of our overall philosophy and we are committed to developing high-quality
products. A team of professional product developers works with a sensory
technologist to test product prototypes with consumers. The research and
development department incorporates product ideas from all areas of our business
in order to formulate new products. In addition to developing new products, the
research and development department routinely reformulates and revises existing
products. We incurred approximately $1.7 million in Company-sponsored research
and development activities in 2003, $1.0 million in 2002 and $1.5 million in
2001.
Sales and Distribution
Our products are sold in all 50 states and in approximately 50 countries.
Certain of our product lines have seasonal fluctuations (e.g., hot tea products,
baking and cereal products and soup sales are stronger in cold months while
sales of snack food products are stronger in the warmer months). Quarterly
fluctuations in our sales volume and operating results are due to a number of
factors relating to our business, including the timing of trade promotions,
advertising and consumer promotions and other factors, such as seasonality,
inclement weather and unanticipated increases in labor, commodity, energy,
insurance or other operating costs. The impact on sales volume and operating
results due to the timing and extent of these factors can significantly impact
our business.
A majority of the products marketed by us are sold through independent food
distributors. Over half of these sales orders are received from third-party food
brokers. We utilize a direct sales force for sales into natural food stores that
has allowed us to reduce our reliance on food brokers. Food brokers act as
agents for us within designated territories, usually on a non-exclusive basis,
and receive commissions. Food distributors purchase products from us for resale
to retailers. Because food distributors take title to the products upon
purchase, product pricing decisions on sales of our products by the distributors
are generally made in their sole discretion, although we may participate in
product pricing during promotional periods.
Our customer base consists principally of mass-market merchandisers,
natural food distributors, supermarkets, drug store chains, club stores and
grocery wholesalers. Recently, growth of natural and organic foods has shifted
from the natural food channel to the grocery channels as mainstream grocery
distributors and retailers provide these products to meet consumer demand and
awareness. Two of the distributors we sell to, United Natural Foods and Tree of
Life, accounted for approximately 18% and 15%, respectively, of net sales for
2003, approximately 17% and 15% respectively in 2002, and approximately 18% to
each of these distributors in 2001. Net sales to export customers account for
less than 5% of total net sales for each of the three years ended June 30, 2003.
Our international subsidiaries in Canada and Europe sell to all channels of
distribution in the countries they serve. International sales represented
approximately 17.3% of total net sales in 2003, 14.3% in 2002 and less than 5%
in 2001.
Marketing
We use a mix of trade and consumer promotions as well as media advertising
to market our products. We use trade advertising and promotion, including
placement fees, cooperative advertising and feature advertising in distribution
catalogs. We also utilize advertising and sales promotion expenditures via
national and regional consumer promotion through television and magazine
advertising, couponing and other trial use programs. During 2002, we increased
our investment in consumer spending to enhance brand equity while closely
monitoring our trade spending. We continued increasing these investments in
2003. These consumer spending categories include, but are not limited to,
consumer advertising using television, radio and print, coupons, direct mailing
programs, and other forms of promotions. There is no guarantee that these
promotional investments in consumer spending will be successful, and as we
monitor our trade spending and increase consumer awareness, there may be a
period of higher costs.
Manufacturing Facilities
We currently manage and operate the following manufacturing facilities
located throughout the United States: Celestial Seasonings, in Boulder,
Colorado, which produces specialty teas; Terra Chips, in Moonachie, New Jersey,
which produces Terra Chips vegetable chips; Arrowhead Mills, in Hereford, Texas,
which produces hot and cold cereals, baked goods and meal cups; and DeBoles(R)
pasta, in Shreveport, Louisiana, which produces organic pasta. We formerly
operated a manufacturing facility in Irwindale, California, producing hot and
cold cereals, baked goods, granola, granola bars, dry soups and other products
under the Health Valley, Breadshop and Casbah labels. During 2003, we sold the
manufacturing assets of our Irwindale facility to a co-pack manufacturer who
continues to manufacture products for us at that facility. The co-pack
manufacturer has recently entered into a lease directly with the landlord of the
facility.
Outside the United States, we have the following manufacturing facilities:
Yves Veggie Cuisine in Vancouver, British Columbia, which produces soy-based
meat alternative products; Hain Celestial Belgium, with its Lima, N.V. facility
in Maldegem, Belgium, which manufactures natural and organic food products, its
Biomarche facility in Sombreffe, Belgium, which processes fresh organic produce
and prepared salads, and its Grains Noirs facility in Brussels, Belgium, which
prepares fresh organic appetizers, salads, sandwiches and other full-plated
dishes.
We own the manufacturing facilities in Moonachie, New Jersey; Boulder,
Colorado; Hereford, Texas; Shreveport, Louisiana; and Vancouver, British
Columbia. We also own the Lima and Biomarche facilities in Belgium. During 2003,
2002 and 2001, approximately 42%, 54% and 51%, respectively, of our revenue was
derived from products manufactured at our currently owned manufacturing
facilities.
We believe we have sufficient capacity in all of our facilities; however,
an interruption in or the loss of operations at one or more of these facilities
or failure to maintain our labor force at one or more of these facilities could
delay or postpone production of our products, which could have a material
adverse effect on our business, results of operations and financial condition
until we could secure an alternate source of supply.
Suppliers of Ingredients and Packaging
Our natural and organic ingredients and our packaging materials and
supplies are obtained from various sources and suppliers located principally in
the United States and locally in Canada and Europe for our businesses in these
areas. Certain of our packaging and products are sourced from the Far East.
Our tea ingredients are purchased from numerous foreign and domestic
manufacturers, importers and growers, with the majority of those purchases
occurring outside of the United States.
We maintain long-term relationships with most of our suppliers. Purchase
arrangements with ingredient suppliers are generally made annually and in U.S.
currency. Purchases are made through purchase orders or contracts, and price,
delivery terms and product specifications vary.
Our organic and botanical purchasers visit major suppliers around the world
annually to procure ingredients and to assure quality by observing production
methods and providing product specifications. We perform laboratory analyses on
incoming ingredient shipments for the purpose of assuring that they meet both
our own quality standards and those of the U.S. Food and Drug Administration
("FDA") and the California Organic Foods Act of 1990.
Our ability to ensure a continuing supply of ingredients at competitive
prices depends on many factors beyond our control, such as foreign political
situations, embargoes, changes in national and world economic conditions,
currency fluctuations, forecasting adequate need of seasonal raw material
ingredients and unfavorable climatic conditions. We take steps intended to
lessen the risk of an interruption of botanical supplies, including
identification of alternative sources and maintenance of appropriate inventory
levels. We have, in the past, maintained sufficient supplies for our ongoing
operations.
Co-Packed Product Base
During 2003, 2002 and 2001, approximately 58%, 46% and 49%, respectively,
of our revenue was derived from products manufactured at independent co-packers.
Currently, independent food manufacturers, who are referred to in our industry
as co-packers, manufacture many of our products, including our Health Valley(R),
Breadshop's(R), Casbah(R), Alba(R), Estee(R), Earth's Best(R), Garden of
Eatin'(R), Hain Pure Foods(R), Hollywood(R), Kineret(R), Little Bear Organic
Foods(R), Terra Chips(R), Westbrae(R), Westsoy(R), Rice Dream(R), Soy Dream(R),
Imagine(R), Walnut Acres Certified Organic(R) and Lima(R) product lines.
In the U.S., we presently obtain:
- all of our requirements for non-dairy beverages from five co-packers, all
of which are under contract or other arrangements;
- all of our U.S. requirements for rice cakes from one co-packer;
- all of our Health Valley baked goods and cereal products from one
co-packer, which is under contract;
- all of our cooking oils from one co-packer;
- principally all of our tortilla chips from three co-packers, one of which
is under contract;
- a portion of our requirements for Terra's Yukon Gold line from one
co-packer, which is under contract;
- the requirements for our canned soups from one co-packer, which is under
contract; and
- all of our Earth's Best baby food products from two co-packers, which are
under contract.
The loss of one or more co-packers, or our failure to retain co-packers for
newly acquired products or brands, could delay or postpone production of our
products, which could have a material adverse effect on our business, results of
operations and financial condition until such time as an alternate source could
be secured, which may be on less favorable terms.
Trademarks
Our trademarks and brand names for the product lines referred to herein are
registered in the United States and a number of foreign countries and we intend
to keep these filings current and seek protection for new trademarks to the
extent consistent with business needs. We also copyright certain of our artwork
and package designs. We own the trademarks for our principal products, including
Arrowhead Mills(R), Bearitos(R), Breadshop's(R), Casbah(R), Celestial
Seasonings(R), DeBoles(R), Earth's Best(R), Estee(R), Garden of Eatin'(R), Hain
Pure Foods(R), Health Valley(R), Imagine(R), Kineret(R), Little Bear Organic
Foods(R), Nile Spice(R), Rice Dream(R), Soy Dream(R), Terra(R), Walnut Acres
Certified Organic(R), Westbrae(R), Westsoy(R), Lima(R) and Yves(R). Celestial
Seasonings has trademarks for most of its best-selling brands, including
Sleepytime(R), Lemon Zinger(R), Mandarin Orange Spice(R), Red Zinger(R), Wild
Berry Zinger(R), Tension Tamer(R), Country Peach Passion(R) and Raspberry
Zinger(R).
We believe that brand awareness is a significant component in a consumer's
decision to purchase one product over another in the highly competitive food and
beverage industry. Our failure to continue to sell our products under our
established brand names or negative publicity relating to one of our significant
brand names, could have a material adverse effect on our business, results of
operations and financial condition. We believe that our trademarks and trade
names are significant to the marketing and sale of our products and that the
inability to utilize certain of these names could have a material adverse effect
on our business, results of operations and financial condition.
Competition
We operate in highly competitive geographic and product markets, and some
of these markets are dominated by competitors with greater resources. We cannot
be certain that we could successfully compete for sales to distributors or
stores that purchase from larger, more established companies that have greater
financial, managerial, sales and technical resources. In addition, we compete
for limited retailer shelf space for our products. Larger competitors, such as
mainstream food companies including General Mills, Nestle S.A., Kraft Foods,
Groupe Danone, Kellogg Company, Unilever PLC, and Sara Lee Corporation, also may
be able to benefit from economies of scale, pricing advantages or the
introduction of new products that compete with our products. Retailers also
market competitive products under their own private labels.
The beverage market for both tea and soy beverages are large and highly
competitive. Competitive factors in the tea industry include product quality and
taste, brand awareness among consumers, variety of specialty tea flavors,
interesting or unique product names, product packaging and package design,
supermarket and grocery store shelf space, alternative distribution channels,
reputation, price, advertising and promotion. Celestial Seasonings currently
competes in the specialty tea market segment which consists of herb tea, green
tea, wellness tea and black tea. Celestial Seasonings specialty tea products,
like other specialty tea products, are priced higher than most commodity black
tea products.
Celestial Seasonings principal competitors on a national basis in the
specialty teas market segment are Thomas J. Lipton Company (a division of
Unilever PLC), Twinings (a division of Associated British Grocers) and R.C.
Bigelow, Inc. Unilever has substantially greater financial resources than the
Company. Additional competitors include a number of regional specialty tea
companies. There may be potential entrants which are not currently in the
specialty tea market who may have substantially greater financial resources than
we have. Private label competition in the specialty tea category is currently
minimal, but growing.
The soy beverage market, including both aseptic and refrigerated products,
has shown sustained growth over the past several years. A statement by the FDA
endorsing the heart healthy benefits of soy in October 1999 spurred the growth
in both the aseptic and refrigerated segments. Aseptic soy milk is the more
mature product category of the two and in the past eighteen months, additional
larger competitors entered the category but have since exited the category after
unsuccessful regional launches. Westsoy has taken advantage of the shelf space
which became available and continues to be the number one and largest growing
brand of aseptic soymilk in the grocery and natural channels.
The refrigerated market is primarily driven by one brand, Silk(R), which is
owned by Dean Foods and holds a significant share of refrigerated soymilk space
through its strong national distribution system. We have switched our primary
focus from our refrigerated Westsoy product and redirected it to focus our
efforts on our recently acquired Soy Dream(R) and Rice Dream(R) refrigerated
products, specifically targeting accounts that agree to partner with us in
strong soy milk markets that distribute both aseptic and refrigerated products.
In the future, our competitors may introduce other products that compete
with our products and these competitive products may have an adverse effect on
our business, results of operations and financial condition.
Government Regulation
Along with our manufacturers, brokers, distributors and co-packers, we are
subject to extensive regulation by federal, state and local authorities. The
federal agencies governing our business include the Federal Trade Commission
(FTC), The Food and Drug Administration (FDA), the United States Department of
Agriculture (USDA), and the Occupational Safety and Health Administration
(OSHA). These agencies regulate, among other things, the production, sale,
safety, advertising, labeling of and ingredients used in our products. Under
various statutes, these agencies prescribe the requirements and establish the
standards for quality, purity and labeling. Among other requirements, the USDA,
in certain circumstances must approve our products, including a review of the
manufacturing processes and facilities used to produce these products before
these products can be marketed in the United States. In addition, advertising of
our business is subject to regulation by the FTC. Our activities are also
regulated by state agencies as well as county and municipal authorities. We are
also subject to the laws of the foreign jurisdictions in which we manufacture
and sell our products.
The USDA adopted regulations with respect to organic labeling and
certification, which became effective February 20, 2001. Full implementation was
required by October 21, 2002. We currently manufacture approximately 650 organic
products which are covered by these new regulations. Substantial labeling
changes, as well as additional requirements for third party organic
certification are required for compliance. In addition, on January 18, 2001, the
FDA proposed new policy guidelines regarding the labeling of genetically
modified foods. While we are revising our current labels to align them with this
policy statement, future developments in the regulation of labeling of
genetically modified foods could require us to further modify the labeling of
our products, which could affect the sales of our products and thus harm our
business.
The FDA published the final rule amending the Nutritional Labeling
regulations to require declaration of "Trans Fatty Acids" in the nutritional
label of conventional foods and dietary supplements on July 11, 2003. The final
rule will be effective on January 1, 2006. We are in the process of revising our
labels to comply with the final rule and a number of label changes have been
completed.
