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, 2005
|_| 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 11747
Melville, New York (Zip Code)
(Address of principal executive offices)
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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
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,
2004, the last business day of the registrant's most recently completed second
fiscal quarter, was $621,035,069.
As of September 1, 2005, there were 36,680,242 shares outstanding of the
registrant's Common Stock, par value $.01 per share.
Documents Incorporated by Reference
Part of the Form 10-K
Document into which Incorporated
The Hain Celestial Group, Inc. Definitive Proxy Part III
Statement for the Annual Meeting of Stockholders
to be Held November 15, 2005
Table of Contents
Page
----
PART I
Item 1. Business......................................................1
General.......................................................1
Products......................................................2
New Product Initiatives Through Research and Development......4
Sales and Distribution........................................4
Marketing.....................................................4
Manufacturing Facilities......................................4
Suppliers of Ingredients and Packaging........................5
Co-Packed Product Base........................................5
Trademarks....................................................6
Competition...................................................6
Government Regulation.........................................7
Independent Certification.....................................7
Available Information.........................................7
Item 2. Properties....................................................8
Item 3. Legal Proceedings.............................................9
Item 4. Submission of Matters to a Vote of Security Holders...........9
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities...........9
Item 6. Selected Financial Data......................................10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...25
Item 8. Financial Statements and Supplementary Data..................26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................50
Item 9A. Controls and Procedures......................................50
Item 9B. Other Information............................................52
PART III
Item 10. Directors and Executive Officers of the Registrant...........52
Item 11. Executive Compensation.......................................52
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................52
Item 13. Certain Relationships and Related Transactions...............52
Item 14. Principal Accountant Fees and Services.......................52
PART IV
Item 15. Exhibits and Financial Statement Schedules...................52
Signatures..........................................56
PART I
THE HAIN CELESTIAL GROUP, INC.
Item 1. Business.
Unless otherwise indicated, references in this Annual Report to 2005, 2004, 2003
or "fiscal" 2005, 2004, 2003 or other years refer to our fiscal year ended June
30 of that year and references to 2006 or "fiscal" 2006 refer to our fiscal year
ending June 30, 2006.
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 and organic food products and
natural personal care 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 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 Organic(R), Ethnic Gourmet(R), Rosetto(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), Lima(R), Biomarche(R), Grains Noirs(R), Natumi(R),
Milkfree, 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, Boston Better Snacks(R), and Alba
Foods(R). Our natural personal care products line is marketed under the
JASON(R), Zia(R), Orjene(R), Shaman Earthly Organics(TM), and Heather's(R)
brands.
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 2005, 2004 and 2003, approximately 47%, 39% and
42%, respectively, of our revenues were derived from products manufactured
within our own facilities. The remaining 53%, 61% and 58% for 2005, 2004 and
2003, 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:
o On April 4, 2005, we acquired Zia Cosmetics, Inc., including the Zia(R)
Natural Skincare brand, a respected leader in therapeutic products for
healthy, beautiful skin sold mainly through natural food retailers.
o On June 3, 2004, we acquired Jason Natural Products, Inc., a
California-based manufacturer and marketer of natural personal care
products.
o On May 27, 2004, we acquired the Rosetto and Ethnic Gourmet brands of H.J.
Heinz Company, L.P. ("Heinz"), which produce and market frozen pasta and
natural ethnic frozen meals, respectively. Heinz owned approximately 16.7%
of our common stock at the time of the transaction.
o On February 25, 2004, we acquired Natumi AG, a German producer and marketer
of soymilk and other non-dairy products.
o 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 Organic(R) brand.
o 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.
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o On December 2, 2002, we acquired the assets and brands of Imagine Foods,
Inc. ("Imagine") in the United States and the United Kingdom. Imagine is a
non-dairy beverage brand specializing in aseptic and refrigerated rice and
soymilks, organic aseptic soups and broths, and organic non-dairy frozen
desserts under the Rice Dream(R), Soy Dream(R) and Imagine(R) brands.
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 and
organic food products and natural personal care products by anticipating and
exceeding consumer expectations and providing quality, innovation, value and
convenience. Our business strategy is to integrate all of our brands under one
management team and employ a uniform marketing, sales and distribution program.
We capitalize on the brand equity and the distribution achieved through each of
our acquired brands with strategic introductions of new product lines that
complement existing product lines to enhance revenues and margins. We believe
that by integrating our various brands, we will achieve economies of scale and
enhanced market penetration. We consider the acquisition of natural and organic
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 discussions with
acquisition candidates.
As of June 30, 2005, we employed a total of 1,487 full-time employees. Of these
employees, 165 were in sales and 792 in production, with the remaining 530
employees filling management, accounting, marketing, operations and clerical
positions.
Products
Grocery
We develop, manufacture, market and distribute a comprehensive line of natural
and organic grocery products consisting of over 1,500 branded items in numerous
categories including 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,
aseptic and instant soups, chilis, packaged grain, nut butters and nutritional
oils, juices, frozen desserts, pastas and ethnic meals, as well as other food
products. Our Hain(R), Westbrae(R), Westsoy(R), Imagine(R), Rice Dream(R), Soy
Dream(R), Walnut Acres Organic(R), Ethnic Gourmet(R), Bearitos(R), Arrowhead
Mills(R), DeBoles(R), Health Valley(R), Hollywood(R), Casbah(R), Breadshop's(R),
Nile Spice(R), Earth's Best(R) and Lima(R) brands comprise this full line of
natural or organic grocery products. We are a leader in many of the top natural
food categories. Natural foods are defined as foods that 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 that are grown without dependence upon artificial pesticides,
chemicals or fertilizers. Grocery accounted for approximately 55% of total net
sales in 2005, 56% in 2004 and 53% in 2003.
Snacks
We develop, manufacture, market and distribute over 250 branded items including
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. Terra Chips(R)
natural food products consist 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 consist of organic tortilla chip products and other
snacks. Boston Popcorn(R) and Harry's(R) products consist of popcorn, potato
chips, tortilla chips and other snack food items. Snacks accounted for
approximately 14% of total net sales in 2005, 14% in 2004 and 15% in 2003.
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Teas
Our tea products are 100% natural and are made from high-quality, natural
flavors and ingredients and are generally offered in 10, 20 and 40 count
packages. We are the leading specialty tea brand in North America. Our teas 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 and chais. Our tea products include
over 80 flavors made from 100% natural ingredients. The types of teas offered
include herb, red (rooibos), honeybush, white, green, black and chai. Our teas
are offered both with and without caffeine. We also offer Cool Brew iced teas,
natural ciders, and Teahouse Chais. Tea beverages accounted for approximately
16% of total net sales in 2005, 18% in 2004 and 20% in 2003.
Personal Care Products
We manufacture and market a full line of personal care products including skin
care, hair care, body care, oral care, and deodorants under the JASON(R),
Zia(R), Orjene(R) and Shaman Earthly Organics(TM) brands. The majority of our
products are under the JASON(R) brand, which consists of approximately 300 items
across all five of the product categories that we participate in. We also
manufacture and market a brand of natural cleaning products called Heather's(R),
which consists of seven items.
Other
Fresh
We process, market and distribute fresh produce and prepared meals from our
Biomarche and Grains Noirs facilities in Belgium. Products include fresh cut
organic fruits and vegetables packaged for distribution to supermarkets and
other retail outlets, and fresh appetizers and full-plated meals for
distribution to retailers, caterers, and food service providers, principally
transportation providers.
On July 1, 2005, we began processing natural and organic, antibiotic- and
hormone-free chickens marketed and distributed to natural food stores,
supermarkets, and food service providers. We market our chickens under a license
agreement for use of the Raised Right(R) brand.
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 the health benefits of
soy without the health concerns associated with traditional meat products. Yves
meat alternative products consist of approximately 60 items including veggie
burgers, veggie wieners, veggie slices, veggie entrees and veggie ground round.
Our Yves meat alternative brand operates from its facility in Vancouver, British
Columbia in Canada and is the principal brand of our operations in Canada.
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.
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.
During fiscal 2005, we initiated a stock keeping unit (SKU) rationalization
program which resulted in the
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discontinuation of numerous SKUs, the elimination of which resulted in a pre-tax
charge to fiscal 2005 earnings of approximately $12.1 million.
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. Our 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 $2.6 million in Company-sponsored research and
development activities in 2005, $2.0 million in 2004 and $1.7 million in 2003.
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).
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. In
fiscal 2005, one of our distributors, United Natural Foods, Inc., accounted for
approximately 22% of net sales. Two of our distributors, United Natural Foods,
Inc. and Tree of Life, accounted for approximately 20% and 12%, respectively, in
2004 and approximately 18% and 15%, respectively, in 2003. Net sales to export
customers account for less than 5% of total net sales for each of the three
years in the period ended June 30, 2005.
Our international subsidiaries in Canada and Europe sell to all channels of
distribution in the countries they serve. International sales represented
approximately 21.1% of total net sales in 2005, 20.3% in 2004 and 17.3% in 2003.
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. In each of 2003, 2004 and 2005, we have
increased our investment in consumer spending to enhance brand equity while
closely monitoring our trade spending. 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.
Manufacturing Facilities
We currently manage and operate the following manufacturing facilities located
throughout the United States: Celestial Seasonings(R), in Boulder, Colorado,
which produces specialty teas; Terra Chips(R), in Moonachie, New Jersey,
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which produces vegetable chips; Arrowhead Mills(R), in Hereford, Texas, which
produces hot and cold cereals, baking goods and meal cups; DeBoles(R), in
Shreveport, Louisiana, which produces organic pasta; Ethnic Gourmet(R), in
Framingham, Massachusetts, which produces frozen meals; Rosetto(R), in West
Chester, Pennsylvania, which produces frozen pasta; and JASON(R), in Culver
City, California, which produces personal care products. 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(R), Breadshop(R) and Casbah(R) labels. During fiscal 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 entered into a lease directly with the landlord of the
facility.
Outside the United States, we have the following manufacturing facilities: Yves
Veggie Cuisine(R) 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(R) facility in Sombreffe, Belgium, which processes fresh organic
produce and prepared salads, its Grains Noirs(R) facility in Brussels, Belgium,
which prepares fresh organic appetizers, salads, sandwiches and other
full-plated dishes, and its Natumi facility in Eitorf, Germany, which produces
soymilk and other non-dairy products.
We own the manufacturing facilities in Moonachie, New Jersey; Boulder, Colorado;
Hereford, Texas; Shreveport, Louisiana; West Chester, Pennsylvania and
Vancouver, British Columbia. We also own the Lima and Biomarche(R) facilities in
Belgium. During 2005, 2004 and 2003, approximately 47%, 39% and 42%,
respectively, of our revenue was derived from products manufactured at our
currently owned manufacturing facilities.
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 operations 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 the
local currency of the country in which we operate. 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.
Co-Packed Product Base
During 2005, 2004 and 2003, approximately 53%, 61% and 58%, 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), Bearitos(R), Nile Spice(R), Harry's Premium
Snacks(R), Boston's(R), Alba Foods(R), Estee(R), Earth's Best(R), Garden of
Eatin'(R), Hain Pure Foods(R), Hollywood(R), Little Bear Organic Foods(R),
Westbrae(R), Westsoy(R), Rice Dream(R), Soy Dream(R), Imagine(R), Walnut Acres
Organic(R), Lima(R) and some of our Terra Chips(R), Rosetto(R), Arrowhead
Mills(R), Yves Veggie Cuisine(R) and Ethnic Gourmet(R) product lines.
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In the U.S., we presently obtain:
o all of our requirements for non-dairy beverages from five co-packers, all
of which are under contract or other arrangements;
o all of our U.S. requirements for rice cakes from one co-packer;
o all of our Health Valley(R) baked goods and cereal products from one
co-packer, which is under contract;
o all of our cooking oils from one co-packer;
o principally all of our Garden of Eatin(R) and Little Bear Organic Foods(R)
tortilla chips from three co-packers, one of which is under contract;
o a portion of our requirements for Terra(R) Yukon Gold, Red BlissTM, Terra
BluesTM, and PotpourriTM potato chips and FritesTM from one co-packer,
which is under contract;
o the requirements for our canned soups from four co-packers, which are under
contract;
o all of our Earth's Best(R) baby food products from seven co-packers, which
are under contract;
o a portion of our Ethnic Gourmet(R) products from one co-packer, which is
under contract; and
o all of our Zia(R) natural skin care products from four co-packers, which
are under contract or other arrangements.
