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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, 2007
| ¨ | 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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 58 South Service Road Melville, New York |
11747 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (631) 730-2200
Securities registered pursuant to Section 12(b) of the Act:
| (Title of Each Class) | (Name of Each Exchange on which registered) | |
| Common Stock, par value $.01 per share | The NASDAQ Stock Market® |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 ¨ No x
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
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 System on December 29, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,218,555,438.
As of January 23, 2008, there were 40,089,863 shares outstanding of the registrant’s Common Stock, par value $.01 per share.
Documents Incorporated by Reference: None
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Explanatory Note
This Annual Report on Form 10-K for our fiscal year ended June 30, 2007 (the “2007 Form 10-K”), includes restatements of our consolidated balance sheet as of June 30, 2006 and our consolidated statements of operations, stockholders’ equity, and cash flows for each of the fiscal years ended June 30, 2006 and 2005.
This restatement is a result of an independent investigation of our historical stock option granting processes and related accounting conducted by a group of four of our independent directors (“Independent Directors”), with the assistance of independent counsel. The investigation included a review of options granted by the Company from its initial public offering in November 1993 through May 6, 2005, the last date on which stock options were granted. The investigation did not include options granted by companies acquired by us prior to the acquisitions. Based on the findings of the investigation, corrections to our consolidated financial statements were required to reflect additional charges for stock-based compensation expenses and related income tax effects. This restatement is more fully described in Note 3, “Restatement of Consolidated Financial Statements,” to the consolidated financial statements and in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This 2007 Form 10-K also reflects the restatement of “Selected Financial Data” in Item 6 for the fiscal years ended June 30, 2006, 2005, 2004 and 2003.
We have not amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K.
THE HAIN CELESTIAL GROUP, INC.
| Item 1. | Business. |
Unless otherwise indicated, references in this Annual Report to 2007, 2006, 2005 or “fiscal” 2007, 2006, 2005 or other years refer to our fiscal year ended June 30 of that year and references to 2008 or “fiscal” 2008 refer to our fiscal year ending June 30, 2008.
The Hain Celestial Group, Inc. 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 and organic 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®, Hain Pure Foods®, Westbrae Natural®, WestSoy®, Rice Dream®, Soy Dream®, Imagine®, Walnut Acres Organic®, Ethnic Gourmet®, Rosetto®, Little Bear Organic Foods®, Bearitos®, Arrowhead Mills®, Health Valley®, Breadshop’s®, Casbah®, Spectrum Naturals®, Spectrum Essentials®, Hollywood®, Garden of Eatin’®, Terra®, Harry’s Premium Snacks®, Boston’s The Best You’ve Ever Tasted®, Lima®, Grains Noirs™, Natumi®, Yves Veggie Cuisine®, DeBoles®, Earth’s Best®, Nile Spice®, Linda McCartney® (under license), Realeat®, Granose®, TofuTown® and WhiteWave® (under license, with a term of 12 months expiring in June 2008). The Company’s principal specialty product lines include Estee® sugar-free products and Alba®. Our natural personal care products line is marketed under the Avalon Organics®, Alba Botanica®, JASON®, Zia®, Orjene®, Shaman Earthly Organics®, Heather’s®, Queen Helene®, Batherapy®, Shower Therapy®, Footherapy® and TenderCare® brands. Our natural and organic antibiotic-free chicken is marketed under the FreeBird™ brand and our antibiotic-free turkey is marketed under the Plainville Farms® brand. We operate in one segment, the sale of natural and organic products, including food, beverage and personal care products. See Notes 1 and 18 to the Consolidated Financial Statements included in Item 15 of this Form 10-K for additional information about segments, as well as information about our geographic operations.
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 retailers, drug stores, food service channels and club stores. During 2007, 2006 and 2005, approximately 46%, 47% and 47%, respectively, of our
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revenues were derived from products manufactured within our own facilities. The remaining 54%, 53% and 53%, for 2007, 2006 and 2005, respectively, of our revenues were derived from products which are produced by independent manufacturers (“co-packers”) using proprietary specifications.