Furthermore, new government laws and regulations may be introduced in the
future that could result in additional compliance costs, seizures, confiscation,
recall or monetary fines, any of which could prevent or inhibit the development,
distribution and sale of our products. If we fail to comply with applicable laws
and regulations, we may be subject to civil remedies, including fines,
injunctions, recalls or seizures, as well as potential criminal sanctions, which
could have a material adverse effect on our business, results of operations and
financial condition.
Independent Certification
We rely on independent certification agencies to certify our products as
"organic" or "kosher," to differentiate our products in natural and specialty
food categories. The loss of any independent certifications could adversely
affect our market position as a natural and specialty food company, which could
have a material adverse effect on our business, results of operations and
financial condition.
We comply with the requirements of independent organizations or
certification authorities in order to label our product as certified. For
example, we can lose our "organic" certification if a plant becomes contaminated
with non-organic materials, or if not properly cleaned after a production run.
In addition, all raw materials must be certified organic. We utilize
organizations such as Quality Assurance International (QAI) and Oregon Tilth to
certify our products as organic under the guidelines established by the USDA.
Similarly, we can lose our "kosher" certification if a plant and raw materials
do not meet the requirements of the appropriate kosher supervision organization,
such as The Orthodox Union, The Organized Kashruth Laboratories, "KOF-K" Kosher
Supervision, and STAR-K.
Item 2. Properties.
Our corporate headquarters are located in approximately 35,000 square feet
of leased office space located at 58 South Service Road, Melville, New York,
11747 to which we relocated in January 2002. The lease on this facility expires
in 2012 with a current annual rental of approximately $1.2 million.
We own a manufacturing and office facility in Boulder, Colorado, built in
1990 on 42 acres of Company-owned land. The facility has approximately 167,000
square feet, of which 50,000 square feet is office space and 117,000 square feet
is manufacturing space.
In January 2001, we purchased a 75,000 square foot manufacturing facility
in Moonachie, New Jersey to manufacture our Terra vegetable chip products. This
facility became operational in the fall of 2001.
We own and operate manufacturing and distribution centers in Hereford,
Texas (134,000 square feet) and Shreveport, Louisiana (36,000 square feet) for
certain of our natural food product lines.
We lease 60,000 square feet of warehouse space in Boulder, Colorado which
is used for the storage and shipment of our tea and beverage products. The lease
expires in 2004, and provides for a current annual rental of approximately
$500,000.
We lease 375,000 square feet of warehouse space in a building located in
Ontario, California. The lease provides for a minimum annual rental of
approximately $1.3 million and provides renewal options. The lease expires in
2007. This facility serves as one of our West Coast distribution centers for
principally all of our product lines.
We operate a 7,000 square foot warehouse and distribution center located in
East Hills, New York which is utilized to distribute frozen kosher food
products. The lease on this property provides for annual rental of approximately
$55,000 and expires in 2005.
Outside the United States, we own and operate a 53,000 square foot
manufacturing and office facility in Vancouver, British Columbia that produces
soy-based meat substitute products; a 135,000 square foot manufacturing,
distribution and office facility in Maldegem, Belgium, which produces natural
and organic food products; and a 30,000 square foot processing and distribution
center in Sombreffe, Belgium, which processes fresh organic produce. In
addition, we lease a 19,000 square foot facility located in Brussels, Belgium,
which produces fresh prepared appetizers and sandwiches. The lease on this
property provides for annual rental of approximately $79,000 and expires in
2010.
In addition to the foregoing distribution facilities operated by us, we
also utilize bonded public warehouses from which deliveries are made to
customers.
Item 3. Legal Proceedings.
From time to time, we are involved in litigation incidental to the conduct
of our business. Disposition of pending litigation is not expected by management
to have a material adverse effect on our business, results of operations or
financial condition.
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.
Outstanding shares of our Common Stock, par value $.01 per share, are
traded on Nasdaq's National Market System (under the ticker symbol HAIN). The
following table sets forth the reported high and low closing prices for our
Common Stock for each fiscal quarter from July 1, 2001 through September 23,
2003.
Common Stock
-------------------------------------------------
Fiscal 2003 Fiscal 2002
---------------------- --------------------------
High Low High Low
----------- ---------- ------------ -------------
First Quarter $ 17.88 $12.13 $ 26.00 $ 18.22
Second Quarter 16.42 12.65 28.06 18.06
Third Quarter 15.82 11.84 26.90 20.01
Fourth Quarter 17.61 15.14 22.37 15.42
July 1 - September 23, 2003 20.29 15.85 - -
As of September 23, 2003, there were 522 holders of record of our Common
Stock.
We have not paid any dividends on our Common Stock to date. We intend to
retain all future earnings for use in the development of our business and do not
anticipate declaring or paying any dividends in the foreseeable future. The
payment of all dividends will be at the discretion of our Board of Directors and
will depend on, among other things, future earnings, operations, capital
requirements, contractual restrictions, including restrictions within our Credit
Facility (as defined below), our general financial condition and general
business conditions.
The table below sets forth information with respect to our equity
compensation plans as of June 30, 2003:
Number of Securities Number of Securities
to be Issued Upon Remaining Available for
Exercise of Weighted-Average Future Issuance Under Equity
Outstanding Options, Exercise Price of Compensation Plans
Warrants and Rights Outstanding Options, (excluding securities
Warrants and Rights reflected in column (a))
Plan Category ------------------------ ------------------------ ------------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 8,266,721 $17.75 491,432
Equity compensation plans not
approved by security holders N/A N/A N/A
Total 8,266,721 $17.75 491,432
Item 6. Selected Financial Data.
The following information has been summarized from our financial statements
and should be read in conjunction with such financial statements and related
notes thereto (in thousands, except per share amounts):
Year Ended June 30
------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ---------------- --------------- --------------- -------------
Operating results:
Net sales $466,459 $395,954 $345,661 $ 332,436 $269,760
Income (loss) before
extraordinary item and
cumulative change in
accounting principle 27,492 2,971 23,589 (11,403) 13,517
Extraordinary item - - - (1,940) -
Cumulative change in
accounting principle - - - (3,754) -
--------------- ---------------- --------------- --------------- -------------
Net income (loss) $ 27,492 $ 2,971 $ 23,589 $(17,097) $ 13,517
=============== ================ =============== =============== =============
Basic earnings per common
share:
Income (loss) before
extraordinary item and
cumulative change in $ .81 $ .09 $ .71 $(.41) $ .56
accounting principle
Extraordinary item - - - (.07) -
Cumulative change in
accounting principle - - - (.13) -
--------------- ---------------- --------------- --------------- -------------
Net income (loss) $ .81 $ .09 $ .71 $ (.61) $ .56
=============== ================ =============== =============== =============
Diluted earnings per
common share (a):
Income (loss) before
extraordinary item and
cumulative change in
accounting principle $ .79 $ .09 $ .68 $ (.41) $ .51
Extraordinary item - - - (.07) -
Cumulative change in
accounting principle - - - (.13) -
--------------- ---------------- --------------- --------------- -------------
Net income (loss) $ .79 $ .09 $ .68 $ (.61) $ .51
=============== ================ =============== =============== =============
Financial Position:
Working Capital $ 83,324 $ 70,942 $ 92,312 $89,750 $ 37,983
Total Assets 581,548 481,183 461,693 416,017 362,669
Long-term Debt 59,455 10,293 10,718 5,622 141,138
Stockholders' Equity 440,797 403,848 396,653 351,724 164,489
(a) As a result of the net loss for the year ended June 30, 2000, diluted
earnings per share is the same as basic earnings per share since the effects of
stock options and warrants are not included as the results would be
antidilutive.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
We made the following acquisitions during the three years ended June 30,
2003:
On June 17, 2003, we acquired Acirca, Inc., a New York based manufacturer,
distributor and marketer of natural and organic juices, pasta sauces, soups and
salsas under the Walnut Acres Certified Organic(R) brand.
On May 14, 2003, we acquired Grains Noirs, N.V., a Belgian producer and
marketer of fresh prepared organic appetizers, salads, sandwiches and other
full-plated dishes.
On December 2, 2002, we acquired the assets and business of Imagine Foods,
Inc. ("Imagine") in the United States and the United Kingdom. Imagine is a
non-dairy beverage business specializing in aseptic and refrigerated rice and
soy milks, organic aseptic soups and broths, and organic non-dairy frozen
desserts under the Rice Dream(R), Soy Dream(R) and Imagine(R) brands.
On December 10, 2001, we acquired Lima N.V., the leading Belgian natural
and organic food manufacturer and marketer.
On June 8, 2001, we acquired Yves Veggie Cuisine, Inc. and its subsidiaries
("Yves"). Yves is a manufacturer, distributor and marketer of premium soy
protein meat alternative food products.
On January 18, 2001, we acquired Fruit Chips B.V., a Netherlands based
company, who manufactures, distributes and markets low fat fruit, vegetable and
potato chips.
All of the foregoing acquisitions ("the acquisitions" or "acquired
businesses") have been accounted for as purchases. Consequently, the operations
of the acquired businesses are included in our results of operations from their
respective dates of acquisition.
Results of Operations
2002 Restructuring and Non-recurring Charges
During the fourth quarter of fiscal 2002, we recorded charges aggregating
$21.3 million, before taxes, related to the expected sale of the manufacturing
assets of our Health Valley facility in Irwindale, California ($11.3 million)
and the discontinuance of our supplements business ($7.9 million) and Weight
Watchers licenses ($2.1 million). Approximately $17.9 million of these charges
were non-cash in nature.
During the second half of 2002, we decided to pursue and execute a plan to
sell the Health Valley Irwindale plant. During the fourth quarter of 2002, we
entered into an agreement to sell the manufacturing assets of the facility to a
co-packer. Our decision to dispose of this facility was largely the result of
our inability to reach practical capacity at the facility. Accordingly, we
identified a co-packer who can produce our products and bring more production
into the plant by offering other branded and private label companies the
opportunity to have their products manufactured by the co-packer.
This agreement went into effect on October 1, 2002 and currently we
purchase our products from this co-packer on a cost plus basis. This pricing
structure was not expected to provide us with any immediate increase in margins,
but allows us to share in the potential operating efficiencies of the plant
through reduced product pricing in our cost plus arrangement when and if the
co-packer brings more production into the plant.
As of June 30, 2002, with the expected sale of all plant assets and certain
inventories to this co-packer, we recorded this restructuring and non-recurring
charge. The charge included $7.6 million of charges associated with reduced
values of inventories of raw ingredients and packaging, certain lease
obligations and other items, none of which included employee severance costs. Of
this $7.6 million of charges, our 2002 gross profit was reduced by $5.5 million
charged to cost of sales as required by accounting rules. At June 2002,
approximately $2.1 million of future costs were accrued, principally related to
lease exit costs. In addition, we recorded $3.7 million of impairment charges to
reduce the Health Valley plant's manufacturing assets to their net realizable
values. Additional restructuring charges of approximately $.4 million were
incurred during the year ended June 30, 2003 for severance liabilities and
related employee costs and trade items that could not be accrued at June 30,
2002. In addition, at the time of lease termination in fiscal 2003, we were able
to reduce our potential lease exit costs by $.9 million, which was recorded as a
credit to restructuring and other non-recurring charges. Through June 30, 2003,
approximately $1.1 million was charged against the Health Valley facility charge
accrual in the aggregate.
In June 2002, we announced that we had discontinued our supplements
business at Celestial Seasonings, and that we would not renew our license to
sell certain Weight Watchers products. These product lines did not represent our
core product category of natural and organic foods, and further, the supplements
business had faced increasing competition over the last few years along with
reduced consumer interest. Our operating results and financial position have
been only minimally enhanced in fiscal 2003 without these non-core product
lines. In addition, we can now better utilize our management resources away from
these non-core product lines. In connection with these discontinuances, we
recorded charges of $7.9 million related to supplements, principally for
inventories, packaging and trade items. Of this $7.9 million charge, $6.2
million had the effect of reducing our 2002 gross profit. The charge for the
non-renewal of the Weight Watchers license amounted to $2.1 million, principally
for inventories, packaging and trade items, of which $.7 million reduced our
2002 gross profit. Approximately $4.3 million had been accrued at June 30, 2002
associated with these future costs. At June 30, 2003, it was determined that $2
million of the accruals for sales returns and other trade incentives would no
longer be required and, therefore, such amount was reversed. Through June 30,
2003, approximately $1.8 million has been charged against these accruals in the
aggregate.
Fiscal 2003 Compared to Fiscal 2002
Net sales in 2003 were $466 million, an increase of 17.8% over net sales of
$396 million in 2002. The increase in sales came principally from the net sales
of businesses acquired in 2003 as well as from the full year of our operation of
businesses acquired in 2002. Net sales in 2003 were favorably impacted by the
normal winter weather across the United States after the unusually warm winter
of the prior year, which provided higher unit sales volumes for tea, soups and
hot cereals while the net sales of our Terra Chips products experienced declines
during the year caused principally by weaker Frites and Red Bliss sales. Our
sales were favorably impacted by approximately 1.8% due to the weaker U.S.
dollar.
Gross profit in 2003 increased to $143 million, or 30.7% of net sales, as
compared to $104 million, or 26.3% of net sales, in 2002. The 2002 gross profit
adjusted for the restructuring and non-recurring charges in that year was $116.4
million, or 29.4% of net sales. The improvement in gross profit as a percentage
of sales in 2003 came from more efficient trade spending as a percentage of
sales and improvements in our delivery and warehousing costs as a percentage of
sales, offset by higher ingredient costs and the lower gross profits associated
with businesses acquired in Europe.
Selling, general and administrative expenses increased by $9.4 million to
$97.3 million, in 2003 from $87.9 million in 2002. The increase in spending in
selling, general and administrative expenses came principally from $5.5 million
of costs brought on by businesses acquired in 2003 as well as from the full year
of our operation of businesses acquired in 2002, $.6 million of increased
consumer marketing, and increases across all levels of general and
administrative expenses to support our growing business. As a percentage of
sales, selling, general and administrative expenses decreased in 2003 to 20.9%
from 22.2% in 2002. This decrease was caused principally by the increase in
sales at a faster rate than the increase in general and administrative costs as
we leverage the infrastructure in place as we acquire additional new businesses
and add them to existing infrastructures, particularly in the United States.