Trademarks
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 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),
Ethnic Gourmet(R), Garden of Eatin'(R), Hain Pure Foods(R), Health Valley(R),
Imagine(R), JASON(R), Zia(R), Orjene(R), Shaman Earthly Organics(TM),
Heather's(R), Little Bear Organic Foods(R), Nile Spice(R), Rice Dream(R),
Rosetto(R), Soy Dream(R), Terra(R), Walnut Acres Organic(R), Westbrae(R),
Westsoy(R), Lima(R), Biomarche(R) and Yves Veggie Cuisine(R). Celestial
Seasonings(R) has trademarks for most of its best-selling teas, 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).
Competition
We operate in highly competitive geographic and product markets, and some of
these markets are dominated by competitors with greater resources. In addition,
we compete for limited retailer shelf space for our products. Larger competitors
include mainstream food companies such as General Mills, Nestle S.A., Kraft
Foods, Groupe Danone, Kellogg Company, Unilever PLC, and Sara Lee Corporation.
Retailers also market competitive products under their own private labels.
The beverage markets 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
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competes in the specialty tea market segment which includes 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.
The principal competitors of Celestial Seasonings(R) on a national basis in the
specialty teas market are Thomas J. Lipton Company (a division of Unilever PLC),
Twinings (a division of Associated British Grocers) and R.C. Bigelow, Inc. In
addition, in April 2004, Tazo Tea Company (a subsidiary of Starbucks
Corporation) and Kraft Foods. announced a licensing agreement whereby Tazo
products might gain additional access to grocery channels through placement by
Kraft. Additional competitors include a number of regional specialty tea
companies.
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 soymilk is the more
mature product category of the two and in recent years, additional larger
competitors entered the category but have since exited the category after
unsuccessful regional launches. Westsoy(R) 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.
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), FDA, United States Department of Agriculture (USDA), and 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 not only approve
our products, but also review 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.
Independent Certification
We rely on independent certification, such as certifications of 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
harm our business.
We must comply with the requirements of independent organizations or
certification authorities in order to label our products as certified. 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 utilize appropriate kosher supervision organizations, such
as The Union of Orthodox Jewish Congregations, The Organized Kashruth
Laboratories, "KOF-K" Kosher Supervision, Kosher Overseers Associated of America
and Upper Midwest Kashruth.
Available Information
The following information can be found on our website at
http://www.hain-celestial.com:
o our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (SEC);
o our policies related to corporate governance, including our Code of
Business Conduct and Ethics applying to our directors, officers and
employees (including our principal executive officer and principal
financial and ac-
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counting officer) that we have adopted to meet the requirements set forth
in the rules and regulations of the SEC; and
o the charters of the Audit, Compensation and Corporate Governance &
Nominating Committees of our Board of Directors.
We intend to satisfy the applicable disclosure requirements regarding amendments
to, or waivers from, provisions of our Code of Ethics by posting such
information on our website.
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.
The lease on this facility expires in 2012 with a current annual rental of
approximately $1.3 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 for our teas. We also lease 81,000 square feet of warehouse
space nearby which is used for the storage and shipment of our tea products. The
lease expires in 2012, and provides for a current annual rental of approximately
$500,000.
We own a 75,000 square foot manufacturing facility in Moonachie, New Jersey
where we manufacture our Terra(R) vegetable chip products.
We own and operate manufacturing and distribution centers in Hereford, Texas
(136,000 square feet) and Shreveport, Louisiana (37,000 square feet) for certain
of our natural food product lines.
We own and operate a 105,000 square foot manufacturing facility in West Chester,
Pennsylvania that manufactures our Rosetto(R) frozen pasta and co-packs similar
products for Heinz and others.
We lease a 28,864 square foot manufacturing facility in Framingham,
Massachusetts which is used to manufacture Ethnic Gourmet(R) frozen meals. The
lease on this facility expires in 2006 with a current annual rental of
approximately $300,000.
We lease a 24,275 square foot manufacturing facility in Culver City, California
through 2011 that produces our JASON(R) personal care products. We also lease
two nearby warehouse locations, a 39,000 square foot warehouse in Inglewood,
California through 2007, and a 30,000 square foot warehouse in Culver City,
California through 2007. The leases on these properties require aggregate annual
rentals of approximately $770,000.
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
2008. This facility serves as one of our West Coast distribution centers for
principally all of our product lines.
Outside the United States, we own and operate a 53,000 square foot manufacturing
and office facility in Vancouver, British Columbia that produces soy protein
meat alternative products; a 141,000 square foot manufacturing, distribution and
office facility in Maldegem, Belgium, which produces natural and organic food
products; and a 43,000 square foot processing and distribution center in
Sombreffe, Belgium, which processes fresh organic produce. In addition, we lease
a 30,000 square foot facility located in Brussels, Belgium, which produces fresh
prepared appetizers and sandwiches. The lease on this property provides for
annual rentals of approximately $122,000 and expires in 2011. We also lease a
46,000 square foot manufacturing and office facility in Eitorf, Germany, which
produces soymilk and other non-dairy products. The lease on this property
provides for annual rentals of approximately $211,000 and expires in 2013.
-8-
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, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Outstanding shares of our Common Stock, par value $.01 per share, are quoted 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, 2003 through September 1, 2005.
Common Stock
------------------------------------------------------------------
Fiscal 2005 Fiscal 2004
--------------------------------- -------------------------------
High Low High Low
--------------- ---------------- --------------- --------------
First Quarter $18.24 $15.24 $20.29 $15.85
Second Quarter 20.69 16.18 24.02 18.10
Third Quarter 20.73 18.20 24.09 20.90
Fourth Quarter 20.17 17.20 22.14 17.13
July 1 - September 1, 2005 20.45 18.30 - -
As of September 1, 2005, there were 481 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, 2005:
Number of Securities
Number of Securities Remaining Available for
to be Issued Upon Weighted-Average Future Issuance Under Equity
Exercise of Exercise Price of Compensation Plans
Outstanding Options, Outstanding Options, (excluding securities
Plan Category Warrants and Rights Warrants and Rights reflected in column (a))
- ----------------------------------- ----------------------- ---------------------- -----------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 8,098,104 $ 18.37 315,532
Equity compensation plans not
approved by security holders N/A N/A N/A
Total 8,098,104 $ 18.37 315,532
-9-
Issuer Purchases of Equity Securities
Total Number of Maximum Number
Shares Purchased as of Shares that May
Total Number of Part of Publicly Yet Be Purchased
Shares Average Price Paid Announced Plans or Under the Plans or
Period Purchased per Share Programs(a) Programs
- -------------------------- -------------------- ------------------ -------------------- -------------------
July 1-31, 2004
August 1-31, 2004
September 1-30, 2004
October 1-31, 2004
November 1-30, 2004
December 1-31, 2004
January 1-31, 2005
February 1-29, 2005 80,000 $ 18.82 80,000 555,361
March 1-31, 2005 10,000 18.40 10,000 545,361
April 1-30, 2005
May 1-31, 2005 99,700 17.76 99,700 900,300
June 1-30, 2005
------------------ ------------------ -------------------- ------------------
Total 189,700 $ 18.24 189,700 900,300
================== ================== ==================== ==================
(a) The Company's plan to repurchase up to one million shares of its common
stock was first announced publicly on a conference call on August 29, 2002. At
March 31, 2005, there remained authorization to repurchase 545,361 shares of our
common stock. Effective April 18, 2005, the Board of Directors voted to refresh
the authorization of shares to be repurchased to a total of one million.
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
----------------------------------------------------------------------------
2005 2004 2003 2002 2001
-------------- ------------- ------------- ------------ --------------
Operating results:
Net sales $ 619,967 $ 544,058 $ 466,459 $ 395,954 $ 345,661
Net income (a) $ 21,870 $ 27,008 $ 27,492 $ 2,971 $ 23,589
Basic earnings per common share $ .60 $ .77 $ .81 $ .09 $ .71
Diluted earnings per common share $ .59 $ .74 $ .79 $ .09 $ .68
Financial Position:
Working Capital $ 124,342 $ 129,949 $ 83,324 $ 70,942 $ 92,312
Total assets 707,136 684,231 581,548 481,183 461,693
Long-term debt 92,271 104,294 59,455 10,293 10,718
Stockholders' equity 528,290 496,765 440,797 403,848 396,653
(a) Amounts for 2001 include amortization of goodwill and indefinite-life
intangible assets, net of tax, amounting to $4 million, or $0.12 per share. In
subsequent years, no amortization expense has been incurred in accordance with
SFAS No. 142, which was adopted by the Company effective at the beginning of
2002.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
We manufacture, market, distribute and sell natural, organic, specialty and
snack food products and natural personal care products under brand names which
are sold as "better-for-you" products. 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.
-10-
We made the following acquisitions during the three years ended June 30, 2005:
o On April 4, 2005, we acquired Zia Cosmetics, Inc., including the Zia(R)
Natural Skincare brand, a respected leader in therapeutic products for
healthy, beautiful skin sold mainly through natural food retailers.
o On June 3, 2004, we acquired Jason Natural Products, Inc., a
California-based manufacturer and marketer of natural personal care
products.
o On May 27, 2004, we acquired the Rosetto(R) and Ethnic Gourmet(R) brands of
Heinz, which produce and market frozen pasta and natural ethnic frozen
meals, respectively.
o On February 25, 2004, we acquired Natumi AG, a German producer and marketer
of soymilk and other non-dairy products.
o 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 Organic(R) brand.
o 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.
o On December 2, 2002, we acquired the assets and brands of Imagine Foods,
Inc. ("Imagine") in the United States and the United Kingdom. Imagine is a
non-dairy beverage brand specializing in aseptic and refrigerated rice and
soymilks, organic aseptic soups and broths, and organic non-dairy frozen
desserts under the Rice Dream(R), Soy Dream(R) and Imagine(R) brands.
All of the foregoing acquisitions ("the acquisitions" or "acquired brands") have
been accounted for as purchases. Consequently, the operations of the acquired
brands are included in our results of operations from their respective dates of
acquisition.
On June 30, 2005, we sold our Kineret(R) and Kosherific(R) brands, which
marketed and distributed a line of frozen and dry kosher food products. We
acquired these brands in fiscal 1994.
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:
-11-
Revenue Recognition and Sales Incentives
Sales are recognized when the earnings process is complete, which occurs when
products are shipped in accordance with terms of agreements, title and risk of
loss transfer to customers, collection is probable and pricing is fixed or
determinable. Sales are reported net of sales incentives, which include trade
discounts and promotions and certain coupon costs. Shipping and handling costs
billed to customers are included in reported sales. Allowances for cash
discounts are recorded in the period in which the related sale is recognized.
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 one of
our customers represented approximately 20% of our trade receivable balance at
June 30, 2005, 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. As the result of our continuing focus on the
monitoring of unauthorized deductions and successful collection efforts, our
chargebacks receivable balance approximated only $4.5 million at June 30, 2005,
significantly lower than the $6 million at June 30, 2004.
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 actual,cost or market, 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 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 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 value of goodwill, which is allocated to
the Company's five reporting units, and other intangible assets with indefinite
useful lives are tested annually for impairment.
In connection with its monitoring role, the Staff of the Division of Corporation
Finance of the Securities and Exchange Commission reviewed and commented on the
Company's Form 10-K for the year ended June 30, 2004 and certain quarterly
reports on Form 10-Q and current reports on Form 8-K. While most of the Staff's
comments have
-12-
been resolved, the Staff has questioned the number of reporting units identified
by the Company. Goodwill is assigned to reporting units and is tested annually
for impairment. The Company and its independent registered public accounting
firm believe that the Company's determination of reporting units is appropriate
and that such determination is consistent with the manner in which the Company's
business is managed, and that this determination conforms with the applicable
accounting requirements; however, the Staff may disagree. If it was ultimately
determined that the number of reporting units is to be greater than that
identified by the Company (which totals five), goodwill would be allocated and
tested for impairment across a different configuration of reporting units than
currently utilized, which could result in the Company recognizing an impairment
of goodwill that it would not otherwise recognize.