The Hain Celestial Group, Inc. was incorporated in Delaware in 1993. Our worldwide headquarters office is located at 58 South Service Road, Melville, New York, 11747. Since our formation, we have completed a number of acquisitions of companies and brands. In the last three fiscal years, we have acquired the following companies and brands:
| • |
On June 8, 2007 we acquired the tofu and meat-alternative business of WhiteWave Foods Company. The product line includes baked and grilled tofu, seitan, tempeh and other traditional tofu items which are sold under the TofuTown® and WhiteWave® (under license) brand names. |
| • |
On January 11, 2007 we acquired Avalon Natural Products, Inc., including the Avalon Organics® and Alba Botanica® brands, a leader in the natural personal care products category in the areas of skin care, hair care, bath and body and sun care. |
| • | On December 8, 2006 we acquired the business and certain assets of Haldane Foods Limited, a producer of meat-free food and non-dairy beverage products. |
| • |
On June 12, 2006 we acquired the Linda McCartney® brand (under license) and the frozen meat-free business from the H.J. Heinz Company, L.P. (“Heinz”) including a manufacturing facility based in Fakenham, England. |
| • | On April 30, 2006 we acquired the fresh prepared food business based in Luton, England from Heinz. |
| • |
On March 3, 2006 we acquired the business and assets of Para Laboratories, Inc., including the Queen Helene®, Batherapy®, Shower Therapy® and Footherapy® brands of skin care, hair care, and body care products for professional and personal use. |
| • |
On December 16, 2005 we acquired Spectrum Organic Products, Inc., a leading manufacturer and marketer of natural and organic culinary oils, vinegars, condiments and butter substitutes under the Spectrum Naturals® brand and nutritional supplements under the Spectrum Essentials® brand. |
| • | On July 1, 2005 we acquired a 50.1% controlling interest in Hain Pure Protein Corporation, which specializes in natural and organic antibiotic-free poultry. |
| • |
On April 4, 2005 we acquired Zia Cosmetics, Inc., including the Zia® Natural Skincare brand, a leader in therapeutic products for healthy, beautiful skin sold mainly through natural food retailers. |
In addition, in August 2007 we acquired the assets and business of Plainville Turkey Farm, Inc. through Hain Pure Protein Corporation. Plainville is a leading supplier of natural and antibiotic-free whole turkeys and deli turkey products, under the Plainville Farms® brand, to the natural and grocery channels in the Northeast and Mid-Atlantic regions.
In December 2007 we acquired TenderCare International Inc. TenderCare is a marketer and distributor of chlorine-free and gel-free natural diapers and baby wipes under the TenderCare® and Tushies® brand names.
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
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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, 2007, we employed a total of 2,131 full-time employees. Of these employees, 143 were in sales and 1,308 in production, with the remaining 680 employees filling management, accounting, marketing, operations and clerical positions.
Grocery
We develop, manufacture, market and distribute a comprehensive line of branded natural and organic grocery products in numerous categories including non-dairy beverages (such as soy, rice and oat) popcorn cakes, cookies, crackers, flour and baking mixes, hot and cold cereals, pasta, baby food, condiments, cooking and culinary 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®, Westbrae Natural®, WestSoy®, Imagine®, Rice Dream®, Soy Dream®, Walnut Acres Organic®, Ethnic Gourmet®, Bearitos®, Arrowhead Mills®, DeBoles®, Rosetto®, Ethnic Gourmet®, Health Valley®, Hollywood®, Casbah®, Spectrum Naturals®, Spectrum Essentials®, Breadshop’s®, Nile Spice®, Earth’s Best® and Lima® 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 products accounted for approximately 51% of total net sales in 2007, 51% in 2006, and 55% in 2005.
Snacks
We develop, manufacture, market and distribute a full line of branded snack products including a variety of potato and vegetable chips, organic tortilla style chips, pretzels and popcorn under the Terra®, Garden of Eatin’®, Little Bear Organic Foods®, Boston’s The Best You’ve Ever Tasted®, Bearitos® and Harry’s Premium Snacks® names. Terra® natural snack food products consist of varieties of potato chips, sweet potato chips and other vegetable chips. Garden of Eatin’® natural snack food products consist of organic tortilla chip products and other snacks. Boston’s The Best You’ve Ever Tasted Popcorn and Harry’s Premium Snacks® products consist of popcorn, potato chips, tortilla chips and other snack food items. Snacks accounted for approximately 11% of total net sales in 2007, 13% in 2006 and 14% in 2005.
Teas and Coffees
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 manufacturer and marketer of specialty tea in North America. Our teas are sold in mass-market retailers, 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®, Lemon Zinger®, Peppermint, Chamomile, Mandarin Orange Spice®, Cinnamon Apple Spice™, Red Zinger®, Raspberry Zinger®, Tension Tamer®, Country Peach Passion® and Wild Berry Zinger®, a line of green teas, a line of wellness teas, a line of organic teas, a line of specialty black teas, chais and our new line of Go Stix™ for kids. In early fiscal 2008, we introduced our new Saphara™ super premium teas, which are certified fair trade and organic, whole leaf teas in a pyramid tea bag. Our tea products include over 90 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 and natural ciders. Tea beverages accounted for approximately 10% of total net sales in 2007, 14% 2006 and 16% in 2005.
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In addition to our traditional tea products, in fiscal 2008 we expanded our offerings to include a new line of Celestial Seasonings Coffee, consisting of five certified fair trade and organic, whole bean blends.
Personal Care Products
We develop, manufacture, market and distribute a full line of personal care products including skin care, hair care, body care, oral care, and deodorants under the Avalon Organics®, Alba Botanica®, JASON®, Earth’s Best Organic® Baby Body Care, Zia®, Orjene®, Shaman Earthly Organics®, Queen Helene®, Batherapy®, Shower Therapy®, Footherapy® and TenderCare® brands. Our personal care products are sold in mass-market retailers, grocery, natural foods and other retail stores. We also manufacture and market a brand of natural cleaning products under the Heather’s® brand. Personal care products accounted for approximately 10% of total net sales in 2007, 6% in 2006, and 5% in 2005.