Operating income increased to $46.2 million in 2003 from $7.3 million in
2002. The 2002 amount was reduced by the restructuring and non-recurring charges
of $21.3 million in that year. The increase in operating income came from the
elimination of those 2002 charges, and from the higher level of sales and gross
profits, offset by higher selling, general and administrative expenses, all
discussed above.
Interest and other expenses, net, decreased to $2 million in 2003 from $2.5
million in 2002. This decrease is principally comprised of an increase in
interest expense by approximately $.8 million in 2003, such increase coming from
the increased borrowings during 2003 to fund the three acquisitions of
businesses we made during the year, offset by the elimination of the $1.5
million charge we incurred in 2002 when we closed the Terra Chips former
manufacturing facility in Brooklyn, NY.
Income before income taxes increased to $44.2 million in 2003 from $4.8
million in 2002. This increase is the result of the aforementioned increase in
operating income and the overall reduction of interest and other expenses, net.
Income taxes increased to $16.7 million in 2003 from $1.8 million in 2002.
Our effective tax rate was 37.8% in 2003 compared to 38.1% in 2002. The small
reduction in our effective tax rate came principally from the departure of our
Terra Chips manufacturing facility from New York City and the resulting
elimination of the related local income taxes.
Net income for 2003 amounted to $27.5 million compared to $3 million in
2002. This $24.5 million increase in net income is primarily attributable to the
aforementioned increase in income before income taxes offset by the increase in
income tax expense.
Fiscal 2002 Compared to Fiscal 2001
Net sales in fiscal 2002 were $396 million, an increase of 14.5% over net
sales of $345.7 million in 2001. Adjusted for sales derived from acquired
businesses and a continuation of the redirection of management focus from
certain non-core product lines (principally supplements and non-core food
product categories), our net sales increased 4%. Our net sales were impacted
during fiscal 2002 by the tragic events of September 11, 2001, the unusually
warm winter which slowed sales of teas and other cold weather products, and
product availability issues affecting our Terra Chips products caused first by
capacity limitations at our original Brooklyn, New York plant and further by the
delays in the start-up of production at our Moonachie, New Jersey plant. Our
internal growth was derived principally from our Terra and Garden of Eatin'
snack brands and from our refrigerated Westsoy brand.
Gross profit for 2002 decreased by $7 million to $104 million (26.3% of net
sales) as compared to $111 million (32.1% of net sales) in 2001. Gross profits
in 2002 adjusted for the restructuring and non-recurring charges discussed above
were $116.4 million, or 29.4% of reported net sales. The decline in adjusted
gross profit percentage of 2.7% was caused by: changes in the mix of sales
driven principally by unusually warm winter weather ($6.0 million or 1.5%);
higher than anticipated start-up production costs at our new Terra Chips
manufacturing facility in Moonachie ($1.5 million or .4%); higher freight and
warehousing costs associated with certain strategic initiatives to increase
inventory levels in order to reduce stock outs with the objective of increasing
customer satisfaction ($3.5 million or .9%); and lower gross profits associated
with certain of our recent business acquisitions ($.8 million or .2%).
Selling, general and administrative expenses (excluding amortization
expense) increased by approximately $22.7 million to $87.9 million (22.2% of net
sales) in 2002 as compared to $65.2 (18.9% of net sales) in 2001. The increase
is a result of: $10.7 million of costs brought on by the aforementioned
acquisitions during the second half of fiscal 2001 and first half of fiscal
2002; $2 million of increased consumer marketing; $1.4 million of higher
depreciation associated with continuing improvements to our information systems
and the capital expenditures related to our headquarters office relocation; and
increases across all levels of general and administrative costs to support the
growing infrastructure required for our business. Amortization of goodwill and
other intangible assets was $6.4 million for 2001 compared to approximately $.3
million for 2002. The results for 2002 include the effect of adopting Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets", which resulted in a $6.1
million reduction in overall expenses ($4.0 million net of tax) and a $.12
increase in basic and diluted earnings per share. The $6 million pre-tax
reduction of amortization expense in 2002 represents the amount of amortization
of goodwill and indefinite-life intangible assets that arose from acquisitions
prior to July 1, 2001 and is no longer being amortized.
As discussed above, during 2002 we recorded $5 million of restructuring and
other non-recurring charges, and a $3.9 million impairment of long-lived assets
charge. There were no such charges in 2001. These charges are related to certain
asset write-offs, trade costs and employee severance costs associated with the
discontinuance of the Celestial Seasonings supplements business and Weight
Watchers brand license and the expected Health Valley facility sale.
Merger related charges amounted to $1 million for 2001, resulting from
certain employee costs associated with the Celestial Seasonings Merger in May
2000.
Operating income decreased to $7.3 million during 2002 compared to $38.4
million in 2001. The decrease of $31.1 million is due to the aforementioned
restructuring and non-recurring charges of $21.3 million, decreased gross
profits and higher selling, general and administrative expenses, all discussed
above.
Interest expense (income) net, and other expenses amounted to expense of
$2.5 million in 2002 compared with income of $2.3 million in 2001. The decrease
of $4.8 million is primarily the result of the interest expense we incurred in
2002 while using our Credit Facility as compared to the interest we earned in
2001 on the investible cash we had during that year. Since June 2001, we have
used that cash to fund the Yves and Lima acquisitions, and to fund the
construction of our new Terra Chips manufacturing facility in Moonachie, New
Jersey. In addition, in 2002 we incurred a full year of carrying costs for our
Credit Facility, which we entered into on March 28, 2001. In 2002, we also
incurred other costs and expenses totaling $1.5 million resulting from the
closure of our Terra Chips Brooklyn, NY manufacturing facility in December 2001,
and the return of the leased premises to the owner.
We disposed of machinery and equipment and leasehold improvements deemed
unusable which totaled $1 million, and we were required to retrofit the leased
Brooklyn facility to its original condition at a cost of approximately $.5
million.
Income before income taxes decreased $35.9 million to $4.8 million in 2002
as compared to $40.7 million in 2001. The decrease is a result of the
aforementioned decrease in operating income and higher interest and other costs.
Income taxes decreased to $1.8 million for 2002 compared to $17.1 million
in 2001. The effective tax rate was 38% in 2002 compared to 42% in 2001. The
reason for our lower tax rate was the elimination of nondeductible goodwill
amortization discussed above.
Net income for 2002 amounted to $3 million compared to $23.6 million in
2001. This $20.6 million decrease in earnings was primarily attributable to the
aforementioned decrease in income before income taxes offset by the reduction in
income tax expense.
Liquidity and Capital Resources
We finance our operations and growth primarily with the cash flows we
generate from our operations and from borrowings under our Credit Facility.
We have available to us a $240 million revolving Credit Facility (the
"Credit Facility") which provides us with a $145 million revolving credit
facility through March 29, 2005, and a $95 million renewable 364-day facility
through March 25, 2004. The Credit Facility is unsecured, but is guaranteed by
all of our direct and indirect domestic subsidiaries. We are required to comply
with customary affirmative and negative covenants for facilities of this nature.
This access to capital provides us with flexible working capital needs in
the normal course of business and the opportunity to grow our business through
acquisitions or develop our existing infrastructure through capital investment.
Net cash provided by operations was $21.9 million and $22.6 million for
2003 and 2002, respectively. Our working capital and current ratio were $83.3
million and 2.3 to 1, respectively, at June 30, 2003 compared with $70.9 million
and 2.3 to 1 respectively, at June 30, 2002. Our improvement in working capital
was derived principally from the net income earned during the year ended June
30, 2003.
Net cash provided by financing activities was $49.2 million for 2003.
During 2003, we borrowed cash to fund the three acquisitions made during the
year. Net cash used in financing activities was $6.5 million for 2002. During
2002, we repaid certain debt obligations of acquired businesses totaling $3.7
million and we used $3.6 million of cash for a stock buyback program. During the
year ended June 30, 2003, we acquired .3 million shares of our common stock in
open market purchases at a cost of approximately $4.3 million.
Obligations for all debt instruments, capital and operating leases and
other contractual obligations are as follows:
Payments Due by Period
--------------------------------------------------
Less than
Total 1 year 1 - 3 years Thereafter
----------- ----------- -------------- -----------
Debt instruments $ 64,630 $6,751 $ 55,826 $2,053
Capital lease obligations 3,632 2,056 1,576 -
Operating leases 20,037 3,332 8,399 8,306
----------- ----------- -------------- -----------
Total contractual cash
obligations $ 88,299 $ 12,139 $ 65,801 $ 10,359
=========== =========== ============== ===========
We believe that cash on hand of $11.0 million at June 30, 2003, as well as
projected fiscal 2004 cash flows from operations, and availability under our
Credit Facility are sufficient to fund our working capital needs, anticipated
capital expenditures of approximately $12 million, and the $12.1 million of debt
and lease obligations described in the table above, during the next fiscal year.
We currently invest our cash on hand in highly liquid short-term investments
yielding approximately 1.1% interest.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The accounting principles we
use require us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting periods presented. We
believe in the quality and reasonableness of our critical accounting policies;
however, it is likely that materially different amounts would be reported under
different conditions or using assumptions different from those that we have
consistently applied. We believe our critical accounting policies are as
follows, including our methodology for estimates made and assumptions used:
Valuation of Accounts and Chargebacks Receivable
We perform ongoing credit evaluations on existing and new customers daily.
We apply reserves for delinquent or uncollectible trade receivables based on a
specific identification methodology and also apply a general reserve based on
the experience we have with our trade receivables aging categories. Credit
losses have been within our expectations over the last few years. While two of
our customers represent approximately 25% of our trade receivable balance at
June 30, 2003, we believe there is no credit exposure at this time.
Based on cash collection history and other statistical analysis, we
estimate the amount of unauthorized deductions that our customers have taken to
be repaid and collectible in the near future in the form of a chargeback
receivable. While our estimate of this receivable balance could be different had
we used different assumptions and judgments, historically our cash collections
of this type of receivable have been within our expectations and no significant
write-offs have occurred; however, during the fourth quarter of 2003, we reduced
our chargebacks receivable by $1.5 million. Our chargebacks receivable balance
at June 2003 was $6 million as compared to $5 million at June 2002.
There can be no assurance that we would have the same experience with our
receivables during different economic conditions, or with changes in business
conditions, such as consolidation within the food industry and/or a change the
way we market and sell our products.
Inventory
Our inventory is valued at the lower of cost or market. Cost has been
derived principally using standard costs utilizing the first-in, first-out
method. We provide write-downs for finished goods expected to become
non-saleable due to age and specifically identify and reserve for slow moving or
obsolete raw ingredients and packaging.
Property, Plant and Equipment
Our property, plant and equipment is carried at cost and depreciated or
amortized on a straight-line basis over the lesser of the estimated useful lives
or lease life, whichever is shorter. We believe the asset lives assigned to our
property, plant and equipment are within ranges/guidelines generally used in
food manufacturing and distribution businesses. Our manufacturing plants and
distribution centers, and their related assets, are periodically reviewed to
determine if any impairment exists by analyzing underlying cash flow
projections. At this time, we believe no impairment exists on the carrying value
of such assets. Ordinary repairs and maintenance are expensed as incurred.
Intangibles
Goodwill is no longer amortized and the value of an identifiable intangible
asset is amortized over its useful life unless the asset is determined to have
an indefinite useful life. The carrying values of goodwill and other intangible
assets with indefinite useful lives are tested annually for impairment.
Revenue Recognition and Sales Incentives
Sales are recognized upon the shipment of finished goods to customers and
are reported net of sales incentives. Allowances for cash discounts and returns
are recorded in the period in which the related sale is recognized. Shipping and
handling costs are included as a component of cost of sales.
Supplementary Quarterly Financial Data:
Unaudited quarterly financial data (in thousands, except per share amounts)
for fiscal 2003 and 2002 is summarized as follows:
Three Months Ended
------------- -------------- ----------- -----------
September 30, December 31, March 31, June 30,
2002 2002 2003 2003
------------- -------------- ----------- -----------
Net sales $ 96,420 $123,006 $ 129,224 $ 117,809
Gross profit 29,254 40,346 40,000 33,403
Restructuring and
non-recurring charges - 440 - (875)
Operating income 7,703 13,356 13,804 11,296
Income before income taxes 7,533 13,150 12,620 10,861
Net income $ 4,689 $ 8,186 $ 7,856 $ 6,761
Basic earnings per
common share $ .14 $ .24 $ .23 $ .20
Diluted earnings per
common share $ .14 $ .24 $ .23 $ .19
Gross profit for the three months ended June 30, 2003 was positively
impacted by the following offsetting items: a reduction by $1.5 million of
chargebacks receivable from customers, and a $2.0 million reduction of reserves
established last year in connection with similar items included in the charges
recorded for supplements and other items. These offsetting items increased gross
profit by $0.5 million.
Three Months Ended
--------------- ------------------------------------
September 30, December 31, March 31, June 30,
2001 2001 2002 2002
--------------- ------------------------------------
Net sales $89,735 $105,169 $105,614 $ 95,436
Gross profit 26,485 32,473 32,442 12,639
Restructuring and
non-recurring charges - - - 4,977
Impairment of property,
plant & equipment - - - 3,878
Operating income (loss) 9,135 9,960 8,531 (20,362)
Income (loss) before
income taxes 8,778 8,396 8,231 (20,602)
Net income (loss) $ 5,443 $ 5,205 $ 5,137 $(12,814)
Basic earnings per
common share $ .16 $ .15 $ .15 $ (.38)
Diluted earnings per common
share $ .16 $ .15 $ .15 $ (.38)
Gross profit for the three months ended June 30, 2002 was negatively
impacted by approximately $12.4 million of charges to cost of sales resulting
from the restructuring and non-recurring charges related to the expected sale of
the Health Valley manufacturing facility, and the discontinuance of the
supplements business and Weight Watchers license.