Segments
SFAS No. 131 defines an operating segment as that component of an enterprise (i)
that engages in business activities from which it may earn revenues and incur
expenses, (ii) whose operating results are regularly reviewed by the
enterprise's chief operating decision maker (CODM) to make decisions about
resources to be allocated to the segment and assess its performance, and (iii)
for which discrete financial information is available. SFAS No. 142 defines a
reporting unit as an operating segment or one level below an operating segment
if the component constitutes a business for which discrete financial information
is available and segment management regularly reviews the operating results of
that component. The Company has determined that it operates in one segment, the
sale of natural and organic products, including food, beverage and personal care
products, and further that such single segment includes five reporting units in
the annual test of Goodwill for impairment. Characteristics of the Company's
operations which are relied on in making these determinations include the
similarities apparent in the Company's products in the natural and organic
consumer markets, the commonality of the Company's customers across brands, the
Company's unified marketing strategy, and the nature of the financial
information used by the CODM, described below, other than information on sales
and direct product costs, by brand. The Company's five reporting units are
Grocery (including snacks); Tea; Personal Care; Canada; and Europe. The Company
has further determined that its Chairman of the Board and Chief Executive
Officer is the Company's CODM as defined in SFAS No. 131, and is also the
manager of the Company's single segment. In making decisions about resource
allocation and performance assessment, the Company's CODM focuses on sales
performance by brand using internally generated sales data as well as externally
developed market consumption data acquired from independent sources, and further
reviews certain data regarding standard costs and standard gross margins by
brand. In making these decisions, the CODM receives and reviews certain Company
consolidated quarterly and year-to-date information; however, the CODM does not
receive or review any discrete financial information by geographic location,
business unit, subsidiary, division or brand. The CODM reviews and approves
capital spending on a Company consolidated basis rather than at any lower unit
level. The Company's Board of Directors receives the same quarterly and
year-to-date information as the Company's CODM.
Results of Operations
Fiscal 2005 Compared to Fiscal 2004
Net sales in 2005 were $620.0 million, an increase of $75.9 million or 14% over
net sales of $544.1 million in 2004. The increase came from volume increases,
the phasing in of price increases and from sales generated by brands acquired in
2004, with increases offset by reduced sales due to the elimination of our
CarbFit(R) brand, which experienced strong sales during the prior year, before
the decline in consumer demand for low carbohydrate products. We experienced
strong brand sales gains for Terra Chips(R), which was up 20.0%, Garden of
Eatin'(R), which was up 14.7%, Earth's Best(R), which was up 39.6%, Imagine(R)
soups, which was up 18.8%,, and to a lesser extent increased sales of Celestial
Seasoning(R) teas, which was up 6.1%. Sales of our brands in Europe increased
27.1%.
Gross profit in 2005 was 27.6% of net sales as compared to 29.5% of net sales in
2004. The decline in gross profit percentage was principally the result of a
$9.0 million charge for our Stock Keeping Unit ("SKU") rationalization program,
which had the effect of reducing 2005 gross profit by 1.2 percentage points.
After considering the effect of the SKU rationalization, our margins remained
relatively flat as a result of the price increases we phased in begin-
-13-
ning July 1, 2004 and June 1, 2005, which provided us with an almost equal
offset to increases in ingredient and other input costs; increases in
transportation costs resulting from higher fuel costs; the cost effects of new
regulations on the U.S. trucking industry in effect for the full fiscal year; an
increase in the percentage of our shipments that are delivered by us, which has
stabilized since we first experienced such increases in our third quarter of
fiscal 2004; and a change in the mix of products sold whereby our higher margin
tea sales became a lower proportion of our consolidated sales.
Selling, general and administrative expenses increased by $14.1 million to
$128.1 million in 2005 from $114.0 million in 2004. Such expenses as a
percentage of net sales amounted to 20.7% in 2005 as compared with 21.0% in
2004. Selling, general and administrative expenses have increased in overall
dollars, primarily as a result of costs brought on by brands acquired in 2004,
increased consumer marketing expenses needed to support our increased sales as
well as increases across all levels of general and administrative expenses to
support our growing business. General and administrative expenses for the year
ended June 30, 2005 includes approximately $3.1 million for the SKU
rationalization program and approximately $1.1 million of outside professional
costs for Sarbanes-Oxley compliance.
Non-cash compensation expenses were $4.7 million in 2005, an increase of $4.3
million from $0.4 million in 2004. The increase in non-cash compensation
expenses primarily relate to the accelerated vesting of employee stock options
in June 2005, when our board of directors approved the acceleration of the
vesting of all outstanding unvested stock options held by employees. This action
was taken in order to reduce future compensation charges for these stock options
and to provide an incentive to employees in view of the uncertainty of future
equity-based compensation with the pending implementation of SFAS No. 123(R). As
a result of this action, approximately 1.2 million outstanding unvested stock
options were accelerated (approximately 56,000 of which were at exercise prices
greater than market price at the date of acceleration), substantially all of
which were granted in August 2004 at an exercise price of $16.01 per share with
original vesting through August 2006. We recognized a charge to earnings for the
difference between the market value of our stock on the date of acceleration and
the exercise price of the options, such charge amounting to approximately $3.7
million ($3.1 million net of tax) for the year ended June 30, 2005. As a result
of this action, there will be no stock option amortization expense in future
periods unless additional stock options are granted.
Operating income was $38.2 million or 6.2% in 2005 compared to $45.9 million or
8.4% in 2004. The decline in operating income was the result of the aggregate of
$16.0 million of charges from SKU rationalization and the acceleration of
vesting of stock options. After considering the effect of such $16.0 million of
charges, operating income was $55.0 million in 2005, representing a 19.8%
increase over 2004. This increase results principally from higher sales coupled
by stable margins and lower selling, general and administrative expenses as a
percentage of sales
Interest and other expenses, net, amounted to $3.7 million in 2005 compared to
$2.5 million in 2004. Our interest expense was $2.0 million higher in 2005 as
compared to 2004, principally as a result of the higher interest rates on higher
average borrowings we carried this year after our recent acquisitions. We had
$0.7 million in net currency exchange gains in the current year as compared to
less than $0.3 million in net currency exchange losses in the prior year, which
partially offset the additional interest costs.
Income before income taxes in 2005 amounted to $34.5 million compared to $43.4
million in 2004. This decrease is attributable to the aforementioned decrease in
operating income and increase in interest and other expenses, net. After
considering the effect of the aggregate of $16.0 million of charges from SKU
rationalization and the acceleration of vesting of stock options, income before
income taxes was $50.5 million representing an increase of $7.1 million, or
16.4% over the prior year. This increase results principally from higher sales
coupled by stable margins and lower selling, general and administrative expenses
as a percentage of sales.
Our effective income tax rate approximated 36.7% of pre-tax income for 2005
compared to 37.8% for 2004. This decrease was attributable to a $1.3 million
reduction in tax liabilities resulting from the termination of certain
outstanding tax matters and is equal to the amount charged against the Company's
earnings when these arose in prior years.
-14-
Net income in 2005 amounted to $21.9 million, or $0.59 per diluted share,
compared to $27.0 million, or $0.74 per diluted share, in 2004. The decrease of
$5.1 million in net income was primarily attributable to the aforementioned
decrease in income before income taxes offset by the decrease in our effective
tax rate.
During 2005, we initiated a program to focus on our Operating Free Cash Flow and
Cash Conversion Cycle. We define Operating Free Cash Flow as cash provided from
operating activities less capital expenditures. During 2005, our Operating Free
Cash Flow was $25.1 million as compared to $20.9 million in 2004, representing
an increase of 20%. Our Cash Conversion Cycle, which is a measure of the number
of days needed to convert operating activities into cash, was reduced to 69 days
in 2005 from the 86 days of the prior year, an improvement of 17 days, or 20%.
Fiscal 2004 Compared to Fiscal 2003
Net sales in 2004 were $544.1 million, an increase of $77.6 million or 17% over
net sales of $466.5 million in 2003. The increase in sales came from volume
increases principally in our snacks brands, which were up 14.9%, our Earth's
Best baby food brand, which was up 23.1%, our Celestial Seasonings tea brand,
which was up 3.4%, and from the introduction of our new Carb Fit brand of
low-carbohydrate products, as well as sales of brands acquired in 2004 and a
full year of our operation of brands acquired in 2003. We believe that sales
growth during the 2004 period was negatively impacted by our inability to fill
orders for soup due to non-recurring manufacturing issues encountered at our
independent soup co-packer, thereby causing out-of-stock positions on soup and,
to a lesser extent, by the strike during our second and third quarters of fiscal
2004 of grocery workers in Southern California where we have a very strong
market presence.
Gross profit in 2004 was 29.5% of net sales as compared to 30.3% of net sales in
2003. The decline in gross profit percentage was principally the result of the
aggressive spending in the trade and with consumers, including spending on the
launch of Carb Fit, as well as increases in transportation costs resulting from
higher fuel costs, the cost effects of new regulations on the U.S. trucking
industry, and an increase in the percentage of our shipments that were delivered
by us. We also saw increases in the cost of ingredients.
Selling, general and administrative expenses increased by $18.4 million to
$114.0 million in 2004 from $95.6 million in 2003. Such expenses as a percentage
of net sales amounted to 21.0% in 2004 as compared with 20.5% in 2003. Selling,
general and administrative expenses increased in overall dollars and as a
percentage of sales, primarily as a result of $3.5 million of additional costs
associated with brands acquired in 2004 as well as the full year of operations
of brands acquired in 2003, $4.1 million of increased consumer marketing to
support our increased sales, including our new Carb Fit line of products, $0.5
million of added costs relating to the implementation of required provisions of
the Sarbanes Oxley Act, and increased costs relating to the management changes
that have been made during the second half of our fiscal year.
There were no restructuring and other non-recurring charges in 2004. During
2003, we recorded approximately $0.4 million of additional restructuring and
other non-recurring charges related to the sale of our Health Valley facility
for severance liabilities and related employee costs and trade items that could
not be accrued in 2002. In addition, at the time of lease termination in 2003,
we were able to reduce our potential lease exit costs by $0.9 million, which was
recorded as a credit to restructuring and other non-recurring charges in 2003.
Operating income was $45.9 million in 2004 compared to $46.2 million in 2003.
Operating income as a percentage of net sales was 8.4% in 2004, compared with
9.9% in 2003. These changes are a result of higher sales offset by the
aforementioned decrease in gross profit and increase in selling, general and
administrative expenses.
Interest and other expenses, net, amounted to $2.5 million in 2004 compared to
$2.0 million in 2003. We incurred higher interest expense in 2004 resulting from
borrowings for acquisitions which were outstanding for the full year in 2004 as
compared to only part of the year in 2003.
Income before income taxes in 2004 amounted to $43.4 million compared to $44.2
million in 2003. This decrease is attributable to the aforementioned decrease in
operating income and increase in interest and other expenses, net.
-15-
Income taxes in 2004 amounted to $16.4 million compared to $16.7 million in
2003. Our effective tax rate was 37.8% in 2004 and 2003.
Net income in 2004 amounted to $27.0 million compared to $27.5 million in 2003.
The decrease of $0.5 million in net income was primarily attributable to the
aforementioned decrease in income before income taxes.
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.
On April 22, 2004, we entered into a new $300 million credit facility (the
"Credit Facility") with a bank group led by our existing bank agents for a
five-year term expiring in April 2009. The Credit Facility provides for an
uncommitted $50 million accordion feature, under which the facility may be
increased to $350 million. The Credit Facility is secured only by a pledge of
shares of certain of our foreign subsidiaries and 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 an applicable
margin) or, at our option, the reserve adjusted LIBOR rate plus an applicable
margin. As of June 30, 2005, $89,700 million was borrowed under the Credit
Facility at an average interest rate of 3.7%.
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 $35.0 million and $30.8 million for 2005 and
2004, respectively. Our working capital and current ratio were $124.3 million
and 2.8 to 1, respectively, at June 30, 2005 compared with $130.0 million and
2.9 to 1 respectively, at June 30, 2004. Our improvement in cash provided by
operations was the result of higher sales and stable margins while incurring
non-cash SKU rationalization and non-cash compensation charges.
Net cash (used in) provided by financing activities was ($14.7) million for 2005
and $48.9 million for 2004. During 2005 and 2004, we borrowed cash to fund
acquisitions made during each year. During 2005, we received $5.2 million of
proceeds on the exercise of stock options and warrants and we acquired 189,700
shares of our common stock in open market purchases at a cost of approximately
$3.5 million. During 2004, we received $19.8 million of proceeds on the exercise
of stock options and warrants, and we acquired 64,397 shares of our common stock
in open market purchases at a cost of approximately $1.1 million.
Obligations for all debt instruments, capital and operating leases and other
contractual obligations are as follows:
Payments Due by Period
------------------------------------------------------------------------------
Less than 1-3 3-5
Total 1 year years years Thereafter
------------ -------------- ------------ ------------- ---------------
Debt instruments $ 94,676 $2,497 $ 2,479 $89,700 $ -
Capital lease obligations 386 294 92 - -
Operating leases 23,925 5,354 7,752 5,431 5,388
Purchase Obligations 20,865 18,358 2,507 - -
------------ -------------- ------------ ------------- ---------------
Total contractual cash obligations $139,852 $26,503 $12,830 $95,131 $5,388
============ ============== ============ ============= ===============
We believe that cash on hand of $24.1 million at June 30, 2005, as well as
projected fiscal 2006 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 $8.1 million of debt
and lease obligations described in
-16-
the table above, during the next fiscal year. We currently invest our cash on
hand in highly liquid short-term investments yielding approximately 3.1%
interest.
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, 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:
o general economic and business conditions;
o the ability of the Company to implement its business and acquisition
strategy;
o the ability to effectively integrate its acquisitions;
o the ability of the Company to obtain financing for general corporate
purposes;
o competition;
o availability of key personnel; and
o 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.
Our Acquisition Strategy Exposes Us To Risk
We intend to continue to grow our business in part through the acquisition of
new brands, both in the United States and internationally. Our acquisition
strategy is based on identifying and acquiring brands with products that
complement our existing product mix. We cannot be certain that we will be able
to:
o successfully identify suitable acquisition candidates;
o negotiate identified acquisitions on terms acceptable to us; or
o obtain the necessary financing to complete such acquisitions.
We may encounter increased competition for acquisitions in the future, which
could result in acquisition prices we do not consider acceptable. We are unable
to predict whether or when any prospective acquisition candidate will become
available or the likelihood that any acquisition will be completed.
Our Future Success May Be Dependent on Our Ability to Integrate Companies That
We Acquire
Our future success may be dependent upon our ability to effectively integrate
new brands that we acquire, including our ability to realize potentially
available marketing opportunities and cost savings, some of which may involve
operational changes. We cannot be certain:
-17-
o as to the timing or number of marketing opportunities or amount of cost
savings that may be realized as the result of our integration of an
acquired brand;
o that a business combination will enhance our competitive position and
business prospects;
o that we will not experience difficulties with customers, personnel or other
parties as a result of a business combination; or
o that, with respect to our acquisitions outside the United States, we will
not be affected by, among other things, exchange rate risk.
In addition, we cannot be certain that we will be successful in:
o integrating an acquired brand's distribution channels with our own;
o coordinating sales force activities of an acquired company or in selling
the products of an acquired company to our customer base; or
o integrating an acquired company into our management information systems or
in integrating an acquired company's products into our product mix.
Additionally, integrating an acquired company into our existing operations will
require management resources and may divert our management from our day-to-day
operations. If we are not successful in integrating the operations of acquired
companies, our business could be harmed.
Consumer Preferences for Our Products Are Difficult to Predict and May Change
A significant shift in consumer demand away from our products or our failure to
maintain our current market position could reduce our sales or the prestige of
our brands in our markets, which could harm our business. While we continue to
diversify our product offerings, we cannot be certain that demand for our
products will continue at current levels or increase in the future.
Our business is primarily focused on sales of natural and organic products in
markets geared to consumers of natural foods, specialty teas, non-dairy
beverages, cereals, breakfast bars, canned soups and vegetables, snacks and
cooking oils, which, if consumer demand for such categories were to decrease,
could harm our business. Consumer trends change based on a number of possible
factors, including:
o nutritional values, such as a change in preference from fat free to reduced
fat to no reduction in fat; and
o a shift in preference from organic to non-organic and from natural products
to non-natural products.
In addition, we have other product categories, such as medically-directed food
products, kosher foods and other specialty food items, as well as natural health
and beauty care products. We are subject to evolving consumer preferences for
these products.
Our Markets Are Highly Competitive
We operate in highly competitive geographic and product markets, and some of our
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 and Sara Lee Corporation, also may be able to
benefit from economies of scale, pricing advantages or the in-
-18-
troduction of new products that compete with our products. Retailers also market
competitive products under their own private labels.
The beverage market is large and highly competitive. The tea portion of the
beverage market is also highly competitive. Competitive factors in the tea
industry include product quality and taste, brand awareness among consumers,
variety of specialty tea flavors, interesting or unique product names, product
packaging and package design, supermarket and grocery store shelf space,
alternative distribution channels, reputation, price, advertising and promotion.
Our principal competitors on a national basis in the specialty tea market are
Thomas J. Lipton Company, a division of Unilever PLC, and R.C. Bigelow, Inc.
Unilever has substantially greater financial resources than us. In addition, in
April 2004, Tazo Tea Company (a subsidiary of Starbucks Corporation) and Kraft
Foods Global, Inc. announced a licensing agreement whereby Tazo products might
gain additional access to grocery channels through placement by Kraft, which has
substantially greater financial resources than we do. 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 resources than we have. Private label competition in the
specialty tea category is currently minimal, but growing. In the future,
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.
We Are Dependent Upon the Services of Our Chief Executive Officer
We are highly dependent upon the services of Irwin D. Simon, our Chairman of the
Board, President and Chief Executive Officer. We believe Mr. Simon's reputation
as our founder and his expertise and knowledge in the natural and organic
products market are critical factors in our continuing growth. The loss of the
services of Mr. Simon could harm our business.
We Rely on Independent Brokers and Distributors for a Substantial Portion of Our
Sales
We rely upon sales efforts made by or through non-affiliated food brokers to
distributors and other customers. The loss of, or business disruption at, one or
more of these distributors or brokers may harm our business. If we were required
to obtain additional or alternative distribution and food brokerage agreements
or arrangements in the future, we cannot be certain that we will be able to do
so on satisfactory terms or in a timely manner. In fiscal 2005, one of our
distributors, United Natural Foods, Inc., accounted for approximately 22% of our
net sales. Two of our distributors, United Natural Foods, Inc. and Tree of Life,
accounted for approximately 20% and 12%, respectively, of our net sales for the
fiscal year ended June 30, 2004, and approximately 18% and 15%, respectively,
for the year ended June 30, 2003. Our inability to enter into satisfactory
brokerage agreements may inhibit our ability to implement our business plan or
to establish markets necessary to develop our products successfully. Food
brokers act as selling agents representing specific brands on a non-exclusive
basis under oral or written agreements generally terminable at any time on 30
days' notice, and receive a percentage of net sales as compensation.
Distributors purchase directly for their own account for resale. In addition,
the success of our business depends, in large part, upon the establishment and
maintenance of a strong distribution network.
Loss of One or More of Our Manufacturing Facilities Could Harm Our Business
For the years ended June 30, 2005, 2004 and 2003, approximately 47%, 39% and
42%, respectively, of our revenue was derived from products manufactured at our
manufacturing facilities. An interruption in or the loss of operations at one or
more of these facilities, or the 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.
We Rely on Independent Co-Packers to Produce Some or Most of Our Products
During 2005, 2004 and 2003, approximately 53%, 61% and 58%, respectively, of our
revenue was derived from products manufactured at independent co-packers. In the
U.S., we presently obtain:
-19-
o all of our requirements for non-dairy beverages from five co-packers, all
of which are under contract or other arrangements;
o all of our U.S. requirements for rice cakes from one co-packer;
o all of our Health Valley(R) baked goods and cereal products from one
co-packer, which is under contract;
o all of our cooking oils from one co-packer;
o principally all of our Garden of Eatin(R) and Little Bear Organic Foods(R)
tortilla chips from three co-packers, one of which is under contract;
o a portion of our requirements for Terra(R) Yukon Gold, Red BlissTM, Terra
BluesTM, and Potpourri TM potato chips and FritesTM line from one
co-packer, which is under contract;
o the requirements for our canned soups from four co-packers, which are under
contract;
o all of our Earth's Best(R) baby food products from seven co-packers, which
are under contract; and
o a portion of our Ethnic Gourmet(R) products from one co-packer, which is
under contract; and
o all of our Zia(R) natural skincare products from four co-packers, which are
under contract or other arrangements.
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.
Our Tea Ingredients Are Subject to Import Risk
Our tea brand purchases its ingredients 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 botanical purchasers visit major suppliers around the world annually to
procure ingredients and to assure quality by observing production methods and
providing product specifications. Many ingredients are presently grown in
countries where labor-intensive cultivation is possible, and where we often must
educate the growers about product standards. We perform laboratory analysis on
incoming ingredient shipments for the purpose of assuring that they meet our
quality standards and those of the 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 and will continue
to 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.
Our failure to maintain relationships with our existing suppliers or find new
suppliers, observe production standards for our foreign procured products or
continue our supply of botanicals from foreign sources could harm our business.
-20-
Our Future Results of Operations May be Adversely Affected by Escalating Fuel
Costs.
Many aspects of our business have been, and continue to be, directly affected by
the continuously rising cost of fuel. Increased fuel costs have translated into
increased costs for the products and services we receive from our third party
providers including, but not limited to, increased production and distribution
costs for our products. As the cost of doing business increases, we may not be
able to pass these higher costs on to our customers and, therefore, any such
increase may adversely affect our earnings.
We Are Subject to Risks Associated with Our International Sales and Operations,
Including Foreign Currency Risks
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. Consequently, isolating the effect of changes in currency does
not incorporate these other important economic factors. These changes, if
material, could cause adjustments to our financing and operating strategies.
During fiscal 2005, approximately 21.1% of our net sales were generated outside
the United States, while such sales outside the United States were 20.3% of net
sales in 2004 and 17.3% in 2003.
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;
o compliance with applicable foreign laws; and
o difficulties in managing a global enterprise, including staffing,
collecting accounts receivable and managing distributors.
Our Inability to Use Our Trademarks Could Have a Material Adverse Effect on Our
Business
Our inability to use our trademarks could have a material adverse effect on our
business, results of operations and financial condition.
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 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.
Our Products Must Comply With Government Regulation
The USDA has adopted regulations with respect to a national organic labeling and
certification program which became effective February 20, 2001, and fully
implemented on October 21, 2002. We currently manufacture approximately 650
organic products which are covered by these regulations. Future developments in
the regulation of labeling of organic 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.
-21-
In addition, on January 18, 2001, the FDA proposed new policy guidelines
regarding the labeling of genetically engineered foods. The FDA is currently
considering the comments it received before issuing final guidance. These
guidelines, if adopted, could cause us to 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. Additionally, an allergen labeling law was
passed and signed on August 3, 2004. This law requires certain allergens to be
clearly labeled by January 1, 2006. We are in the process of revising our labels
to comply with the final rules. Additionally, Canada has adopted new food
labeling regulations that must be implemented by December 12, 2005, which
require a Nutritional Facts panel to be on most food packages. Yves products
will be subject to these regulations, as will all our other products sold into
Canada.
Furthermore, new government laws and regulations may be introduced in the future
that could result in additional compliance costs, seizures, confiscations,
recalls 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.
Product Recalls Could Have a Material Adverse Effect on Our Business
Manufacturers and distributors of products in our industry are sometimes subject
to the recall of their products for a variety of reasons, including for product
defects, such as ingredient contamination, packaging safety and inadequate
labeling disclosure. If any of our products are recalled due to a product defect
or for any other reason, we could be required to incur the expense of the recall
or the expense of any resulting legal proceeding. Additionally, if one of our
significant brands were subject to recall, the image of that brand and our
company could be harmed, which could have a material adverse effect on our
business.
Product Liability Suits, If Brought, Could Have a Material Adverse Effect On Our
Business
If a product liability claim exceeding our insurance coverage were to be
successfully asserted against us, it could harm our business. We cannot assure
you that such coverage will be sufficient to insure against claims which may be
brought against us, or that we will be able to maintain such insurance or obtain
additional insurance covering existing or new products. As a marketer of food
products, we are subject to the risk of claims for product liability. We
maintain product liability insurance and generally require that our co-packers
maintain product liability insurance with us as a co-insured.
We Rely on Independent Certification For a Number of Our Natural and Specialty
Food Products
We rely on independent certification, such as certifications of our products as
"organic" or "kosher," to differentiate our products from others. The loss of
any independent certifications could adversely affect our market position as a
natural and specialty food company, which could harm our business.
We must comply with the requirements of independent organizations or
certification authorities in order to label our products as certified. For
example, we can lose our "organic" certification if a manufacturing 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. Similarly, we can lose our "kosher" certification if a manufacturing
plant or raw materials do not meet the requirements of the appropriate kosher
supervision organization.
Due to the Seasonality of Many of Our Products, Including Our Tea Products, and
Other Factors, Our Operating Results Are Subject to Quarterly Fluctuations
Our tea brand manufactures and markets 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. In addi-
-22-
tion, some of our other products (e.g., baking and cereal products and soups)
also show stronger sales in the cooler months while our snack food product lines
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. For these reasons, you
should not rely on our quarterly operating results as indications of future
performance.