Seasonality
Our tea business consists primarily of manufacturing and marketing hot tea
products and, as a result, its quarterly results of operations reflect seasonal
trends resulting from increased demand for its hot tea products in the cooler
months of the year. This is also true for our soups and hot cereals businesses,
but to a lesser extent. Quarterly fluctuations in our sales volume and operating
results are due to a number of factors relating to our business, including the
timing of trade promotions, advertising and consumer promotions and other
factors, such as seasonality, abnormal and inclement weather patterns and
unanticipated increases in labor, commodity, energy, insurance or other
operating costs. The impact on sales volume and operating results, due to the
timing and extent of these factors, can significantly impact our business. For
these reasons, you should not rely on our quarterly operating results as
indications of future performance. In some future periods, our operating results
may fall below the expectations of securities analysts and investors, which
could harm our business.
Inflation
Management does not believe that inflation had a significant impact on our
results of operations for the periods presented.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
The principal market risks (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed are:
o interest rates on debt and cash equivalents, and
o foreign exchange rates, generating translation and transaction gains and
losses.
Interest Rates
We centrally manage our debt and cash equivalents considering investment
opportunities and risks, tax consequences and overall financing strategies. Our
cash equivalents consist primarily of commercial paper and obligations of U.S.
Government agencies. Assuming year-end 2003 variable debt and cash equivalents
levels, a one-point change in interest rates would have the effect of increasing
our interest expense by approximately $.6 million, thereby reducing our net
income by approximately $.01 per share.
Foreign Operations
Operating in international markets involves exposure to movements in
currency exchange rates, which are volatile at times. The economic impact of
currency exchange rate movements is complex because such changes are often
linked to variability in real growth, inflation, interest rates, governmental
actions and other factors. These changes, if material, could cause adjustments
to our financing and operating strategies. Consequently, isolating the effect of
changes in currency does not incorporate these other important economic factors.
During fiscal 2003, approximately 17.3% of our net sales were generated from
sales outside the United States, while such sales outside the United States were
14.3% of net sales in 2002 and less than 5% in 2001.
We expect sales from non-core U.S. markets to possibly represent an
increasing portion of our total net sales in the future. Our non U.S. sales and
operations are subject to risks inherent in conducting business abroad, many of
which are outside our control, including:
o periodic economic downturns and unstable political environments;
o price and currency exchange controls;
o fluctuations in the relative values of currencies;
o unexpected changes in trading policies, regulatory requirements, tariffs
and other barriers; and
o difficulties in managing a global enterprise, including staffing,
collecting accounts receivable and managing distributors.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of The Hain Celestial
Group, Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets - June 30, 2003 and 2002
Consolidated Statements of Income - Years ended June 30, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity - Years ended June 30,
2003, 2002 and 2001
Consolidated Statements of Cash Flows - Years ended June 30, 2003, 2002
and 2001
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of The Hain
Celestial Group, Inc. and subsidiaries is included in Item 15 (a):
Schedule II Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
Report of Independent Auditors
The Stockholders and Board of Directors
The Hain Celestial Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Hain
Celestial Group, Inc. and Subsidiaries as of June 30, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 2003. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Hain
Celestial Group, Inc. and Subsidiaries at June 30, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 4 to the consolidated financial statements, in fiscal
year 2002, the Company changed its method of accounting for goodwill and other
intangible assets.
/s/ Ernst & Young LLP
Melville, New York
August 28, 2003
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30,
------------------------
2003 2002
------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,984 $ 7,538
Accounts receivable, less allowance for doubtful 61,215 49,018
accounts of $1,748 and $1,002
Inventories 66,444 53,624
Recoverable income taxes, net 223 3,677
Deferred income taxes 3,171 7,223
Other current assets 7,671 5,804
--------=-- ----------
----------- ----------
Total current assets 149,708 126,884
Property, plant and equipment, net of accumulated 68,665 69,774
depreciation and amortization of $31,555 and $22,767
Goodwill 296,508 239,644
Trademarks and other intangible assets, net of 55,975 38,880
accumulated amortization of $7,377 and $6,966
Other assets 10,692 6,001
----------- ----------
----------- ----------
Total assets $ 581,548 $ 481,183
=========== ==========
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 55,091 $ 46,166
Accrued restructuring and non-recurring charges 619 6,410
Income taxes payable 1,867 1,935
Current portion of long-term debt 8,807 1,431
----------- ----------
Total current liabilities 66,384 55,942
Long-term debt, less current portion 59,455 10,293
Deferred income taxes 14,912 11,100
----------- ----------
Total liabilities 140,751 77,335
Stockholders' equity:
Preferred stock - $.01 par value, authorized 5,000,000 - -
shares, no shares issued
Common stock - $.01 par value, authorized 100,000,000 348 341
shares, issued 34,810,722 and 34,075,639 shares
Additional paid-in capital 364,877 354,822
Retained earnings 79,089 51,597
Foreign currency translation adjustment 4,639 963
----------- ----------
448,953 407,723
Less: 606,619 and 306,917 shares of treasury stock,
at cost (8,156) (3,875)
----------- ----------
Total stockholders' equity 440,797 403,848
----------- ----------
Total liabilities and stockholders' equity $ 581,548 $ 481,183
=========== ==========
See notes to consolidated financial statements.
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30
----------------------------------
2003 2002 2001
---------- ---------- ----------
Net Sales $ 466,459 $ 395,954 $ 345,661
Cost of sales 23,456 291,915 234,643
---------- ---------- ----------
---------- ---------- ----------
Gross profit 143,003 104,039 111,018
Selling, general and administrative expenses 97,279 87,920 71,607
Merger costs - - 1,032
Restructuring and other non-recurring charges (435) 4,977 -
Impairment of long-lived assets - 3,878 -
---------- --------- ----------
Operating income 46,159 7,264 38,379
Interest expense (income), net and other
expenses 1,995 2,461 (2,292)
---------- --------- ----------
Income before income taxes 44,164 4,803 40,671
Provision for income taxes 16,672 1,832 17,082
---------- --------- ----------
Net income $ 27,492 $ 2,971 $ 23,589
========== ========= ==========
Net income per share:
Basic $ .81 $ .09 $ .71
========== ========= ==========
Diluted $ .79 $ .09 $ .68
========== ========= ==========
Weighted average common shares outstanding:
Basic 33,910 33,760 33,014
========== ========= ==========
Diluted 34,722 34,744 34,544
========== ========= ==========
See notes to consolidated financial statements.
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2001, 2002 AND 2003
(In thousands, except per share and share data)
Common Stock Foreign
------------------- Additional Treasury Stock Currency Comprehensive
Amount Paid-in Retained ------------------ Translation Income
Shares at $.01 Capital Earnings Shares Amount Adjustment Total (Loss)
--------------------------------------------------------------------------------------------------
Balance at June 30, 2000 32,147,261 $ 321 $ 326,641 $ 25,037 100,000 $ (275) $351,724
Exercise of common stock warrants, 66,419 2 657 659
net of related expenses
Exercise of stock options 1,265,465 13 12,857 12,870
Issuance of common stock 191,979 2 5,714 5,716
Non-cash compensation charge 46 46
Tax benefit from stock options 3,027 3,027
Net income for the period 23,589 23,589
Comprehensive income:
Net income $ 23,589
Translation adjustments $ (978) (978) (978)
----------
Total comprehensive income $ 22,611
-----------------------------------------------------------------------------------------========
Balance at June 30, 2001 33,771,124 338 348,942 48,626 100,000 (275) (978) 396,653
Exercise of stock options 94,341 1 992 993
Purchase of treasury shares 206,917 (3,600) (3,600)
Issuance of common stock 210,174 2 4,507 4,509
Non-cash compensation charge 47 47
Tax benefit from stock options 334 334
Net income for the period 2,971 2,971
Comprehensive income:Net income 2,971
Translation adjustments 1,941 1,941 1,941
--------
Total comprehensive income $ 4,912
-----------------------------------------------------------------------------------------========
Balance at June 30, 2002 34,075,639 341 354,822 51,597 306,917 (3,875) 963 403,848
Exercise of stock options 67,521 1 623 624
Purchase of treasury shares 299,702 (4,281) (4,281)
Issuance of common stock 667,562 6 9,206 9,212
Non-cash compensation charge 46 46
Tax benefit from stock options 180 180
Net income for the period 27,492 27,492
Comprehensive income:
Net income $ 27,492
Translation adjustments 3,676 3,676 3,676
----------
Total comprehensive income $ 31,168
-------------------------------------------------------------------------------------============
Balance at June 30, 2003 34,810,722 $ 348 $ 364,877 $ 79,089 606,619 $ (8,156) $ 4,639 $ 440,797
============================================================================================
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
-----------------------------------------
2003 2002 2001
------------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 27,492 $ 2,971 $ 23,589
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash restructuring and non-recurring charges, - 10,929 -
including related inventory charges
Non-cash impairment of long-lived assets - 3,878 -
Depreciation and amortization of property and equipment 7,610 7,687 6,287
Amortization of goodwill and other intangible assets 385 249 6,441
Amortization of deferred financing costs 624 423 107
Provision for doubtful accounts 103 551 393
Deferred income taxes 7,864 (237) 7,301
Other 46 47 46
Increase (decrease) in cash attributable to changes in
operating assets and liabilities, net of amounts
applicable to aquired businesses:
Accounts receivable (4,973) 1,824 (6,514)
Inventories (2,742) (9,179) 848
Other current assets (1,167) (4,274) 604
Other assets (1,745) 1,836 (746)
Accounts payable and accrued expenses (9,320) (7,494) (19,119)
Accrued restructuring and non-recurring charges (5,805) 6,410 -
Recoverable income taxes 3,389 6,637 577
Tax benefit of nonqualified stock options 180 334 3,027
----------- ----------- -------------
Net cash provided by operating activities 21,941 22,592 22,841
----------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired (57,528) (13,568) (37,184)
Purchases of property and equipment (9,157) (21,341) (13,474)
----------- ----------- -------------
Net cash used in investing activities (66,685) (34,909) (50,658)
----------- ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) from bank revolving credit facility, net 49,450 - 4,400
Payments on economic development revenue bonds (500) (459) (366)
Costs in connection with bank financing (220) (249) (1,369)
Purchase of treasury stock (4,281) (3,600) -
Proceeds from exercise of options and stock purchase plan, 624 1,071 13,685
net of related expenses
Proceeds (repayments) of other long-term debt, net 4,100 (3,275) (217)
----------- ----------- -------------
Net cash provided by (used in) financing activities 49,173 (6,512) 16,133
----------- ----------- -------------
Effect of exchange rate changes on cash (983) (276) 19
----------- ----------- -------------
Net increase (decrease) in cash and cash equivalents 3,446 (19,105) (11,665)
Cash and cash equivalents at beginning of year 7,538 26,643 38,308
----------- ----------- -------------
Cash and cash equivalents at end of year $ 10,984 $ 7,538 $ 26,643
=========== =========== =============
See notes to consolidated financial statements.
1. BUSINESS The Hain Celestial Group (herein referred to as "the Company",
"we","us" and "our") is a natural, organic, specialty and snack food company. We
are a leader in many of the top natural food categories, with such well-known
natural food brands as Celestial Seasonings(R) teas, Hain Pure Foods(R),
Westbrae(R), Westsoy(R), Rice Dream(R), Soy Dream(R), Imagine(R), Walnut Acres
Certified Organic(R), Little Bear Organic Foods(R), Bearitos(R), Arrowhead
Mills(R), Health Valley(R), Breadshop's(R), Casbah(R), Garden of Eatin'(R),
Terra Chips(R), Harry's Premium Snacks(R), Boston's(R), Gaston's(R), Lima(R),
Biomarche(R), Grains Noirs(R), DeBoles(R), Earth's Best(R), and Nile Spice(R).
Our principal specialty product lines include Hollywood(R) cooking oils,
Estee(R) sugar-free products, Kineret(R) kosher foods, Boston Better Snacks(R),
and Alba Foods(R).
We operate in one business segment: the sale of natural, organic and other
food and beverage products. During the three years ended 2003, approximately
42%, 54% and 51% of our revenues were derived from products that are
manufactured within our own facilities with 58%, 46% and 49% produced by various
co-packers. In fiscal 2003, 2002 and 2001, there were no co-packers who
manufactured 10% or more of our co-packed products.
2. BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of The Hain
Celestial Group, Inc. and all wholly-owned subsidiaries. In the Notes to
Consolidated Financial Statements, all dollar amounts, except per share data,
are in thousands unless otherwise indicated.
3. SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES
Consolidation Policy
Our accompanying consolidated financial statements include the accounts of
the Company and all of its wholly-owned subsidiaries. Material intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The accounting principles we
use require us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting periods presented. We
believe in the quality and reasonableness of our critical accounting policies;
however, it is likely that materially different amounts would be reported under
different conditions or using assumptions different from those that we have
consistently applied.
Valuation of Accounts and Chargebacks Receivable and Concentration of Credit
Risk
We perform ongoing credit evaluations on existing and new customers daily.
We apply reserves for delinquent or uncollectible trade receivables based on a
specific identification methodology and also apply an additional reserve based
on the experience we have with our trade receivables aging categories. Credit
losses have been within our expectations in recent years. While two of our
customers represent 25%, 27% and 29% of our trade receivables balance as of June
30, 2003, 2002 and 2001, respectively, we believe there is no credit exposure at
this time.
Based on cash collection history and other statistical analysis, we
estimate the amount of unauthorized deductions our customers have taken that we
expect to be repaid and collectible in the near future in the form of a
chargeback receivable. While our estimate of this receivable balance ($6 million
at June 30, 2003 and $5 million at June 30, 2002) could be different had we used
different assumptions and judgments, historically our cash collections of this
type of receivable has been within our expectations and no significant
write-offs have occurred; however, during the fourth quarter of 2003, we reduced
our chargebacks receivable by $1.5 million.
During the year ended June 30, 2003, sales to two customers and their
affiliates approximated 18% and 15%. These two customers accounted for
approximately 17% and 15% in 2002 and approximately 18% each of sales in 2001.