Our Officers and Directors May Be Able to Control Our Actions
Our officers and directors beneficially own approximately 10.5% of our common
stock as of June 30, 2005. In addition, two of these directors currently serve
as a designee and a jointly appointed designee of an affiliate of H.J. Heinz
Company, or Heinz, which owns approximately 16.6% of our common stock as of June
30, 2005. Accordingly, our officers and directors may be in a position to
influence the election of our directors and otherwise influence stockholder
action.
Our Ability to Issue Preferred Stock May Deter Takeover Attempts
Our 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 and adversely affect the relative
voting power or other rights of the holders of our common stock. In the event of
issuance, the preferred stock could be used as a method of discouraging,
delaying or preventing a change in control. Our certificate of incorporation
authorizes the issuance of up to 5,000,000 shares of "blank check" preferred
stock with such designations, rights and preferences as may be determined from
time to time by our board of directors. Although we have no present intention to
issue any shares of our preferred stock, we may do so in the future under
appropriate circumstances.
-23-
Supplementary Quarterly Financial Data:
Unaudited quarterly financial data (in thousands, except per share amounts) for
fiscal 2005 and 2004 is summarized as follows:
Three Months Ended
---------------------------------------------------------------------
September 30, December 31, March 31, June 30,
2004 2004 2005 2005
---------------- ------------- -------------- ---------------
Net sales $ 137,604 $169,753 $ 161,261 $ 151,349
Gross profit (a) 38,975 53,231 45,468 33,283
Operating income (loss)(b) 10,790 18,058 11,728 (2,388)
Income (loss) before income taxes (b) 10,135 17,505 10,546 (3,675)
Net income (loss)(b) 6,182 10,678 7,698 (2,688)
Basic earnings per common share $ .17 $ .29 $ .21 $ (.07)
Diluted earnings per common share $ .17 $ .29 $ .21 $ (.07)
Three Months Ended
---------------------------------------------------------------------
September 30, December 31, March 31, June 30,
2003 2003 2004 2004
---------------- --------------- ------------- ---------------
Net sales $ 127,053 $142,792 $ 136,862 $ 137,351
Gross profit 37,162 47,099 38,546 37,457
Operating income 11,343 17,052 9,019 8,464
Income before income taxes 10,552 16,702 8,087 8,047
Net income 6,542 10,372 5,014 5,080
Basic earnings per common share $ .19 $ .30 $ .14 $ .14
Diluted earnings per common share $ .19 $ .29 $ .14 $ .14
(a) Gross profit was negatively impacted by approximately $1.2 million ($.7
million net tax) for the three months ended March 31, 2005 and
approximately $7.8 million ($4.8 million net of tax) for the three months
ended June 30, 2005 as the result of charges relative to the Company's SKU
Rationalization.
(b) Operating income (loss) and income (loss) before income taxes for the three
months ended June 30, 2005 were negatively impacted by a charge of
approximately $3.9 million ($3.3 million net of tax) resulting from
non-cash compensation, including the acceleration of the vesting of
outstanding stock options.
Seasonality
Our tea brand manufactures and markets 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. In addition,
some of our other products (e.g., baking and cereal products and soups) also
show stronger sales in the cooler months while our snack food product lines 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. For these reasons, you
should not rely on our quarterly operating results as indications of future
performance.
Inflation
Management does not believe that inflation had a significant impact on our
results of operations for the periods presented.
-24-
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 2005 variable debt and cash equivalents
levels, a one-point change in interest rates would have the effect of increasing
our interest expense by approximately $.8 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. Consequently, isolating the effect of changes in currency does
not incorporate these other important economic factors. These changes, if
material, could cause adjustments to our financing and operating strategies.
During fiscal 2005, approximately 21.1% of our net sales were generated from
sales outside the United States, while such sales outside the United States were
20.3% of net sales in 2004 and 17.3% in 2003.
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;
o compliance with applicable foreign laws; and
o difficulties in managing a global enterprise, including staffing,
collecting accounts receivable and managing distributors.
-25-
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:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - June 30, 2005 and 2004
Consolidated Statements of Income - Years ended June 30, 2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity - Years ended June 30, 2005,
2004 and 2003
Consolidated Statements of Cash Flows - Years ended June 30, 2005, 2004 and 2003
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 SEC are not required under the related instructions or are
inapplicable and therefore have been omitted.
-26-
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors of
The Hain Celestial Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Hain
Celestial Group, Inc. (the Company) and Subsidiaries as of June 30, 2005 and
2004, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 2005.
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 the standards of the Public Company
Accounting Oversight Board (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, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2005, in conformity with U.S. generally accepted
accounting principles. 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.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of The Hain
Celestial Group, Inc.'s internal control over financial reporting as of June 30,
2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated August 31, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, New York
August 31, 2005
-27-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
June 30
----------------------------------
2005 2004
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,139 $ 27,489
Accounts receivable, less allowance for doubtful accounts of
$2,074 and $2,185 67,148 69,392
Inventories 76,497 86,873
Recoverable income taxes, net 2,575 --
Deferred income taxes 5,671 3,111
Other current assets 18,164 11,449
------------ -------------
Total current assets 194,194 198,314
Property, plant and equipment, net of accumulated depreciation
and amortization of $49,035 and $40,799 88,204 87,002
Goodwill 350,833 333,218
Trademarks and other intangible assets, net of accumulated
amortization of $9,142 and $8,349 61,010 55,793
Other assets 12,895 9,904
------------ -------------
Total assets $707,136 $684,231
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 65,922 $ 59,031
Income taxes payable 1,139 2,489
Current portion of long-term debt 2,791 6,845
------------ -------------
Total current liabilities 69,852 68,365
Long-term debt, less current portion 92,271 104,294
Deferred income taxes 16,723 14,807
------------ -------------
Total liabilities 178,846 187,466
Stockholders' equity:
Preferred stock - $.01 par value, authorized 5,000,000 shares,
no shares issued -- --
Common stock - $.01 par value, authorized 100,000,000 shares,
issued 37,475,998 and 37,064,648 shares 375 371
Additional paid-in capital 404,517 394,740
Deferred compensation (1,872) (2,809)
Retained earnings 127,967 106,097
Foreign currency translation adjustment 10,048 7,651
------------ -------------
541,035 506,050
Less: 861,256 and 671,556 shares of treasury stock, at cost (12,745) (9,285)
------------ -------------
Total stockholders' equity 528,290 496,765
------------ -------------
Total liabilities and stockholders' equity $707,136 $684,231
============ =============
See notes to consolidated financial statements.
-28-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended June 30
--------------------------------------------------
2005 2004 2003
----------- ------------ ------------
Net sales $619,967 $544,058 $466,459
Cost of sales 449,010 383,794 325,054
----------- ------------ ------------
Gross profit 170,957 160,264 141,405
Selling, general and administrative expenses 128,119 114,014 95,635
Restructuring and other non-recurring charges -- -- (435)
Non-cash compensation 4,650 372 46
----------- ------------ ------------
Operating income 38,188 45,878 46,159
Interest expense, net and other expenses 3,677 2,490 1,995
----------- ------------ ------------
Income before income taxes 34,511 43,388 44,164
Provision for income taxes 12,641 16,380 16,672
----------- ------------ ------------
Net income $ 21,870 $ 27,008 $ 27,492
=========== ============ ============
Earnings per share:
Basic $ .60 $ .77 $ .81
=========== ============ ============
Diluted $ .59 $ .74 $ .79
=========== ============ ============
Weighted average common shares outstanding:
Basic 36,407 35,274 33,910
=========== ============ ============
Diluted 37,153 36,308 34,722
=========== ============ ============
See notes to consolidated financial statements.
-29-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2003, 2004 AND 2005 (In thousands, except per share and
share data)
Common Stock
Additional Unamortized
Amount Paid-In Non-Cash Retained
Shares at $.01 Capital Compensation Earnings
----------- ---------- ---------- ------------ ---------
Balance at June 30, 2002 34,075,639 $341 $354,822 $51,597
Exercise of stock options 67,521 1 623
Purchase of treasury shares
Issuance of common stock 667,562 6 9,206
Non-cash compensation charge 46
Tax benefit from stock options 180
Comprehensive income:
Net income 27,492
Translation adjustments
----------- ---------- ---------- ------------ ---------
Total comprehensive income
Balance at June 30, 2003 34,810,722 348 364,877 79,089
Exercise of stock options and warrants 2,103,926 21 19,787
Purchase of treasury shares
Restricted stock grant 150,000 2 3,133 $ (3,135)
Non-cash compensation charge 46 326
Tax benefit from stock options 6,897
Comprehensive income:
Net income 27,008
Translation adjustments
----------- ---------- ---------- ------------ ---------
Total comprehensive income
Balance at June 30, 2004 37,064,648 371 394,740 (2,809) 106,097
Exercise of stock options and warrants 411,350 4 5,237
Purchase of treasury shares
Restricted stock grant
Non-cash compensation charge 3,713 937
Tax benefit from stock options 827
Comprehensive income:
Net income 21,870
Translation adjustments
----------- ---------- ---------- ------------ ---------
Total comprehensive income
Balance at June 30, 2005 37,475,998 $375 $404,517 $(1,872) $127,967
=========== ========== ========== ============ =========
-30-
Foreign
Currency
Treasury Stock Translation Comprehensive
Shares Amount Adjustment Total Income
--------- ---------- ------------ ---------- -------------
Balance at June 30, 2002 306,917 $(3,875) $ 963 $403,848
Exercise of stock options 624
Purchase of treasury shares 299,702 (4,281) (4,281)
Issuance of common stock 9,212
Non-cash compensation charge 46
Tax benefit from stock options 180
Comprehensive income:
Net income 27,492 $ 27,492
Translation adjustments 3,676 3,676 3,676
--------- ---------- ------------ ---------- -------------
Total comprehensive income $ 31,168
=============
Balance at June 30, 2003 606,619 (8,156) 4,639 440,797
Exercise of stock options and warrants 19,808
Purchase of treasury shares 64,937 (1,129) (1,129)
Restricted stock grant --
Non-cash compensation charge 372
Tax benefit from stock options 6,897
Comprehensive income:
Net income 27,008 $ 27,008
Translation adjustments 3,012 3,012 3,012
--------- ---------- ------------ ---------- -------------
Total comprehensive income $ 30,020
=============
Balance at June 30, 2004 671,556 (9,285) 7,651 496,765
Exercise of stock options and warrants 5,241
Purchase of treasury shares 189,700 (3,460) (3,460)
Non-cash compensation charge 4,650
Tax benefit from stock options 827
Comprehensive income:
Net income 21,870 $ 21,870
Translation adjustments 2,397 2,397 2,397
--------- ---------- ------------ ---------- -------------
Total comprehensive income $24,267
=============
Balance at June 30, 2005 861,256 $ (12,745) $ 10,048 $ 528,290
========= ========== ============ ============
See notes to consolidated financial statements.
-31-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended June 30
----------------------------------------
2005 2004 2003
--------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $21,870 $ 27,008 $ 27,492
Adjustments to reconcile net income to net cash provided by
operating activities:
SKU Rationalization charges 12,142 - -
Depreciation and amortization 13,838 9,763 8,619
Provision for doubtful accounts 68 438 103
Deferred income taxes (644) 3,968 7,864
Non-cash compensation 4,650 372 46
Increase (decrease) in cash attributable to changes in operating
assets and liabilities, net of amounts applicable to acquired
brands:
Accounts receivable 2,577 (5,230) (4,973)
Inventories 496 (11,436) (2,742)
Other current assets (6,977) (2,086) (1,167)
Other assets (5,936) 1,888 (1,745)
Accounts payable and accrued expenses (4,015) (1,403) (9,320)
Accrued restructuring and non-recurring charges - - (5,805)
Recoverable income taxes (3,923) 622 3,389
Tax benefit of nonqualified stock options 827 6,897 180
--------- ----------- ----------
Net cash provided by operating activities 34,973 30,801 21,941
--------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of brands, net of cash acquired (11,098) (50,734) (57,528)
Purchases of property and equipment (9,890) (9,918) (9,157)
--------- ----------- ----------
Net cash used in investing activities (20,988) (60,652) (66,685)
--------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) proceeds from bank revolving credit facility, net (9,500) 45,350 49,450
Payments on economic development revenue bonds (3,550) (558) (500)
Costs in connection with bank financing (34) (985) (220)
Purchase of treasury stock (3,460) (1,129) (4,281)
Proceeds from exercise of options and warrants, net of related
expenses 5,241 19,808 624
(Repayments) proceeds of other long-term debt, net (3,412) (13,612) 4,100
--------- ----------- ----------
Net cash (used in) provided by financing activities (14,715) 48,874 49,173
--------- ----------- ----------
Effect of exchange rate changes on cash (2,620) (2,518) (983)
--------- ----------- ----------
Net (decrease) increase in cash and cash equivalents (3,350) 16,505 3,446
Cash and cash equivalents at beginning of year 27,489 10,984 7,538
--------- ----------- ----------
Cash and cash equivalents at end of year $ 24,139 $ 27,489 $ 10,984
========= =========== ==========
See notes to consolidated financial statements.