Inventory
Our inventory is valued at the lower of cost or market. Cost has been
determined principally using standard costs utilized under the first-in,
first-out method. We provide write-downs for finished goods expected to become
non-saleable due to age and specifically identify and provide for slow moving or
obsolete raw ingredients and packaging.
Property, Plant and Equipment
Our property, plant and equipment is carried at cost and depreciated or
amortized on a straight-line basis over the estimated useful lives or lease
life, whichever is shorter. We believe the asset lives assigned to our property,
plant and equipment are within ranges generally used in food manufacturing and
distribution businesses. Our manufacturing plants and distribution centers, and
their related assets, are periodically reviewed to determine if any impairment
exists by analyzing underlying cash flow projections. At this time, we believe
no impairment exists on the carrying value of such assets. Ordinary repairs and
maintenance are expensed as incurred. We utilize the following ranges of asset
lives:
Buildings and improvements 10-31 years
Machinery and equipment 5-10 years
Furniture and fixtures 3-7 years
Leasehold improvements 3-10 years
Intangibles
Goodwill is no longer amortized and the value of an identifiable intangible
asset is amortized over its useful life unless the asset is determined to have
an indefinite useful life. The carrying values of goodwill and other intangible
assets with indefinite useful lives are tested annually for impairment.
Revenue Recognition and Sales Incentives
Sales are recognized upon the shipment of finished goods to customers and
are reported net of sales incentives. Allowances for cash discounts and returns
are recorded in the period in which the related sale is recognized.
In May 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue 00-14, "Accounting for Certain Sales Incentives." Under the consensus,
certain sales incentives must be recognized as a reduction of sales rather than
as an expense (we included such sales incentives within selling, general and
administrative expenses). In April 2001, the EITF reached a consensus on Issue
00-25, "Vendor Statement Characterization of Consideration from a Vendor to a
Retailer," which expanded upon the types of consideration paid by vendors to
retailers which are to be considered sales incentives and, accordingly, should
be classified as a reduction of sales rather than as a component of selling,
general and administrative expenses. In November 2001, the EITF reached a
consensus on Issue 01-9, "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of A Vendor's Product," which provides interpretative
guidance to Issues 00-14 and 00-25. Our statements of income reflect the
adoption of these EITF consensuses by the classification of certain vendor
promotional allowances and other sales incentives as reductions of sales rather
than as selling expenses as had been the predominant industry and company
practice in the past. The sales amounts for 2003 and 2002 are in conformity with
those EITF consensuses, which were adopted by us effective January 1, 2002. To
provide comparability, upon adoption of these consensuses, the sales amount for
2001 was restated by reclassifying promotional allowances and other sales
incentives of $67.2 million. The adoption of these EITF consensuses had no
impact on income or cash flows.
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S.
dollars at current rates, except that revenues, costs and expenses are
translated at average rates during each reporting period. Net exchange gains or
losses resulting from the translation of foreign financial statements and the
effect of exchange rate changes on intercompany transactions of a long-term
investment nature are accumulated and credited or charged directly to a separate
component of stockholders' equity and other comprehensive income.
Advertising Costs
Media advertising costs, which are included in selling, general and
administrative expenses, amounted to $5.6, $4.8 and $1.6 million for fiscal
2003, 2002 and 2001, respectively. Such costs are expensed as incurred.
Income Taxes
We follow the liability method of accounting for income taxes. Under the
liability method, deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities at enacted rates
in effect in the years in which the differences are expected to reverse.
Shipping and Handling Costs
We include the costs associated with shipping and handling of our inventory
as a component of cost of sales.
Fair Values of Financial Instruments
At June 30, 2003 and 2002, we had $0.2 and $3.6 million invested in
corporate money market securities, including commercial paper, repurchase
agreements, variable rate instruments and bank instruments. These securities are
classified as cash equivalents as their maturities when purchased are less than
three months. At June 30, 2003 and 2002, the carrying values of these money
market securities approximate their fair values.
We believe that the interest rates charged on our debt instruments
approximate current borrowing rates and, accordingly, the carrying amounts of
such debt at June 30, 2003 and 2002 approximate fair value.
Accounting For Stock Issued to Employees
We have elected to follow APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related Interpretations, in accounting for stock
options because, as discussed below, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of our employee stock
options at least equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding earnings and earnings per share is required
by SFAS No. 123, and has been determined as if we have accounted for our stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: risk free interest rates
ranging from 4% to 6.77%; no dividend yield; volatility factors of the expected
market price of our common stock of approximately 55% for fiscal 2003 and 93%
for fiscal 2002 and 2001; and a weighted-average expected life of the options of
five years in each year.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Our pro forma
information is as follows:
2003 2002 2001
---------- ----------- ----------
Net income, as reported $ 27,492 $2,971 $ 23,589
Non-cash compensation charge net of
related tax effects 30 30 30
Stock-based employee compensation
expense determined under fair value
method, net of related tax effects (11,365) (15,165) (15,074)
---------- ----------- ----------
Pro forma net income (loss) $ 16,157 $ (12,164) $8,545
========== =========== ==========
Basic net income per common share:
As reported $ .81 $ .09 $ .71
Pro forma $ .48 $ (.36) $ .26
Diluted net income per common share:
As reported $ .79 $ .09 $ .68
Pro forma $ .47 $ (.36) $ .25
Accounting for the Impairment of Long-Lived Assets
During 2002, we accounted for the impairment of long-lived assets, other
than goodwill and other indefinite life intangibles, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
recorded value of the asset may not be recoverable. We perform such a review at
each balance sheet date whenever events and circumstances have occurred that
indicate possible impairment. We consider continued operating losses and
significant and long-term changes in prevailing market conditions to be the
primary indicators of potential impairment. In accordance with SFAS No. 121, we
use an estimate of the future undiscounted net cash flows of the related asset
or asset grouping over the remaining life to measure whether the assets are
recoverable. During fiscal 2002, as part of the expected Health Valley Irwindale
manufacturing facility sale (see Note 5),we recorded a $3.7 million impairment
charge to reduce the Health Valley plant's manufacturing assets to their net
realizable value.
Effective July 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes SFAS No. 121; however, it retains fundamental provisions related to
the recognition and measurement of the impairment of long-lived assets to be
"held and used." In addition, SFAS No. 144 provides more guidance on estimating
cash flows when performing a recoverability test, requires that a long-lived
assets group to be disposed of other than by sale (e.g., abandoned) be
classified as "held and used" until disposed of, and establishes more
restrictive criteria regarding classification of an asset group as "held for
sale."
SFAS No. 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations" ("APB 30"), for the disposal of a segment of a business, and extends
the reporting of a discontinued operation to a "component of an entity."
Further, SFAS No. 144 requires operating losses from a "component of an entity"
to be recognized in the period in which they occur rather than as of the
measurement date as previously required by APB 30.
There have been no disposal activities since adoption of SFAS No. 144 and,
therefore, the adoption of that statement had no effect on our financial
statements.
Deferred Financing Costs
Eligible costs associated with obtaining debt financing are capitalized and
amortized over the related term of the applicable debt instruments, which
approximates the effective interest method.
Earnings Per Share
We report basic and diluted earnings per share in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per share excludes
the dilutive effects of options and warrants. Diluted earnings per share
includes only the dilutive effects of common stock equivalents such as stock
options and warrants.
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128.
2003 2002 2001
-------------------------------
Numerator:
Net income $ 27,492 $ 2,971 $ 23,589
===============================
Denominator (in thousands):
Denominator for basic earnings per
share - weighted average shares outstanding
during the period 33,910 33,760 33,014
Effect of dilutive securities
Stock options 653 802 1,304
Warrants 159 182 226
-------------------------------
812 984 1,530
-------------------------------
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversions 34,722 34,744 34,544
===============================
Basic net income per share $ .81 $ .09 $ .71
===============================
Diluted net income per share $ .79 $ .09 $ .68
===============================
Options and warrants totaling 4,528,953 in 2003, 4,068,369 in 2002, and
1,481,950 in 2001, were excluded from our earnings per share computations as
their effects would have been anti-dilutive.
Reclassifications
We have made certain reclassifications to the prior years' consolidated
financial statements and notes thereto to conform to the current year
presentation.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Our results for the year ended June 30, 2002, include the effect of
adopting SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets", which resulted in a $6.1 million reduction ($4.0
million, net of tax) in amortization expense and $.12 increases in both basic
and diluted earnings per share. SFAS No. 141 provides that all business
combinations initiated after June 30, 2001 shall be accounted for using the
purchase method. In addition, it provides that the cost of an acquired entity
must be allocated to the assets acquired, including identifiable intangible
assets and liabilities assumed, based on their estimated fair values at the date
of acquisition. The excess of cost over the fair value of the net assets
acquired must be recognized as goodwill. SFAS No. 142 provides that goodwill is
no longer amortized and the value of an identifiable intangible asset must be
amortized over its useful life unless the asset is determined to have an
indefinite useful life.
The following table reflects consolidated results of operations (net of tax
effect) adjusted as though the adoption of SFAS No. 141 and 142 occurred as of
the beginning of the year ended June 30, 2001.
2001
--------------
Net income as reported $23,589
Goodwill and indefinite-life
intangibles amortization, net of tax 4,000
--------------
Net income as adjusted $27,589
==============
Basic earnings per common share:
As reported $ 0.71
==============
As adjusted $ 0.84
==============
Diluted earnings per common share:
As reported $ 0.68
==============
As adjusted $ 0.80
==============
At June 30, 2003, included in trademarks and other intangible assets on the
balance sheet, is approximately $3.0 million of intangible assets deemed to have
a finite life which are being amortized over their estimated useful lives.
Goodwill must be tested for impairment at the beginning of the fiscal year in
which SFAS No. 142 is adopted and at least annually thereafter. We perform a
test for impairment during the fourth quarter of our fiscal year. In accordance
with SFAS No. 142, we have evaluated the fair value of our reporting units and
compared those values to the carrying values of their related goodwill and
indefinite-life intangible assets, and based on such evaluations, no impairment
existed at July 1, 2001 or through June 2003. The $6.1 million pre-tax reduction
of intangible amortization expense recognized during the year ended June 30,
2002 represents the amount of amortization of goodwill and indefinite-life
intangible assets that arose from acquisitions prior to July 1, 2001 and are no
longer amortized. Amounts assigned to indefinite-life intangible assets
primarily represent the values of trademarks. The following table reflects the
components of trademarks and other intangible assets:
2003 2002
-------------- ------------- --------------- -------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------- --------------- -------------
Amortized intangible
assets:
Other intangibles $ 3,041 $ 893 $ 1,790 $ 482
Non-amortized
intangible assets:
Trademarks 60,311 6,484 44,056 6,484
5. 2002 RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the fourth quarter of fiscal 2002, we recorded charges aggregating
$21.3 million, before taxes, related to the expected sale of our Health Valley
facility in Irwindale, California ($11.3 million) and the discontinuance of our
supplements business ($7.9 million) and Weight Watchers license ($2.1 million).
Approximately $17.9 million of these charges were noncash in nature.
Our Health Valley facility charge included $7.6 million of restructuring
and non-recurring charges associated with reduced values of inventories of raw
ingredients and packaging, certain lease obligations and other items. Of this
$7.6
million of charges, our 2002 gross profit was reduced by $5.5 million
charged to cost of sales as required by accounting rules. In addition, we
recorded $3.7 million of impairment charges to reduce the Health Valley plant's
manufacturing assets to their net realizable value. At June 30, 2002, we accrued
$2.1 million of future costs associated with this charge primarily relating to
lease exit costs relating to incremental costs and contractual obligations and
other facility exit costs expected to be incurred as part of this sale.
Additional restructuring charges of approximately $.4 million were incurred
during the year ended June 30, 2003 for severance liabilities and related
employee costs and trade items that could not be accrued at June 30, 2002. In
addition, at the time of lease termination in fiscal 2003, we were able to
reduce our potential lease exit costs by $.9 million, which was recorded as a
credit to restructuring and other non-recurring charges. Through June 30, 2003,
approximately $1.1 million was charged against the Health Valley facility charge
accrual in the aggregate.
We also discontinued our supplements business at Celestial Seasonings, and
did not renew our license to sell certain Weight Watchers products. In
connection with these 2002 discontinuances, we recorded charges of $7.9 million
related to supplements principally for inventories, packaging and trade items.
Of this $7.9 million charge, $6.2 million had the effect of reducing our 2002
gross profit. The charge for the non-renewal of the Weight Watchers license
amounted to $2.1 million, principally for inventories, packaging and trade
items, of which $.7 million reduced our 2002 gross profit. At June 30, 2002, we
accrued $3.1 and $1.2 million for future costs associated with the Celestial
Seasonings supplements and Weight Watchers license discontinuances,
respectively. These future costs primarily related to anticipated sales returns
resulting from the discontinuance notification, other trade incentives, employee
severance costs and other items. At June 30, 2003, it was determined that $2
million of the accruals for anticipated sales returns and other trade incentives
would no longer be required and therefore, such amount was reversed. Through
June 30, 2003, approximately $1.8 million has been charged against these
accruals in the aggregate.
At June 30, 2003, our balance sheet includes the above-described aggregate
of $.6 million of accrued restructuring and non-recurring charges, substantially
all of which are expected to be paid during 2004.
6. ACQUISITIONS
Fiscal 2003
On June 17, 2003, we acquired 100% of the stock of privately-held Acirca,
Inc., the owner of the Walnut Acres Certified Organic(R) brand of organic fruit
juices, soups, pasta sauces and salsas. Since June 2000, the financial and
investment group Acirca, Inc. has expanded Walnut Acres, its premier certified
organic food and beverage brand, by integrating a series of organic brands
including Mountain Sun(R), ShariAnn's(R), Millina's Finest(R), and Frutti di
Bosco(R) into its Walnut Acres flagship. The acquisition of these product lines
allows us to add natural and organic juices and sauces to our product offerings,
and enhance our offerings of soups and salsas. The purchase price consisted of
approximately $9 million in cash, 134,797 shares of our common stock valued at
$2.2 million, plus the assumption of certain liabilities. At June 30, 2003,
goodwill (not deductible for tax purposes) from this transaction was estimated
to be $14.2 million.
On December 2, 2002, we acquired substantially all of the assets and
assumed certain liabilities of privately-held Imagine Foods, Inc. ("Imagine") in
the United States and the United Kingdom. Imagine is a non-dairy beverage
company specializing in aseptic and refrigerated rice and soy milks, organic
aseptic soups and broths, and organic frozen desserts in the U.S., Canada, and
Europe.
The acquisition of these product lines is expected to enhance our existing
market positions in non-dairy beverages and soups while adding frozen dessert
products to our offerings to customers. The purchase price consisted of
approximately $44.2 million in cash, 532,765 shares of our common stock valued
at $7 million, plus the assumption of certain liabilities. At June 30, 2003,
goodwill (deductible for tax purposes) from this transaction was valued at $35.8
million, trademarks and other non-amortizable intangibles were $15.7 million,
and patents and other amortizable intangibles were valued at $1.5 million.
The following table summarizes the estimated fair values of assets acquired
and liabilities assumed of Acirca and Imagine at the dates of the acquisitions:
Current assets $17,714
Property and equipment 2,409
------------------
------------------
Total assets 20,123
Liabilities assumed 14,937
------------------
------------------
Net assets acquired $ 5,186
==================
The balance sheet at June 30, 2003, includes the assets acquired and
liabilities assumed valued at fair market value at the date of purchase. We have
completed substantially all of the procedures required to finalize the purchase
price allocation for Imagine, while such procedures required for Acirca are in
the early stages and are expected to be completed during 2004.
Our results of operations for the years ended June 30, 2003 and 2002
include the results of the above described acquisitions from their respective
dates of acquisition. Unaudited pro forma results of operations reflecting the
above acquisitions as if they occurred at the beginning of the periods presented
would have been as follows:
2003 2002
------------- ---------------
------------- ---------------
Net sales $ 524,176 $ 473,169
Net income (loss) 20,142 (12,916)
Income (loss) per share:
Basic 0.59 (0.38)
Diluted 0.57 (0.38)
Weighted average shares:
Basic 34,261 34,428
Diluted 35,073 34,428
In management's opinion, the unaudited pro forma results of operations are
not indicative of the actual results that would have occurred had the Acirca and
Imagine acquisitions been consummated at the beginning of the periods presented
or of future operations of the combined companies under our management.
On May 14, 2003, our subsidiary in Belgium acquired Grains Noirs, N.V., a
Belgian producer and marketer of fresh prepared organic appetizers, salads,
sandwiches and other full-plated dishes. The purchase price paid was
approximately $2.2 million in cash. The net assets acquired, as well as the
sales and results of operations of Grains Noirs, are not material and,
therefore, have not been included in the detailed information about our
acquisitions.
Fiscal 2002
In December 2001, we acquired 100% of the stock of privately-held Lima,
N.V. ("Lima"), a leading Belgian manufacturer and marketer of natural and
organic foods. We consummated this strategic European acquisition to provide us
with a diversified
natural and organic food products manufacturer and distributor that is
similar to our manufacturing and distribution (types of food products) here in
the United States. The aggregate purchase price, including acquisition costs,
amounted to approximately $20 million. The purchase price paid was based on a
multiple of future operating income Lima will generate with the integration of
certain business processes and introduction of existing Hain products into
Europe, utilizing Lima's distribution network.
The purchase price was paid by $15.6 million in cash and the issuance of
205,128 shares of our common stock valued at $4.4 million.
The value assigned to the common stock was determined based on the average
market price of our common stock over the period including three days before and
after the terms of the acquisition were agreed to and announced. The aggregate
purchase price paid over the net assets acquired amounted to approximately $15.6
million (included in goodwill, and currently not tax deductible). Based on an
independent valuation analysis, the excess cost over net assets acquired was
allocated between goodwill and trademarks, which will not amortize under SFAS
No. 142.
The following table summarizes the estimated fair values of assets acquired
and liabilities assumed at the date of acquisition.
December 10, 2001
-------------------
Current assets $ 6,770
Property, plant & equipment and other
long-term assets 3,990
-------------------
Total assets 10,760
Liabilities and debt instruments assumed 6,360
-------------------
Net assets acquired $ 4,400
====================
The above purchase price excludes the amount of contingency payments we are
obligated to pay the former owner of Lima. The contingency payments are based on
the achievement by Lima of certain financial targets over the 2.5 years
following the date of acquisition. Such payments, which could total $2.5
million, will be charged to goodwill if and when paid. During fiscal 2003, $.5
million in contingency payments were made.
Fiscal 2001
On June 8, 2001, we acquired privately-held Yves Veggie Cuisine, Inc.
("Yves") a Vancouver, British Columbia based company. Yves is a leading North
American manufacturer, distributor and marketer of soy protein meat alternative
products. The aggregate purchase price, including acquisition costs, amounted to
approximately $34 million excluding the assumption of debt and capital leases of
approximately $3 million. The purchase price was paid by approximately $32.5
million in cash and $1.5 million worth of common stock (61,500 shares). The
aggregate purchase price paid over the net assets acquired amounted to
approximately $31.5 million.
On January 18, 2001, we acquired privately held Fruit Chips B.V., ("Fruit
Chips") a Netherlands based company, which we subsequently renamed as Terra
Chips B.V. Terra Chips B.V. is a manufacturer and distributor of low fat fruit,
vegetable and potato chips selling to European markets. The aggregate purchase
price paid, including transaction costs was approximately $9.8 million
consisting of both cash and stock. The aggregate purchase price paid over the
net assets acquired was approximately $6.2 million.
Unaudited pro forma results of operations for the years ended June 30, 2002
and 2001 reflecting the above fiscal year 2002 and 2001 acquisitions as if they
occurred at the beginning of such years would not be materially different than
the actual results for those years.
The above acquisitions have been accounted for as purchases and, therefore,
operating results of the acquired businesses have been included in the
accompanying financial statements from the dates of acquisition.
7. INVENTORIES
Inventories consist of the following at June 30:
2003 2002
----------- -----------
Finished goods $ 43,022 $ 35,158
Raw materials, work-in-process and packaging 23,422 18,466
----------- -----------
$ 66,444 $ 53,624
=========== ===========
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30:
2003 2002
----------- ------------
Land $6,913 $6,852
Buildings and improvements 24,448 25,537
Machinery & equipment 61,949 46,036
Furniture and fixtures 2,383 2,336
Leasehold improvements 1,457 1,018
Construction in progress 3,070 5,993
Health Valley plant assets held for sale - 4,769
---------- ------------
100,220 92,541
Less:
Accumulated depreciation and amortization 31,555 22,767
---------- ------------
$ 68,665 $ 69,774
========== ============
Included within machinery and equipment are assets held under capital
leases with net book values at June 30, 2003 and 2002 of $3.9 million and $2.0
million, respectively.
9. LONG-TERM DEBT
Long-term debt at June 30 consists of the following:
2003 2002
------------ ------------
Senior Revolving Credit Facilities payable to banks $ 53,850 $4,400
Capital leases on machinery and equipment 3,632 1,828
Other debt instruments 6,672 888
Economic Development Revenue Bonds due in
monthly installments through November 1, 2009;
interest payable monthly at variable rates 4,108 4,608
------------ ------------
68,262 11,724
Current Portion 8,807 1,431
------------ ------------
$ 59,455 $ 10,293
============ ============
We have a $240 million Credit Facility with a group of banks (the "Credit
Facility"), which provides us with a $145 million revolving credit facility
through March 29, 2005 and a $95 million 364-day facility through March 25,
2004. The Credit Facility is unsecured, but is guaranteed by all of our current
and future direct and indirect domestic subsidiaries. We are required to comply
with customary affirmative and negative covenants for facilities of this nature.
Revolving credit loans under this facility bear interest at a base rate (greater
of the applicable prime rate or Federal Funds Rate plus applicable margin) or,
at our option, the reserve adjusted LIBOR rate plus an applicable margin. During
Fiscal 2003, our average interest rate was 2.9%. As of June 30, 2003, $53.9
million was borrowed under the Credit Facility at an average interest rate of
2.7%.
Capital Leases
Capital leases on machinery and equipment of $3.6 million bear interest at
rates ranging from 4.0% to 12.25% and are due in monthly installments through
May 2007.
The aggregate minimum future lease payments for all capital leases at June
30, 2003 are as follows:
2004 $2,056
2005 1,232
2006 278
2007 66
------------
------------
$ 3,632
============
Other Debt Instruments
Other debt instruments consist of borrowings by our European business under
several arrangements with a member of the group of banks that provide our Credit
Facility. These borrowings include $3.1 million under revolving credit
facilities with interest at rates ranging from 3.8% to 4.2%, and notes payable
of $3.6 million, of which approximately $2.3 million is payable in quarterly
installments plus interest at 4.85% over a five year period through May 2008,
and approximately $1.3 million, which is due in September 2003 with interest at
3.7%.
Economic Development Bonds
Borrowings related to Economic Development Revenue Bonds (the "Bonds") bear
interest at a variable rate (1.4% at June 30, 2003) and are secured by a letter
of credit. The Bonds mature November 1, 2009. The Bonds can be tendered monthly
to the Bond trustee at face value plus accrued interest, with payment for
tendered Bonds made from drawdowns under a letter of credit facility which
expires November 2004.
Maturities of all debt instruments at June 30, 2003, are as follows:
2004 $8,807
2005 54,705
2006 1,460
2007 1,237
2008 1,215
Thereafter 838
-------------
-------------
$ 68,262
=============
Interest paid (which approximates the related expense) during the years
ended June 30, 2003, 2002 and 2001 amounted to $1,566, $893 and $412
respectively.
10. INCOME TAXES
The provision for income taxes for the years ended June 30, 2003, 2002 and
2001 is presented below.
2003 2002 2001
--------- ---------- ----------
Current:
Federal $ 4,906 $ (130) $ 8,145
State 1,530 (15) 1,480
Foreign 2,372 2,214 156
--------- ---------- ----------
8,808 2,069 9,781
Deferred Federal and State 7,864 (237) 7,301
--------- ---------- ----------
Total $16,672 $ 1,832 $17,082
========= ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Components of our deferred tax asset/(liability) as of June 30 are as follows:
2003 2002
-------------- ---------------
Current deferred tax assets:
Basis difference on inventory $1,726 $1,663
Allowance for doubtful accounts 800 284
Net operating loss carryforwards - 1,331
Reserves not currently deductible 645 3,945
-------------- ---------------
Current deferred tax assets 3,171 7,223
-------------- ---------------
Noncurrent deferred tax liabilities:
Difference in amortization (10,120) (7,596)
Basis difference on property and equipment (4,792) (3,504)
-------------- ---------------
Noncurrent deferred tax liabilities (14,912) (11,100)
-------------- ---------------
$ (11,741) $ (3,877)
============== ===============
Reconciliations of expected income taxes at the U.S. federal statutory rate
to the Company's provision for income taxes for the years ended June 30 are as
follows:
2003 % 2002 % 2001 %
-------- ------ --------- -------- -------- ------
Expected U.S. federal
income tax at
statutory rate $15,457 35.0% $ 1,681 35.0% $14,235 35.0%
State income taxes,
net of federal benefit 1,653 3.7 (46) (.9) 1,949 4.8
Goodwill amortization - - - - 1,535 3.8
Foreign income at
different rates 297 0.7 277 5.7 - -
Other (735) (1.7) (80) (1.7) (637) (1.6)
--------- ------ --------- -------- ----------------
Provision for income taxes $16,672 37.7% $ 1,832 38.1% $17,082 42.0%
========= ====== ========= ======== ================
Income taxes paid (refunded) during the years ended June 30, 2003, 2002 and
2001 amounted to $5.2 million, $(5.1) million and $6.1 million, respectively.
11. STOCKHOLDERS' EQUITY
Common Stock
As part of the Yves and Fruit Chips acquisitions consummated during fiscal
2001, 185,330 common shares were issued to the sellers, valued at approximately
$5.6 million in the aggregate.
As part of the Lima acquisition consummated during fiscal 2002, 205,128
common shares were issued to the sellers, valued at approximately $4.4 million.
As part of the Imagine and Acirca acquisitions consummated during fiscal
2003, 667,562 common shares were issued to the sellers, valued at approximately
$9.2 million in the aggregate.
Preferred Stock
We are authorized to issue "blank check" preferred stock (up to 5 million
shares) with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered to issue, without stockholder approval, preferred stock with
dividends, liquidation, conversion, voting, or other rights which could decrease
the amount of earnings and assets available for distribution to holders of our
Common Stock. At June 30, 2003 and 2002, no preferred stock was issued or
outstanding.
Warrants
Since fiscal 1997, we issued a total of 300,000 warrants in connection with
services rendered by third party consultants at prices ranging from $4.13 to
$10.00 per share. 250,000 of these warrants were exercised during fiscal 2000,
resulting in proceeds of $1.6 million. In accordance with the then existing term
loan facility, 50% of the proceeds were used to pay down the term loan with the
remainder used for working capital purposes.
In fiscal 2001, the remaining 50,000 warrants were exercised via a cashless
exercise resulting in the issuance of 35,653 shares.
In connection with an acquisition in 1997, we issued warrants to Argosy
Investment Corp. ("Argosy") to acquire 100,000 shares of our common stock at an
exercise price of $12.688. In fiscal 2003 and 2002, Argosy exercised no
warrants. In fiscal 2001, Argosy exercised 26,666 of these warrants, resulting
in proceeds of $.3 million.
In fiscal 2001, Argosy exercised warrants previously granted in 1994 to
acquire 104,100 of our common stock at an exercise price of $3.25. At June 30,
2003, 322,764 warrants remain available for exercise.