-32-
1. BUSINESS
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 and organic food products and
natural personal care 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 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 Organic(R), Ethnic Gourmet(R), Rosetto(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), Lima(R), Biomarche(R), Grains Noirs(R), Natumi(R),
Milkfree, 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, Boston Better Snacks(R), and Alba
Foods(R). Our natural personal care product line is marketed under the JASON(R),
Zia(R), Orjene(R), Shaman Earthly Organics(TM), and Heather's(R) brands.
We operate in one business segment: the sale of natural and organic food and
personal care products. During the three years ended June 30, 2005,
approximately 47%, 39% and 42% of our revenues were derived from products that
are manufactured within our own facilities with 53%, 61% and 58% produced by
various co-packers. In fiscal 2005, 2004 and 2003, there were no co-packers who
manufactured 10% or more of our 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 one of our
customers represents 20% of our trade receivables balance as of June 30, 2005
and two of our customers represent 28% and 25% of our trade receivables balance
as of June 30, 2004 and 2003, 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. Our estimate of this receivable balance ($4.5 million at June 30,
2005 and $6 million at June 30, 2004) could be different had we used different
assumptions and judgments.
-33-
During the year ended June 30, 2005, sales to one customer and its affiliates
approximated 22% of net sales. In fiscal 2004 and 2003, two customers accounted
for approximately 20% and 12% of net sales and approximately 18% and 15% of net
sales, respectively.
Inventory
Our inventory is valued at the lower of actual cost or market, 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 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 5-15 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 value of goodwill, which is allocated to
reporting units, and other intangible assets with indefinite useful lives are
tested annually for impairment.
Revenue Recognition and Sales Incentives
Sales are recognized when the earnings process is complete, which occurs when
products are shipped in accordance with terms of agreements, title and risk of
loss transfer to customers, collection is probable and pricing is fixed or
determinable. Sales are reported net of sales incentives, which include trade
discounts and promotions and certain coupon costs. Shipping and handling costs
billed to customers are included in reported sales. Allowances for cash
discounts are recorded in the period in which the related sale is recognized.
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 $4.0 million for fiscal 2005 and $5.6
million for each of the two fiscal years 2004 and 2003. Such costs are expensed
as incurred.
-34-
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, 2005 and 2004, we had $10.0 and $10.9 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, 2005 and 2004, 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, 2005 and 2004 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 45% for fiscal 2005, 51% for
fiscal 2004, and 55% for fiscal 2003; and a weighted-average expected life of
the options of approximately 7 years in fiscal 2005 and five years in both 2004
and 2003.
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.
-35-
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:
2005 2004 2003
------------- -------------- -------------
Net income, as reported $ 21,870 $ 27,008 $ 27,492
Non-cash compensation charge net of related tax
effects 3,759 232 30
Stock-based employee compensation expense
determined under fair value method, net of related
tax effects (8,886) (3,921) (11,365)
------------- -------------- -------------
Pro forma net income $ 16,743 $ 23,319 $ 16,157
============= ============== =============
Basic net income per common share:
As reported $ .60 $ .77 $ .81
Pro forma $ .46 $ .66 $ .48
Diluted net income per common share:
As reported $ .59 $ .74 $ .79
Pro forma $ .45 $ .64 $ .47
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), "Share-Based Payment" ("SFAS No. 123-R"). SFAS No. 123(R) requires the
Company to measure compensation cost for all share-based payments at fair value
for interim and annual periods beginning with the Company's fiscal year
commencing July 1, 2005. As all outstanding unvested stock options were
accelerated in June 2005 (see Note 12), there will be no stock option
amortization expense in future periods unless additional stock options are
granted.
Accounting for the Impairment of Long-Lived Assets
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.
-36-
The following table sets forth the computation of basic and diluted earnings per
share pursuant to SFAS No. 128.
2005 2004 2003
---------- ---------- -----------
Numerator:
Net income $21,870 $27,008 $ 27,492
========== ========== ===========
Denominator (in thousands):
Denominator for basic earnings per share - weighted
average shares outstanding during the period 36,407 35,274 33,910
Effect of dilutive securities:
Stock options and awards 745 940 653
Warrants 1 94 159
---------- ---------- -----------
746 1,034 812
---------- ---------- -----------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 37,153 36,308 34,722
========== ========== ===========
Basic net income per share $ 0.60 $ 0.77 $ 0.81
========== ========== ===========
Diluted net income per share $ 0.59 $ 0.74 $ 0.79
========== ========== ===========
Options totaling 3,119,203 in 2005, 2,964,303 in 2004 and 4,528,953 in 2003,
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. STOCK KEEPING UNIT RATIONALIZATION
During 2005, we evaluated the portfolio of stock keeping units ("SKUs") we
maintained on our active list of products sold to our customers, and determined
that there were numerous underperforming SKUs that should be eliminated based on
their low volume of sales or insufficient margins due to disproportionate
manufacturing and other costs. As a result, cost of sales for 2005 includes a
charge for approximately $9.0 million of ingredient and finished goods
inventories, including the costs of disposal, for SKUs eliminated, and selling,
general and administrative expenses includes a charge for approximately $3.1
million for the write-off of deferred packaging design and other costs related
to these SKUs. While the SKU rationalization impacted products across virtually
all of our brands, approximately 20% of the charges were related to the
discontinuance of our CarbFit line of low-carbohydrate products.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
At June 30, 2005, included in trademarks and other intangible assets on the
balance sheet, is approximately $6.3 million of intangible assets deemed to have
a finite life which are being amortized over their estimated useful lives.
Goodwill and indefinite-life intangible assets 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 goodwill and indefinite-life intangible assets, and based on such
evaluations, no impairment existed at July 1, 2002 or through June 30, 2005.
Amounts assigned to indefinite-life intangible assets primarily represent the
values of trademarks.
-37-
The following table reflects the components of trademarks and other intangible
assets:
2005 2004
---------------------------------- -----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Other intangibles $ 6,290 $2,657 $ 4,189 $1,865
Non-amortized intangible assets:
Trademarks 63,861 6,484 59,953 6,484
Amortization of amortized intangible assets amounted to $.6 million in each of
2005 and 2004 and $.4 million in 2003, and is expected to approximate $.6
million in each of the next five fiscal years.
6. ACQUISITIONS
Fiscal 2005
On April 4, 2005, we acquired 100% of the stock of privately held Zia Cosmetics,
Inc., including the Zia(R) Natural Skincare brand, a respected leader in
therapeutic products for healthy, beautiful skin sold mainly through natural
food retailers. The purchase price consisted of approximately $10 million in
cash as well as the assumption of certain liabilities. The purchase price
excludes the amount of contingency payments we may be obligated to pay. The
contingency payments are based on the achievement by Zia of certain financial
targets over an approximate two-year period following the date of acquisition.
Such payments, which could total approximately $1.3 million, will be charged to
goodwill if and when paid. No such contingency payments have been made since the
acquisition. The net assets acquired, as well as the sales and operations of
Zia, are not material to the Company's consolidated financial position or the
results of operations.
Fiscal 2004
On June 3, 2004, we acquired 100% of the stock of privately-held Jason Natural
Products, Inc., a California-based manufacturer and marketer of natural personal
care products. In recent years, Jason Natural Products has expanded its lines of
natural personal care products by integrating a series of brands including
Orjene(R), Shaman Earthly Organics(TM), and Heather's(R) into its portfolio. The
purchase price consisted of approximately $23.9 million in cash, plus the
assumption of certain liabilities. At June 30, 2005, goodwill (not deductible
for tax purposes) from this transaction approximated $25.9 million.
On May 27, 2004, we acquired substantially all of the assets and assumed certain
liabilities of the Rosetto(R) and Ethnic Gourmet(R) brands of H.J. Heinz
Company, LP, which owned approximately 16.7% of our common stock at the time of
the transaction. These brands produce and market frozen pasta and natural ethnic
frozen meals, respectively. The purchase price consisted of approximately $22.8
million in cash, plus the assumption of certain liabilities. At June 30, 2005,
goodwill (deductible for tax purposes) from this transaction approximated $3.3
million, trademarks and other non-amortizable intangibles were $3.1 million, and
other amortizable intangibles were valued at $0.7 million.
-38-
The following table summarizes the estimated fair values of assets acquired and
liabilities assumed of Jason Natural Products, Rosetto, and Ethnic Gourmet at
the dates of the acquisitions:
Current assets $12,358
Property and equipment 12,871
Other assets 102
-------
Total assets 25,331
Liabilities assumed 4,321
-------
Net assets acquired $21,010
=======
The balance sheet at June 30, 2005, includes the assets acquired and liabilities
assumed valued at fair market value at the date of purchase. We have completed
all of the procedures required to finalize the purchase price allocation for
Jason, Rosetto, and Ethnic Gourmet.
Our results of operations for the year ended June 30, 2005 includes the results
of the above described fiscal 2004 acquisitions for the complete period. The
following table presents information about sales and net income had the
operations of the acquired brands been combined with our business as of the
first day of each of the periods shown. This information has not been adjusted
to reflect any changes in the operations of these brands subsequent to their
acquisition by us. Changes in operations of these acquired brands include, but
are not limited to, integration of systems and personnel, discontinuation of
products (including discontinuation resulting from the integration of acquired
and existing brands with similar products), changes in trade practices,
application of our credit policies, changes in manufacturing processes or
locations, and changes in marketing and advertising programs. Had any of these
changes been implemented by the former management of the brands acquired prior
to acquisition by us, the sales and net income information might have been
materially different than the actual results achieved and from the pro forma
information provided below.
2004 2003
------------ ------------
Net sales $ 599,599 $ 529,612
Net income 28,930 29,197
Earnings per share:
Basic $ .82 $ .86
Diluted .80 .84
Weighted average shares:
Basic 35,274 33,910
Diluted 36,308 34,722
In management's opinion, the unaudited pro forma results of operations is not
indicative of the actual results that would have occurred had the JASON(R),
Rosetto(R) and Ethnic Gourmet(R) acquisitions been consummated at the beginning
of the periods presented or of future operations of the combined companies under
our management.
On February 25, 2004, our subsidiary in Belgium acquired Natumi, AG, a German
producer of non-dairy beverages and desserts marketed principally in retail
channels in Europe. The purchase price consisted of approximately $1.75 million
in cash as well as the assumption of certain liabilities. The purchase price
excludes the amount of contingency payments we may be obligated to pay the
former owner of Natumi. The contingency payments are based on the achievement by
Natumi of certain financial targets over an approximate 3.5 year period
following the date of acquisition. Such payments, which could total
approximately 9 million euros, will be charged to goodwill if and when paid. No
such contingency payments have been made since the acquisition. The net assets
acquired, as
-39-
well as the sales and operations of Natumi, are not material to the Company's
consolidated financial position or results of operations and, therefore, have
not been included in the detailed information about our acquisitions.
Fiscal 2003
On June 17, 2003, we acquired 100% of the stock of privately-held Acirca, Inc.,
the owner of the Walnut Acres Organic(R) brand of organic fruit juices, soups,
pasta sauces and salsas. Since June 2000, the financial and investment group
Acirca, Inc. had 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
$9.0 million in cash, 134,797 shares of our common stock valued at $2.2 million,
plus the assumption of certain liabilities. At June 30, 2005, goodwill (not
deductible for tax purposes) from this transaction approximated $11.3 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 soymilks, 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 $7.0 million, plus the assumption of certain liabilities. At June 30, 2005,
goodwill (deductible for tax purposes) from this transaction was valued at $40.0
million, trademarks and other non-amortizable intangibles were $15.7 million,
and patents and other amortizable intangibles were valued at $1.0 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, 2005 includes the assets acquired and liabilities
assumed valued at fair market value at the date of purchase. We have completed
all of the procedures required to finalize the purchase price allocation for
Imagine and Acirca.