12. STOCK OPTION PLANS
Hain
In December 1994, we adopted the 1994 Long-Term Incentive and Stock Award
Plan, which amended and restated our 1993 stock option plan. On December 9,
1997, the stockholders of Hain approved an amendment to increase the number of
shares issuable under the 1994 Long Term Incentive and Stock Award Plan by
345,000 to 1,200,000 shares. In December 1998, the plan was further amended to
increase the number of shares issuable by 1,200,000 bringing the total shares
issuable under this plan to 2,400,000. In December 1999, the plan was further
amended to increase
the number of shares issuable by 1,000,000 bringing the total shares
issuable under this plan to 3,400,000. In May 2000, the plan was further amended
to increase the number of shares issuable by 3,000,000 bringing the total shares
issuable under this plan to 6,400,000. The plan provides for the granting of
incentive stock options to employees, directors and consultants to purchase
shares of our common stock. All of the options granted to date under the plan
have been incentive and non-qualified stock options providing for exercise
prices equivalent to the fair market price at date of grant, and expire ten
years after date of grant. Vesting terms are determined at the discretion of the
Company. During 2001, options to purchase 1,352,850 shares were granted at
prices ranging from $27.125 to $36.6875 per share. During 2002, options to
purchase 1,688,900 shares were granted at prices ranging from $15.42 to $22.72
per share. During 2003, options to purchase 565,000 shares were granted at
prices ranging from $12.13 to $16.30. At June 30, 2003, 167,032 options were
available for grant under this plan.
In October 2002, we adopted a new Long-Term Incentive and Stock Award Plan.
The plan provides for the granting of stock options and other equity awards to
employees, directors and consultants to purchase shares of our common stock. An
aggregate of 1,600,000 shares of common stock have been reserved for issuance
under this plan. All of the options granted to date under the plan have been
incentive and non-qualified stock options providing for exercise price
equivalent to the fair market price at the date of grant and expire ten years
after the date of grant. Vesting terms are determined at the discretion of the
company. During 2003, options to purchase 1,471,200 were granted at prices
ranging from $11.84 to $16.24 per share. At June 30, 2003, 129,400 options were
available for grant under this plan.
Our Chief Executive Officer ("CEO") was granted options to purchase 125,000
shares of common stock at $4.8125 per share on the date of grant (June 30, 1997)
pending approval of an increase in the number of shares available for grant
(approved by shareholders on December 9, 1997). We incur a straight line
non-cash compensation charge ($46 annually) over the ten-year vesting period
based on the excess ($.5 million) of the market value of the stock options
($8.50 per share) on December 9, 1997 over the $4.8125 per share market value on
the date of grant.
In December 1995, we adopted a Directors Stock Option Plan. The plan
provides for the granting of stock options to non-employee directors to purchase
up to an aggregate of 300,000 shares of our common stock. In December 1998, the
plan was amended to increase the number of shares issuable from 300,000 to
500,000. In December 1999, the plan was amended to increase the number of shares
issuable by 250,000, bringing the total shares issuable under this plan to
750,000. The remaining available shares in this plan have been canceled and no
future grants are available on this plan effective January 2001.
In May 2000, we adopted a new Directors Stock Option Plan. The plan
provides for the granting of stock options to non-employee directors to purchase
up to an aggregate of 750,000 shares of our common stock. At June 30, 2001, no
options were granted under this plan. During 2002, options for an aggregate of
255,000 shares were granted at prices ranging from $20.01 to $26.44 per share.
During 2003, options for an aggregate of 300,000 shares were granted at prices
ranging from $12.13 to $17.88. At June 30, 2003 195,000 options were available
for grant under this plan.
We also have a 1993 Executive Stock Option Plan pursuant to which we
granted our CEO options to acquire 600,000 shares of our common stock. These
options are fully vested and exercisable. The exercise price of options designed
to qualify as incentive options is $3.58 per share and the exercise price of
non-qualified options is $3.25 per share. During fiscal 2001, options to
purchase 65,000 shares
were exercised. No exercises were made during fiscal 2002 or 2003. These
options expire during the 2003 calendar year.
Celestial Seasonings
In 1991, Celestial Seasonings granted options to an executive officer of
Celestial Seasonings to purchase 241,944 shares of common stock in connection
with capital contributions made by the officer and certain other agreements.
Such options were immediately vested at the grant date, are exercisable at a
weighted average price per share of $3.90 and expire in 2031.
During 1993, Celestial Seasonings adopted an incentive and non-qualified
stock option plan that provided for the granting of awards for up to 331,430
shares of Celestial Seasonings common stock. Options granted at the time of
Celestial Seasonings initial public offering in 1993 vested over one-year and
five-year periods. Options granted subsequent to Celestial Seasonings initial
public offering generally vested over a five-year period. Options expire ten
years from the grant date.
In 1993, Celestial Seasonings granted options to purchase 25,300 shares of
Celestial Seasonings common stock to a director of Celestial Seasonings. The
options vested over a three-year period and expire ten years from the grant
date. During fiscal 2001, all of these options were exercised.
In 1995, Celestial Seasonings adopted a non-qualified stock option plan for
non-employee directors. The plan provides for up to 189,750 shares of Celestial
Seasonings common stock for issuance upon exercise of options granted to
non-employee directors and in lieu of meeting fees paid to non-employee
directors. The options vest over a one-year period and expire ten years from the
grant date.
During 1998, Celestial Seasonings amended this plan to provide each
non-employee director an initial grant of an option to purchase 12,650 shares
and an annual grant, commencing in 1999, of an option to purchase 5,060 shares.
Effective May 30, 2000, no further grants are available under this plan.
In 1997, Celestial Seasonings granted options to an executive officer of
Celestial Seasonings to purchase 417,450 shares of Celestial Seasonings common
stock. The options were granted in connection with the officer's employment
agreement, initially vested over a five-year period, are exercisable at $8.70
per share and expire ten years from the grant date. During 2001, all of these
options were exercised.
Employee Stock Purchase Plan
Under the Celestial Seasonings Employee Stock Purchase Plan, Celestial
Seasonings was authorized to issue up to 66,286 shares of common stock to its
full-time employees, nearly all of whom were eligible to participate. Under the
terms of the plan, employees could choose each year to have up to 10% of their
annual base earnings withheld to purchase Celestial Seasonings common stock. The
purchase price of the stock was equal to 85 percent of the lower of the market
price at the beginning or end of each six month participation period.
Approximately 30 percent of eligible Celestial Seasonings employees participated
in the plan. Under the plan, Celestial Seasonings sold approximately 5,000
shares for the year ended June 30, 2002 and 5,300 shares for the year ended June
30, 2001. As of December 31, 2001, this plan was terminated.
A summary our stock option plans' activity for the three years ended
June30, 2003 follows:
2003 2002 2001
----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------------------------------------------------------------
Outstanding at
beginning of year 6,023,383 $ 18.72 4,240,741 $ 18.01 3,997,106 $ 12.91
Granted 2,347,700 12.92 1,943,900 19.70 1,537,850 27.55
Exercised (67,821) 9.24 (94,341) 9.12 (1,265,465) 10.16
Terminated (36,541) 23.17 (66,917) 23.27 (28,750) 20.12
---------------------- ---------- ------------- --------------- ------------
Outstanding at end
of year 8,266,721 $ 17.75 6,023,383 $ 18.72 4,240,741 $ 18.01
====================== ========== ============= =============== ============
Exercisable at end
of year 6,675,738 $ 18.18 4,482,182 $ 18.14 3,444,219 $ 16.17
====================== ========== ============= =============== ============
Weighted average
fair value of
options granted
during year $ 12.95 $ 14.23 $ 20.24
===================== ======================== =============== ============
The following table summarizes information for stock options outstanding at
June 30, 2003:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------- ----------------------
Options Weighted Options Weighted
Outstanding Weighted Average Average Exercisable Average
Range of as of Remaining Exercise as of Exercise
Exercise Prices 06/30/2003 Contractual Life Price 06/30/2003 Price
- ------------------------------------------------------------------- ----------------------
(In Years)
$2.94 - $6.75 1,003,981 8.1 $ 3.86 1,003,981 $ 3.86
6.76 - 12.50 1,434,641 9.3 11.79 511,541 11.69
12.51 - 17.65 1,754,146 7.6 15.57 1,682,846 15.57
17.66 - 19.19 1,063,400 8.2 18.06 643,700 18.06
19.20 - 22.73 1,234,430 7.1 20.96 1,112,580 20.86
22.74 - 25.68 172,580 4.4 23.52 172,580 23.52
25.69 - 29.35 1,341,493 7.1 26.80 1,286,460 26.77
29.36 - 33.01 221,550 7.3 31.50 221,550 31.50
33.02 - 38.38 40,500 7.0 35.53 40,500 35.53
------------------------------------------------ -----------------------
8,266,721 7.1 $17.13 6,675,738 $17.65
============== ================================= =======================
Shares of Common Stock reserved for future issuance as of June 30, 2003 are
as follows:
Stock options 8,758,153
Warrants 396,098
-----------------------
9,154,251
=======================
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
13. LEASES
Our corporate headquarters are located in approximately 35,000 square feet
of leased office space in Melville, New York, under a lease which expires in
December 2012. In addition, the Company leases manufacturing and warehouse space
under leases which expire through 2007. These leases provide for additional
payments of real estate taxes and other operating expenses over a base period
amount.
The aggregate minimum future lease payments for these operating leases at
June 30, 2003, are as follows:
2004 $ 3,332
2005 2,749
2006 2,841
2007 2,809
2008 1,509
Thereafter 6,797
-------------
$20,037
=============
Rent expense charged to operations for the years ended June 30, 2003, 2002
and 2001 was approximately $4,200, $3,804 and $3,442, respectively.
14. SEGMENT INFORMATION
Our company is engaged in one business segment: the manufacturing,
distribution and marketing of natural and organic food and beverage products. We
define business segments as components of an enterprise about which separate
financial information is available that is evaluated on a regular basis by a
chief operating decision maker or group.
Outside the United States, we primarily conduct business in Canada and
Europe. We have grouped Canada and Europe together as "other" because they are
individually not significant enough to warrant separate geographic disclosure.
During fiscal year 2001, sales to unaffiliated customers outside the United
States were less than 5% of total net sales.
Selected information related to our operations by geographic area are as
follows:
2003 2002
--------------------------------------------
United United
States Other States Other
--------------------------------------------
Net sales $ 385,569 $80,890 $ 339,343 $56,611
Earnings (loss) before income taxes 37,287 6,877 (734) 5,537
Net assets 398,014 42,783 362,482 41,366
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
15. DEFINED CONTRIBUTION PLANS
We have a 401(k) Employee Retirement Plan ("Plan") to provide retirement
benefits for eligible employees. All full-time employees of Hain and our
domestic subsidiaries who have attained the age of 21 are eligible to
participate upon completion of 30 days of service. The subsidiary Yves Veggie
Cuisine has its own separate Registered Retirement Employee Savings Plan for
those employees residing in Canada. Employees of Yves who meet eligibility
requirements may participate in that plan. On an annual basis, we may, in our
sole discretion, make certain matching contributions. For the years ended June
30, 2003, 2002 and 2001, we made contributions to the Plan of $228, $372 and
$614, respectively.
16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting for Costs Associated with Exit or Disposal Activity
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between SFAS No. 146 and Issue 94-3 relates to SFAS No. 146's
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
Therefore, SFAS No. 146 eliminates the definition and requirements for
recognition of exit costs in Issue 94-3. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. The provisions
of SFAS No. 146 are effective for exit or disposal activities that we may
initiate after December 31, 2002. There have been no disposal or exit activities
since adoption of the statement.
17. LITIGATION
From time to time, the Company is involved in litigation, incidental to the
conduct of its business. In the opinion of management, disposition of pending
litigation will not have a material adverse effect on the Company's business,
results of operations or financial condition.
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with accountants on accounting
and financial disclosure.
Item 9A. Controls And Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have reviewed our
disclosure controls and procedures as of the end of the period covered by this
report. Based upon this review, these officers concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures are
adequately designed to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
applicable rules and forms.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls during the quarter
covered by this report or from the end of the reporting period to the date of
this Form 10-K.
PART III
Item 10, "Directors and Executive Officers of the Registrant", Item 11,
"Executive Compensation", Item 12, "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters", Item 13, "Certain
Relationships and Related Transactions", and Item 14, "Principal Accountant Fees
and Services" have been omitted from this report inasmuch as the Company will
file with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report a
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held on December 4, 2003, at which meeting the stockholders will vote upon
election of the directors. This information in such Proxy Statement is
incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) (1) List of Financial statements
Report of Independent Auditors
Consolidated Balance Sheets - June 30, 2003 and 2002
Consolidated Statements of Income - Years ended June 30, 2003, 2002 and
2001
Consolidated Statements of Stockholders' Equity - Years ended June 30,
2003, 2002 and 2001
Consolidated Statements of Cash Flows - Years ended June 30, 2003, 2002 and
2001
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedule
Valuation and Qualifying Accounts (Schedule II)
(3) List of Exhibits
3.1
Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (Commission File No. 333-33830) filed with the Commission
on April 24, 2000).
3.2
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
of Amendment No. 1 to the Registrant's Registration Statement on Form S-4
(Commission File No. 333-33830) filed with the Commission on April 24, 2000).
4.1
Specimen of common stock certificate (incorporated by reference to
Exhibit 4.1 of Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (Commission File No. 333-33830) filed with the Commission on April 24,
2000).
4.2
1993 Executive Stock Option Plan (incorporated by reference to Exhibit
4.2 of Amendment No. 1 to the Registrant's Registration Statement on Form SB-2
(Commission File No. 33-68026) filed with the Commission on October 21, 1993).
4.3
Amended and Restated 1994 Long Term Incentive and Stock Award Plan
(included as Annex F to the Joint Proxy Statement/Prospectus contained in the
Registrant's Registration Statement on Form S-4 (Commission File No. 333-33830)
filed with the Commission on April 24, 2000).
4.4
1996 Directors Stock Option Plan (incorporated by reference to Appendix
A to the Registrant's Notice of Annual Meeting of Stockholders and Proxy
Statement dated November 4, 1996).
4.5
2000 Directors Stock Option Plan (included as Annex G to the Joint
Proxy Statement/Prospectus contained in the Registrant's Registration Statement
on Form S-4 (Commission File No. 333-33830) filed with the Commission on April
24, 2000).
4.6
2002 long Term Incentive and Stock Award Plan (incorporated by
reference to Appendix A of the Registrant's Notice of annual Meeting of
Stockholders and Proxy Statements dated October 14, 2002).
10.1
Credit Agreement dated as of March 29, 2001 by and among the
Registrant and Fleet National Bank, as administrative agent, SunTrust Bank, as
syndication agent, HSBC Bank USA, as documentation agent, and the lenders party
thereto, as amended through July 17, 2001 (the "Credit Agreement") (incorporated
by reference to Exhibit 10.1 of the Registrant's Annual Report Form 10-K for the
fiscal year ended June 30, 2001 filed with the Commission on September 28,
2001).
10.2
Amendments to the Credit Agreement dated March 28, 2002 and June 25,
2002 (incorporated by reference to Exhibit 10.2 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 2002 filed with the
Commission on September 30, 2002).
10.2.1
Amendment to the Credit Agreement dated March 25, 2003.
10.3
Investor's Agreement among the Registrant, Boulder Inc. (formerly
Earth's Best, Inc.) and Irwin D. Simon dated September 24, 1999 (incorporated by
reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed
with the Commission on September 30, 1999).
10.4
Registration Rights Agreement between the Registrant and Boulder Inc.
(formerly Earth's Best, Inc.), dated September 24, 1999 (incorporated by
reference to Exhibit 10.3 of the Registrant's Current Report on Form 8-K filed
with the Commission on September 30, 1999).
10.5
Form of Change in Control Agreement for Executive Officers
(incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 2000 filed with the
Commission on November 14, 2000).
10.6
Employment Agreement for Chief Executive Officer dated July 1, 2000
(incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 2000 filed with the
Commission on November 14, 2000).
10.7
Employment Agreement for Executive Vice President and Chief Financial
Officer dated October 1, 2001.
21a Subsidiaries of Registrant
23.1a Consent of Independent Auditors - Ernst & Young LLP
31.1a Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2a Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1a Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2a Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
a - Filed herewith
(b) Reports on Form 8-K
On May 6, 2003, the Registrant furnished a Form 8-K with respect to the
Registrant's press release announcing its financial results for its third
quarter ended March 31, 2003.
The Hain Celestial Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
- --------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------
Additions
- --------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to other Balance at
beginning of costs and accounts - Deductions end of
period expenses describe describe period
- --------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 2003
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,002 $ 610 $ 190 (1) $ 54 (2) $ 1,748
Year Ended June 30, 2002
Deducted from asset accounts:
Allowance for doubtful accounts $ 815 $ 551 $ 175 (1) $ 539 (2) $ 1,002
Year Ended June 30, 2001
Deducted from asset accounts:
Allowance for doubtful accounts $ 929 $ 393 $ 41 (1) $ 548 (2) $ 815
(1) Allowance for doubtful accounts at dates of acquisitions of acquired
businesses.
(2) Uncollectible accounts written off, net of recoveries.
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.
THE HAIN CELESTIAL GROUP, INC.
By: /s/ Irwin D. Simon
---------------------------------
Irwin D. Simon
Chairman of the Board, President and Chief Executive Officer
Date: September 26, 2003
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.
Signature Title Date
/s/ Irwin D. Simon President, Chief September 26, 2003
- ------------------------ Executive Officer
Irwin D. Simon and Chairman of the Board of
/s/ Ira J. Lamel Executive Vice President
- ------------------------ and Chief Financial Officer September 26, 2003
Ira J. Lamel
/s/ Andrew R. Heyer Director September 26, 2003
- ------------------------
Andrew R. Heyer
/s/ Beth L. Bronner Director September 26, 2003
- ------------------------
Beth L. Bronner
/s/ Jack Futterman Director September 26, 2003
- ------------------------
Jack Futterman
/s/ James S. Gold Director September 26, 2003
- ------------------------
James S. Gold
/s/ Daniel Glickman Director September 26, 2003
- ------------------------
Daniel Glickman
/s/ Neil Harrison Director September 26, 2003
- ------------------------
Neil Harrison
/s/ Joseph Jimenez Director September 26, 2003
- ------------------------
Joseph Jimenez
/s/ Roger Meltzer Director September 26, 2003
- ------------------------
Roger Meltzer
/s/ Marina Hahn Director September 26, 2003
- ------------------------
Marina Hahn
/s/ Larry Zilavy Director September 26, 2003
- -------------------------
Larry Zilavy
Microsoft Word 10.0.5522; Exhibit 10.2.1 AMENDMENT, dated as of March 25, 2003 (this "Amendment") to the Credit Agreement dated as of March 29, 2001, (as amended, restated, modified or otherwise supplemented, from time to time, the "Credit Agreement") by and among THE HAIN CELESTIAL GROUP, INC., a Delaware corporation (the "Company"), FLEET NATIONAL BANK, a national banking association, as Administrative Agent and as a Lender, SUNTRUST BANK, a Georgia banking corporation, as Syndication Agent and as a Lender, HSBC BANK USA, a New York banking corporation, as Documentation Agent and as a Lender, and the other Lenders party thereto. WHEREAS, the Company has requested and the Administrative Agent and the Lenders have agreed, subject to the terms and conditions of this Amendment, to amend certain provisions of the Credit Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: Amendments. The definition of "Acceptable Acquisition" in Section 1.01 of the Credit Agreement is hereby amended by inserting the words "for which financial statements have been delivered in accordance with Section 6.03 hereof" immediately following the words "most recently concluded four fiscal quarters" in subsections (c) and (d) thereof. The definition of "Consolidated EBITDA" in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Consolidated EBITDA" shall mean, for the Company and its Subsidiaries for any period, the Consolidated Net Income (Net Loss) for such period, plus the sum, without duplication, of (a) Consolidated Interest Expense, (b) depreciation and amortization expenses or charges, (c) all income taxes to any government or governmental instrumentality expensed on the Company's or its Subsidiaries' books (whether paid or accrued), (d) reasonable and customary acquisition or merger charges, restructuring charges that are both non-cash and non-recurring and impairment of assets write-offs that are both non-cash and non-recurring (provided that the portion of the sum of the items referred to in this clause (d) that exceeds 25% of Consolidated EBITDA shall not be included for purposes of this definition), and (e) cumulative non-cash change in accounting effects or non-cash extraordinary items as determined in accordance with Generally Accepted Accounting Principles minus the sum of (y) all extraordinary or unusual gains, and (z) all interest income. All of the foregoing categories shall be calculated with respect to the Company and its Subsidiaries on a consolidated basis in accordance with Generally Accepted Accounting Principles applied on a consistent basis and shall be calculated (without duplication) over the four fiscal quarters immediately preceding the date of calculation thereof. For purposes of clarification, the maximum amount of clause (d) items that may be included in the calculation Consolidated EBITDA shall be equal to: X minus X ---- .75 where "X" equals Consolidated EBITDA calculated without adding to Consolidated Net Income (Net Loss) amounts described in clause (d) above. Notwithstanding the foregoing, solely for purposes of (i) calculating the ratio of Consolidated Total Funded Debt to Consolidated EBITDA in subsection (c) of the definition of Acceptable Acquisition and (ii) calculating the financial condition covenants set forth in Section 7.13 hereof for the four fiscal quarters ended December 31, 2002 and March 31, 2003 (and not for purposes of calculating the Interest Rate Margin, Standby LC Margin, Unused Fee Rate or any other margin or fee), an amount not to exceed $17,917,000,
representing restructuring charges that are both non-cash and non-recurring and impairment of assets write-offs that are both non-cash and non-recurring incurred in the quarter ended June 30, 2002, shall be added (on a dollar for dollar basis), without duplication of any amounts otherwise calculated for such periods under clauses (a) through (e) above, to the calculation of Consolidated EBITDA for such periods. The definition of "Revolving Credit Facility B Commitment Termination Date" in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to provide as follows: "Revolving Credit Facility B Commitment Termination Date" shall mean March 25, 2004. Section 7.06(g)(iii)(A)(4) of the Credit Agreement is hereby amended by inserting the words "for which a financial statement has been delivered in accordance with Section 6.03 hereof" immediately following the words "as of the then most recent fiscal quarter ended". Miscellaneous. Capitalized terms used herein and not otherwise defined herein shall have the same meanings as defined in the Credit Agreement. Except as expressly amended hereby, the Credit Agreement shall remain in full force and effect in accordance with the original terms thereof. The amendments herein contained are limited specifically to the matters set forth above and do not constitute directly or by implication an amendment or waiver of any other provision of Credit Agreement or any default which may occur or may have occurred under the Credit Agreement. The Company hereby represents and warrants that (a) after giving effect to this Amendment, the representations and warranties by the Company and each of its Subsidiaries pursuant to the Credit Agreement and the Loan Documents to which each is a party are true and correct in all material respects as of the date hereof with the same effect as though such representations and warranties had been made on and as of such date, unless any such representation or warranty is as of a specific date, in which case, as of such date, (b) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. This Amendment shall become effective on the later of (i) March 27, 2003, (ii) when duly executed counterparts hereof which, when taken together, bear the signatures of each of the parties hereto shall have been delivered to the Administrative Agent, and (iii) when the Administrative Agent shall have received from the Company, for the benefit of and pro rata distribution to each Lender, a renewal fee with respect to the amendment set forth in paragraph 1(c), in an amount equal to one-tenth of one percent (.10%) of the total of all Lenders' Revolving Credit Facility B Commitments. The Company represents and warrants that it has the corporate power and authority to enter into, perform and deliver this Amendment and any other documents, instruments, agreements or other writings to be delivered in connection herewith and that this Amendment and all documents contemplated hereby or delivered in connection herewith have each been duly executed and delivered by the Company and the transactions contemplated herein have been duly authorized. This Amendment shall constitute a Loan Document. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one Amendment.
Exhibit 10.2.1 (continued) IN WITNESS WHEREOF, the Company and the Administrative Agent, as authorized on behalf of the Lenders, have caused this Amendment to be duly executed by their duly authorized officers, all as of the day and year first above written. THE HAIN CELESTIAL GROUP, INC. By: _________________________ Name: Ira J. Lamel Title: Executive Vice President and Chief Financial Officer FLEET BANK NATIONAL BANK, as Administrative Agent By: _________________________________ Name: Christopher J. Mendelsohn Title: Senior Vice President ACKNOWLEDGMENT Each of the undersigned, not parties to the Credit Agreement but each a Guarantor under a Guaranty dated as of March 29, 2001 (and as of June 18, 2001, with respect to Hain-Yves, Inc.), hereby acknowledges and agreed to the terms of the Amendment contained herein and confirms that its Guaranty is in full force and effect. CELESTIAL SEASONINGS, INC. ARROWHEAD MILLS, INC. KINERET FOODS CORPORATION WESTBRAE NATURAL, INC. HAIN PURE FOOD CO., INC. NATURAL NUTRITION GROUP, INC. LITTLE BEAR ORGANIC FOODS, INC. WESTBRAE NATURAL FOODS, INC. HEALTH VALLEY COMPANY AMI OPERATING, INC. DEBOLES NUTRITIONAL FOODS, INC. DANA ALEXANDER, INC. MOUNTAIN CHAI COMPANY HAIN-YVES, INC. By:______________________________ Name: Ira J. Lamel Title:Executive Vice President and Chief Financial Officer of each of the above-referenced companies
Microsoft Word 10.0.5522;Exhibit 21Jurisdiction of Subsidiary Incorporation - ---------- ------------- Acirca, Inc. Delaware Hain-Celestial (UK) Limited England Celestial Seasonings, Inc. Delaware Natural Nutrition Group, Inc. Delaware Health Valley Company Delaware Arrowhead Mills, Inc. Delaware AMI Operating, Inc. Texas DeBoles Nutritional Foods, Inc. New York Hain Pure Food Co., Inc. California Kineret Foods Corporation New York Westbrae Natural, Inc. Delaware Westbrae Natural Foods, Inc. California Little Bear Organic Foods, Inc. California Dana Alexander, Inc. New York Terra Chips, B.V. Netherlands Hain Yves, Inc. Delaware Hain Celestial Canada ULC Nova Scotia Hain Celestial Europe B.V. Netherlands Hain Celestial Belgium BVBA Belgium
Microsoft Word 10.0.5522;Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-33828 and 333-102017), Post-Effective Amendment No. 1 to the Registration Statement (Form S-4 on Form S-8 No. 333-33830) and Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No. 333-38915), and the Registration Statements (Form S-3 Nos. 333-59761, 333-77137, 333-65618, 333-57806, 333-73808 and 333-106940) of The Hain Celestial Group, Inc. and in the related Prospectus of our report dated August 28, 2003, with respect to the consolidated financial statements and schedule of The Hain Celestial Group, Inc. and Subsidiaries included in this Annual Report (Form 10-K) for the year ended June 30, 2003. /s/ Ernst & Young LLP Melville, New York September 25, 2003
Microsoft Word 10.0.5522; EXHIBIT 31.1 CERTIFICATION I, Irwin D. Simon, certify that: 1. I have reviewed this annual report on Form 10-K of The Hain Celestial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 26, 2003 /s/_Irwin D. Simon____________________ Irwin D. Simon President and Chief Executive Officer
Microsoft Word 10.0.5522; EXHIBIT 31.2 CERTIFICATION I, Ira J. Lamel, certify that: 1. I have reviewed this annual report on Form 10-K of The Hain Celestial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 26, 2003 /s/_Ira J. Lamel______________ Ira J. Lamel Executive Vice President and Chief Financial Officer
Microsoft Word 10.0.5522;
EXHIBIT 32.1
CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the period ended June
30, 2003 (the "Report") filed by The Hain Celestial Group, Inc. (the "Company")
with the Securities and Exchange Commission, I, Irwin D. Simon, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and The information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: September 26, 2003
/s/_Irwin D. Simon__________________
Irwin D. Simon
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has
been provided to The Hain Celestial Group, Inc. and will be retained by
The Hain Celestial Group, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Microsoft Word 10.0.5522; EXHIBIT 32.2 CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the period ended June 30, 2003 (the "Report") filed by The Hain Celestial Group, Inc. (the "Company") with the Securities and Exchange Commission, I, Ira J. Lamel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 26, 2003 /s/_Ira J. Lamel________________ Ira J. Lamel Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to The Hain Celestial Group, Inc. and will be retained by The Hain Celestial Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.