Our results of operations for the years ended June 30, 2005 and 2004 include the
results of the above described fiscal 2003 acquisitions for the complete period.
The following table presents information about sales and net income had the
operations of the acquired brands been combined with our business as of the
first day of the period shown. This information has not been adjusted to reflect
any changes in the operations of these brands subsequent to their acquisition by
us. Changes in operations of these acquired brands include, but are not limited
to, integration of systems and personnel, discontinuation of products (including
discontinuation resulting from the integration of acquired and existing brands
with similar products), changes in trade practices, application of our credit
policies, changes in manufacturing processes or locations, and changes in
marketing and advertising programs. Had any of these changes been implemented by
the former management of the brands acquired prior to acquisition by us, the
sales and net income information might have been materially different than the
actual results achieved and from the pro forma information provided below.
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2003
----------
Net sales $524,176
Net income 20,142
Earnings per share:
Basic $ 0.59
Diluted 0.57
Weighted average shares:
Basic 34,261
Diluted 35,073
In management's opinion, the unaudited pro forma results of operations is not
indicative of the actual results that would have occurred had the Acirca and
Imagine(R) 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.
7. INVENTORIES
Inventories consist of the following at June 30:
2005 2004
---------- -----------
Finished goods $48,240 $56,132
Raw materials, work-in-process and packaging 28,257 30,741
---------- -----------
$76,497 $86,873
========== ===========
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30:
2005 2004
----------- ------------
Land $ 7,481 $ 8,113
Buildings and improvements 31,766 29,867
Machinery and equipment 89,331 79,275
Furniture and fixtures 2,542 2,527
Leasehold improvements 2,955 3,478
Construction in progress 3,164 4,541
----------- ------------
137,239 127,801
Less:
Accumulated depreciation and amortization 49,035 40,799
----------- ------------
$ 88,204 $ 87,002
=========== ============
Assets held under capital leases, which are included within machinery and
equipment at June 30, 2005 and 2004, are not material.
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9. LONG-TERM DEBT
Long-term debt at June 30 consists of the following:
2005 2004
---------- -----------
Senior Revolving Credit Facilities payable to banks $89,700 $ 99,200
Capital leases on machinery and equipment 386 1,881
Other debt instruments 4,976 6,508
Economic Development Revenue Bonds, repaid November 2004 - 3,550
---------- -----------
95,062 111,139
Current Portion 2,791 6,845
---------- -----------
$ 92,271 $ 104,294
========== ===========
On April 22, 2004, we entered into a new $300 million credit facility (the
"Credit Facility") with a bank group led by our existing bank agents for a
five-year term expiring in April 2009. The Credit Facility provides for an
uncommitted $50 million accordion feature, under which the facility may be
increased to $350 million. The Credit Facility is secured only by a pledge of
shares of certain of our foreign subsidiaries and 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 an applicable
margin) or, at our option, the reserve adjusted LIBOR rate plus an applicable
margin. As of June 30, 2005, $89,700 million was borrowed under the Credit
Facility at an average interest rate of 3.7%.
Capital Leases
Capital leases on machinery and equipment of $0.4 million bear interest at rates
ranging from 2.0% to 12.3% and are due in monthly installments through July
2007.
The aggregate minimum future lease payments for all capital leases at June 30,
2005 are as follows:
2006 $ 294
2007 85
2008 7
---------
$ 386
=========
Other Debt Instruments
Other debt instruments consist of borrowings by our European operations under
several arrangements with a member of the group of banks that provide our Credit
Facility. These borrowings include $1.9 million under revolving credit
facilities with interest rates approximating 3.9%, and notes payable of $1.5
million, the majority of which is payable in quarterly installments plus
interest at 4.85% over a three year period through May 2008.
Economic Development Bonds
Borrowings related to Economic Development Revenue Bonds (the "Bonds") bear
interest at a variable rate (1.3% at June 30, 2004) and are secured by a letter
of credit. The Bonds, which would have matured November 1, 2009, were repaid in
2005.
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Maturities of all debt instruments at June 30, 2005, are as follows:
2006 $ 2,791
2007 2,081
2008 490
2009 89,700
----------
$ 95,062
==========
Interest paid (which approximates the related expense) during the years ended
June 30, 2005, 2004 and 2003 amounted to $3,899, $2,484 and $1,566,
respectively.
10. INCOME TAXES
The provision for income taxes for the years ended June 30, 2005, 2004 and 2003
is presented below.
2005 2004 2003
----------- ------------ ------------
Current:
Federal $ 8,790 $ 7,418 $ 4,906
State 1,841 1,612 2,372
Foreign 2,639 3,380 1,530
----------- ------------ ------------
13,270 12,610 8,808
Deferred Federal and State (629) 3,770 7,864
----------- ------------ ------------
Total $ 12,641 $ 16,380 $ 16,672
=========== ============ ============
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:
2005 2004
------------- --------------
Current deferred tax assets:
Basis difference on inventory $ 4,240 $ 2,007
Allowance for doubtful accounts 224 732
Net operating loss carryforwards 191 191
Reserves not currently deductible 1,016 181
------------- --------------
Current deferred tax assets 5,671 3,111
------------- --------------
Noncurrent deferred tax liabilities:
Difference in amortization (13,899) (12,486)
Basis difference on property and equipment (6,420) (5,667)
Noncurrent deferred tax assets:
Net operating loss carryforwards 3,024 3,346
Stock options as compensation 572 -
------------- --------------
Noncurrent deferred tax liabilities, net (16,723) (14,807)
------------- --------------
$ (11,052) $ (11,696)
============= ==============
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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:
2005 % 2004 % 2003 %
-------- -------- --------- --------- --------- -------
Expected U.S. federal income tax at statutory $12,079 35% $15,185 35.0% $15,457 35.0%
rate
State income taxes, net of federal benefit 997 2.9 1,501 3.5 1,653 3.7
Stock options 766 2.2 - - - -
Foreign income at different rates 160 0.5 448 1.0 297 0.7
Other (1,361) (3.9) (754) (1.7) (735) (1.7)
-------- -------- --------- --------- --------- -------
Provision for income taxes $12,641 36.7% $16,380 37.8% $16,672 37.7%
======== ======== ========= ========= ========= =======
Income taxes paid during the years ended June 30, 2005, 2004 and 2003 amounted
to $14.6 million, $4.7 million and $5.2 million, respectively.
11. STOCKHOLDERS' EQUITY
Restricted Stock Grant
In accordance with the terms of the employment agreement with our Chief
Executive Officer ("CEO"), on February 24, 2004, we granted 150,000 shares of
restricted common stock to our CEO. On the grant date, the market value of our
common stock was $20.90 per share and, therefore, the total market value of the
grant approximated $3.1 million. These shares will vest ratably from the date of
grant through expiration of the employment agreement on June 30, 2007. Through
June 30, 2005, 60,414 shares have vested. For the years ended June 30, 2005 and
2004, approximately $0.9 million and $0.3 million are included in non-cash
compensation.
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, 2005 and 2004, no preferred stock was issued or
outstanding.
Warrants
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 $0.3 million. In fiscal 2004, Argosy exercised 36,667 of the
warrants resulting in proceeds of $0.5 million. During fiscal 2005, the
remaining 36,667 warrants were exercised resulting in proceeds of $0.5 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. During fiscal 2004,
the remaining 322,764 warrants were exercised resulting in proceeds of $1.0
million.
12. STOCK OPTION PLANS
Acceleration of Vesting of Stock Options
In June 2005, our board of directors approved the acceleration of the vesting of
all outstanding unvested stock options held by employees. This action was taken
in order to reduce future compensation charges for these stock options and to
provide an incentive to employees in view of the uncertainty of future
equity-based compensation with
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the pending implementation of SFAS No. 123(R). As a result of this action,
approximately 1.2 million outstanding unvested stock options were accelerated
(approximately 56,000 of which were at exercise prices greater than market price
at the date of acceleration), substantially all of which were granted in August
2004 at an exercise price of $16.01 per share with original vesting through
August 2006. We recognized a charge to earnings for the difference between the
market value of our stock on the date of acceleration and the exercise price of
the options, such charge amounting to approximately $3.7 million ($3.1 million
net of tax) for the year ended June 30, 2005. As a result of this action, there
will be no stock option amortization expense in future periods unless additional
stock options are granted.
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 2003, options to purchase 565,000 shares were granted at prices
ranging from $12.13 to $16.30 per share. During 2004, options to purchase
195,550 shares were granted at prices ranging from $18.25 to $20.90. During
2005, options to purchase 212,500 shares were granted at a price of $16.01. At
June 30, 2005, 5,832 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 were originally reserved for
issuance under this plan. In December 2003, the plan was amended to increase the
number of shares issuable by 1,500,000 shares to 3,100,000 shares. 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 shares were granted at prices ranging from $11.84 to $16.24
per share. During 2004, options to purchase 116,300 shares were granted at
prices ranging from $15.85 to $18.63 per share. During 2005, options to purchase
1,545,400 shares were granted at prices ranging from $16.01 to $20.57 per share.
At June 30, 2005, 92,200 options were available for grant under this plan.
Our 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 of
$46,000 annually over the ten-year vesting period based on the excess ($0.5
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 originally
provided for the granting of stock options to non-employee directors to purchase
up to an aggregate of 750,000 shares of our common stock. In De-
-45-
cember 2003, the plan was amended to increase the number of shares issuable by
200,000 shares to 950,000 shares. At June 30, 2001, no options were granted
under this plan. During 2003, options for an aggregate of 300,000 shares were
granted at prices ranging from $12.13 to $17.88 per share. During 2004, options
for an aggregate of 163,000 shares were granted at prices ranging from $18.03 to
$22.08. During 2005, options to purchase 67,500 shares were granted at a price
of $18.11 per share. At June 30, 2005, 219,500 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. The exercise price of
options designed to qualify as incentive options was $3.58 per share and the
exercise price of non-qualified options was $3.25 per share. No exercises were
made during 2003. During fiscal 2004, the remaining outstanding 535,000 options
were exercised. As of June 30, 2004, no additional shares are available for
grant under this plan.
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.
-46-
A summary our stock option plans' activity for the three years ended June 30,
2005 follows:
2005 2004 2003
-------------------------- ----------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ ----------- ----------- ---------- ----------- -----------
Outstanding at beginning of year 6,769,437 $18.67 8,266,721 $17.05 6,023,383 $18.72
Granted 1,829,900 16.35 474,850 20.23 2,347,700 12.92
Exercised (374,683) 12.75 (1,744,495) 10.92 (67,821) 9.24
Terminated (126,550) 21.57 (227,639) 20.95 (36,541) 23.17
------------ ----------- ----------- ---------- ----------- -----------
Outstanding at end of year 8,098,104 $18.37 6,769,437 $18.67 8,266,721 $17.75
============ =========== =========== ========== =========== ===========
Exercisable at end of year 8,098,104 $18.37 6,162,554 $19.09 6,675,738 $18.18
============ =========== =========== ========== =========== ===========
Weighted average fair value of
options granted during year $ 16.35 $ 9.77 $12.95
============ =========== ===========
The following table summarizes information for stock options outstanding at June
30, 2005:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted Options Weighted
Options Remaining Average Exercisable Average
Range of Outstanding Contractual Exercise as of Exercise
Exercise Prices as of 06/30/2005 Life (in years) Price 06/30/2005 Price
- ---------------------------- ---------------- --------------- ---------- ------------ -----------
$2.94 - $6.75 420,644 15.8 $ 4.18 420,644 $ 4.18
6.76 - 12.50 663,145 7.3 11.79 663,145 11.79
12.51 - 17.65 3,030,412 7.5 15.95 3,030,412 15.95
17.66 - 19.19 922,700 6.6 18.10 922,700 18.10
19.20 - 22.73 1,456,830 6.0 21.07 1,456,830 21.07
22.74 - 25.68 160,930 3.7 23.50 160,930 23.50
25.69 - 29.35 1,227,193 5.1 26.78 1,227,193 26.78
29.36 - 33.01 216,250 5.2 31.54 216,250 31.54
---------------- --------------- ---------- ------------ -----------
8,098,104 6.4 $ 18.37 8,098,104 $ 18.37
================ =============== ========== ============ ===========
There were 8,413,636 shares of Common Stock reserved for future issuance as of
June 30, 2005.
Common Stock Issued - Business Acquisitions
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.
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 2013. These leases provide for additional
payments of real estate taxes and other operating expenses over a base period
amount.
-47-
The aggregate minimum future lease payments for these operating leases at June
30, 2005, are as follows:
2006 $ 5,354
2007 4,813
2008 2,939
2009 2,812
2010 2,619
Thereafter 5,388
---------
$ 23,925
=========
Rent expense charged to operations for the years ended June 30, 2005, 2004 and
2003 was approximately $5,491, $4,087 and $4,200, respectively.
14. SEGMENT INFORMATION
Our company is engaged in one business segment: the manufacturing, distribution
and marketing of natural and organic food and personal care 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 our chief
operating decision maker.
The Company's sales by product category are as follows:
2005 2004 2003
--------- ----------- ----------
Grocery $343,445 $303,377 $247,315
Snacks 87,207 78,554 69,036
Tea 100,871 95,786 92,048
Other 88,444 66,341 58,060
--------- ----------- ----------
$619,967 $544,058 $466,459
========= =========== ==========
Outside the United States, we primarily conduct business in Canada and Europe.
Selected information related to our operations by geographic area are as
follows:
2005 2004 2003
------------------------------ -------------------------------- -----------------------------
United United United
States Canada Europe States Canada Europe States Canada Europe
-------- ------- -------- --------- -------- --------- --------- -------- --------
Net sales $489,096 $46,833 $84,038 $433,787 $48,326 $61,945 $385,569 $41,498 $39,392
Earnings before
income taxes 26,743 3,291 4,477 34,437 4,670 4,281 37,287 5,460 1,417
Long lived assets 426,571 50,082 36,289 425,563 43,424 16,930 374,957 39,541 17,342
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, 2005, 2004 and 2003, we made contributions to the Plan of $295, $244 and
$228, respectively.
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16. 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.
17. SUBSEQUENT EVENTS
Hain Pure Protein Corporation
On July 1, 2005, the Company acquired a 50.1% controlling interest in Hain Pure
Protein Corporation ("HPP"), with the remaining minority interest of 49.9%
acquired by Pegasus Capital Advisors, LP, a private equity firm. On the same
date, HPP acquired the business and assets, subject to certain liabilities, of
College Hill Poultry, a processor of natural and organic, antibiotic and hormone
free chickens. The Company's investment in HPP is not, and the sales and
operating results of HPP are not expected to be, material to the Company's
consolidated financial position or results of operations.
Alliance with Yeo Hiap Seng Limited
On August 3, 2005, the Company and Yeo Hiap Seng Limited ("YHS"), a Singapore
based natural food and beverage company listed on the Singapore Stock Exchange,
entered into an agreement to exchange, and subsequently did exchange, $2 million
in equity investments in each other resulting in the issuance of 100,482 shares
of the Company's common stock to YHS and the issuance of 1,326,938 ordinary
shares of YHS (representing less than 1% of the outstanding shares) to the
Company. These investments represent the completion of the first stage of an
alliance established between the Company and YHS which is expected to result in
the pursuit of joint interests in marketing and distribution of food and
beverages and product development.
Spectrum Organic Products, Inc.
On August 23, 2005, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Spectrum Organic Products, Inc. ("Spectrum")
whereby the Company will acquire all of the issued and outstanding stock of
Spectrum.
Spectrum is a California-based leading manufacturer and marketer of natural and
organic culinary oils, vinegars, condiments and butter substitutes under the
Spectrum Naturals(R) brand and essential fatty acid nutritional supplements
under the Spectrum Essentials(R) brand, sold mainly through natural food
retailers. Spectrum reported sales of $49.9 million for its last fiscal year.
Upon the effective time of the merger, the Company will pay approximately $0.705
per share, adjusted to reflect Spectrum's estimate of their expenses and the
price adjustment provisions set forth in the Merger Agreement. The total
consideration to be paid by the Company to Spectrum's shareholders is expected
to be approximately $34,500,000, which shall be comprised of 50% cash and 50% of
the Company's common stock. The value of the common stock portion of the
consideration is subject to an adjustment based upon the closing price of the
Company's common stock immediately prior to the closing of the merger, which is
expected to take place in November 2005. The transaction has been approved by
the boards of directors of both companies and is subject to approval by
Spectrum's shareholders and other customary conditions.
-49-
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
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.
Management's Report on Internal Control over Financial Reporting
Management, including our Chief Executive Officer and our Chief Financial
Officer, is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control system was
designed to provide reasonable assurance to the Company's management and board
of directors regarding the preparation and fair presentation of the published
financial statements in accordance with generally accepted accounting
principles.
Management assessed the effectiveness of our internal control over financial
reporting as of June 30, 2005. In making this assessment, management used the
criteria set forth by the Committee on Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control--Integrated Framework. Based on our
assessment, we believe that, as of June 30, 2005, our internal control over
financial reporting is effective based on those criteria.
Management's assessment of the effectiveness of internal control over financial
reporting as of June 30, 2005 has been audited by Ernst & Young LLP, the
independent registered public accounting firm who also audited the Company's
consolidated financial statements. Ernst & Young's attestation report on
management's assessment of the Company's internal control over financial
reporting follows.
-50-
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors of
The Hain Celestial Group, Inc. and Subsidiaries
We have audited management's assessment, included in the accompanying The Hain
Celestial Group, Inc.'s (the Company) Management Assessment Report, that the
Company maintained effective internal control over financial reporting as of
June 30, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of June 30, 2005, is fairly stated,
in all material respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
The Hain Celestial Group, Inc. and Subsidiaries as of June 30, 2005 and 2004,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 2005 of the
Company and our report dated August 31, 2005 expressed an unqualified opinion
thereon.
/s/Ernst & Young LLP
Melville, New York
August 31, 2005
-51-
Changes in Internal Controls over Financial Reporting.
There were no significant changes in our internal controls over financial
reporting during the fourth fiscal quarter of the period covered by this report.
Item 9B. Other Information
Not applicable.
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 November 15, 2005, 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 and Financial Statement Schedules.
(a) (1) List of Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - June 30, 2005 and 2004
Consolidated Statements of Income - Years ended June 30, 2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity - Years ended June 30, 2005,
2004 and 2003
Consolidated Statements of Cash Flows - Years ended June 30, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedules
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).
-52-
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).
4.5.1 Amendment No. 1 to 2000 Directors Stock Option Plan (incorporated by
reference to Exhibit 4.4 to the Registrant's Registration Statement on Form
S-8 (Commission File No. 333-111881) filed with the Commission on January
13, 2004).
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).
4.6.1 Amendment No. 1 to 2002 Long Term Incentive and Stock Award Plan
(incorporated by reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 (Commission File No. 333-111881) filed with the
Commission on January 13, 2004).
10.1 Amended and Restated Credit Agreement dated as of April 22, 2004, by and
among the Registrant and Fleet National bank, as administrative agent,
SunTrust Bank and KeyBank National Association, as co-syndication agents,
HSBC Bank USA and First Pioneer Farm Credit, ACA, as co-documentation
agents, and the lenders party thereto (incorporated by reference to Exhibit
10.1 of the Registrant's Current Report on Form 8-K filed with the
Commission on April 30, 2004).
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 Employment Agreement between the Registrant and Irwin D. Simon, dated July
1, 2003 (incorporated by reference to Exhibit 10.1 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
2003, filed with the Commission on November 14, 2003).
10.6 Form of Indemnification Agreement (incorporated by reference to Exhibit
10.1 of the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 2004, filed with the Commission on February 9,
2005).
-53-
10.7 Form of Change in Control Agreement (incorporated by reference to Exhibit
10.2 of the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 2004, filed with the Commission on February 9,
2005).
10.8 Amendment and Waiver, dated as of March 7, 2005, to Amended and Restated
Credit Agreement dated as of April 22, 2004 by and among the Company, the
lenders which from time to time are parties thereto, Fleet National Bank, a
Bank of America company, as administrative agent, SunTrust Bank and KeyBank
National Association, as co-syndication agents, and HSBC Bank USA, National
Association and First Pioneer Farm Credit, ACA, as co-documentation agents
(incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed with the Commission on March 11, 2005).
10.9 Agreement and Plan of Merger dated as of August 23, 2005, by and between
The Hain Celestial Group, Inc. and Spectrum Organic Products, Inc.
(incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed with the Commission on August 26, 2005).
10.10 Voting and Support Agreement dated as of August 23, 2005, by and between
The Hain Celestial Group, Inc. and Jethren Phillips (incorporated by
reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K
filed with the Commission on August 26, 2005).
21.1(a) Subsidiaries of Registrant.
23.1(a) Consent of Independent Registered Public Accounting Firm - Ernst & Young
LLP.
31.1(a) Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2(a) Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1(a) Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(a) 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
-54-
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 Balance of
beginning of costs and other accounts - Deductions - end of
period expenses describe describe period
------------ ------------ ---------------- ------------- ------------
Year Ended June 30, 2005 Deducted
from asset accounts:
Allowance for doubtful accounts $2,185 $ 68 $ - $ 179 (2) $ 2,074
Year Ended June 30, 2004 Deducted
from asset accounts:
Allowance for doubtful accounts $1,748 $ 437 $ 10 (1) $ 10 (2) $ 2,185
Year Ended June 30, 2003 Deducted
from asset accounts:
Allowance for doubtful accounts $1,002 $ 610 $ 190 (1) $ 54 (2) $ 1,748
(1) Allowance for doubtful accounts at dates of acquisitions of acquired brands.
(2) Uncollectible accounts written off, net of recoveries.
-55-
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
President, Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ Ira J. Lamel
---------------------------------------
Ira J. Lamel
Executive Vice President and
Chief Financial Officer
Date: September 13, 2005
-56-
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 Executive Officer September 13, 2005
- --------------------------------------- and Chairman of the Board of
Irwin D. Simon Directors
/s/ Ira J. Lamel Executive Vice President and Chief September 13, 2005
- --------------------------------------- Financial Officer
Ira J. Lamel
/s/ Barry J. Alperin Director September 13, 2005
- ---------------------------------------
Barry J. Alperin
/s/ Beth L. Bronner Director September 13, 2005
- ---------------------------------------
Beth L. Bronner
/s/ Jack Futterman Director September 13, 2005
- ---------------------------------------
Jack Futterman
/s/ Daniel R. Glickman Director September 13, 2005
- ---------------------------------------
Daniel R. Glickman
/s/ Marina Hahn Director September 13, 2005
- ---------------------------------------
Marina Hahn
/s/ Andrew R. Heyer Director September 13, 2005
- ---------------------------------------
Andrew R. Heyer
/s/ Roger Meltzer Director September 13, 2005
- ---------------------------------------
Roger Meltzer
Director September 13, 2005
- ---------------------------------------
Mitchell A. Ring
/s/ Lewis D. Schiliro Director September 13, 2005
- ---------------------------------------
Lewis D. Schiliro
/s/ D. Edward I. Smyth Director September 13, 2005
- ---------------------------------------
D. Edward I. Smyth
/s/ Larry S. Zilavy Director September 13, 2005
- ---------------------------------------
Larry S. Zilavy
-57-
Exhibit 21.1
Jurisdiction of
Subsidiary Incorporation
- ---------- -------------
Acirca, Inc. Delaware
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
Jason Natural Products, Inc. California
Yves Fine Foods Inc. Nevada
Fruit Specialties B.V. Netherlands
The Organic Production S.A. Belgium
W.S.L. NV Belgium
Grains Noirs SA Belgium
Societe Anonyme de Gestion et D'administration SA Belgium
Natumi AG Germany
Hain Europe NV Belgium
Lima SA/NV Belgium
Lima France S.A.R.L. France
Biomarche S.C.R.L. Belgium
Zia Cosmetics, Inc. California
Hain Pure Protein Corporation Delaware
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form
S-8 Nos. 333-33828, 333-102017 and 333-111881), 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 Subsidiaries and in the related Prospectus of our reports dated August
31, 2005, with respect to the consolidated financial statements and schedule of
The Hain Celestial Group, Inc. and Subsidiaries, The Hain Celestial Group Inc.'s
management's assessment of the effectiveness of internal control over financial
reporting, and the effectiveness of internal control over financial reporting of
The Hain Celestial Group, Inc. and Subsidiaries included in this Annual Report
(Form 10-K) for the year ended June 30, 2005.
/s/ Ernst & Young LLP
Melville, New York
September 13, 2005
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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) 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
(d) 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 13, 2005
/s/ Irwin D. Simon
--------------------------------------
Irwin D. Simon
President and Chief Executive Officer
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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) 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
(d) 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 13, 2005
/s/ Ira J. Lamel
---------------------------------
Ira J. Lamel
Executive Vice President
and Chief Financial Officer
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,
2005 (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 13, 2005
/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.
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,
2005 (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 13, 2005
/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.