Other
Meat Alternative Products
We manufacture, market and distribute a full line of soy protein meat alternative products under the Yves Veggie Cuisine® brand name including such well-known products as The Good Dog®, The Good Lunch™ and The Good Slice®, among others. We produce a line of tofu products which are sold under the TofuTown® and WhiteWave® (under license) brand names. We also manufacture, market and distribute a full line of meat-free frozen products with the Linda McCartney® (under license), Realeat® and Granose® brands. Meat alternative products provide consumers with the health benefits of soy without the health concerns associated with traditional meat products. Our meat alternative products and other meat-free ingredients include veggie burgers, veggie wieners, veggie slices, veggie entrees, veggie ground round and veggie skewers. Our Yves Veggie Cuisine® meat alternative brand operates from our facility in Vancouver, British Columbia in Canada. Our TofuTown® and WhiteWave® brands are produced in our Boulder, Colorado facility. Our Linda McCartney®, Realeat® and Granose® brands operate from our facility in Fakenham, England.
Fresh
We process, market and distribute fresh prepared foods from our facility in Luton, England, and from our Grains Noirs facility in Brussels, Belgium. Products include fresh organic sandwiches, appetizers and full-plated meals for distribution to retailers, caterers, and food service providers, such as those in the transportation business.
We process natural and organic, antibiotic- and hormone-free chickens marketed and distributed to natural food stores, supermarkets and food service providers under the FreeBird™ brand. We have expanded our offerings to include antibiotic-free turkeys and turkey deli products with the August 2007 acquisition of the Plainville Farms® brand.
Medically-Directed and Weight Management Products
Our Estee® and Featherweight® brands market and distribute a 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 quality, taste, nutritional value and cost and make improvements where possible. We discontinue products or stock keeping units (“SKU’s”) when sales of those items do not warrant further production.
New Product Initiatives Through Research and Development
We consider research and development of new products to be a significant part of our overall philosophy and we are committed to developing high-quality products. A team of professional product developers, including microbiologists, nutritionists, food scientists, chefs and chemists, work to develop products to meet consumers’ changing
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needs. Our Research and Development staff 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 staff routinely reformulates and revises existing products. We incurred approximately $1.5 million in Company-sponsored research and development activities in 2007, $1.2 million in 2006 and $2.6 million in 2005. Our research and development expenditures do not include the expenditures on such activities undertaken by co-packers who develop numerous products on their own initiative with the expectation that we will accept their new product ideas and market them under our brands. These efforts by co-packers have resulted in a substantial number of our new product introductions. We are unable to estimate the amount of expenditures made by co-packers on research and development; however, we believe such activities and expenditures are important to our continuing ability to introduce new products.
Our products are sold in all 50 states and in more than 50 countries. Our customer base consists principally of natural food distributors, mass-market retailers, supermarkets, drug store chains, club stores and grocery wholesalers. While the natural food channel continues to grow, growth in the grocery channels has accelerated as increased consumer awareness and demand has resulted in mainstream grocery retailers providing more natural and organic products.
In the United States, our products are sold through a combination of internal direct sales professionals, supported by third-party food brokers. Food brokers act as agents for us within designated territories, usually on a non-exclusive basis, and receive commissions. We utilize our internal retail direct sales force for sales into natural food stores, which has allowed us to reduce our reliance on food brokers.
A majority of the products marketed by us are sold through independent food distributors. 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 to the retailers are generally made in their sole discretion. We may influence product pricing with the use of promotional incentives. In fiscal 2007, 2006 and 2005, one of our distributors, United Natural Foods, Inc., accounted for approximately 20%, 21% and 22% of net sales, respectively.
Our subsidiaries in Canada and Europe sell to all major channels of distribution in the countries they serve. International sales represented approximately 24.9% of total net sales in 2007, 19.3% in 2006 and 21.1% in 2005.
Certain of our product lines have seasonal fluctuations (e.g., hot tea, baking, hot cereal and soup sales are stronger in colder months while sales of snack foods are stronger in the warmer months).
We use a combination 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 2007, 2006 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. During fiscal 2006, we initiated sponsorship programs including Earth’s Best® with PBS Kids and Sesame Street, and Terra® as The Official Chip of Madison Square Garden. We continued these sponsorship programs in fiscal 2007. In addition, Celestial Seasonings® continued its partnership with The Heart Truth Campaign. There is no guarantee that these promotional investments in consumer spending will be successful.
We currently manage and operate the following manufacturing facilities located throughout the United States: Celestial Seasonings®, in Boulder, Colorado, which produces specialty teas; Terra®, in Moonachie, New Jersey,
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which produces vegetable chips; Arrowhead Mills®, in Hereford, Texas, which produces cereals and baking goods; DeBoles®, in Shreveport, Louisiana, which produces organic and gluten-free pasta; a frozen foods facility in West Chester, Pennsylvania, which produces Ethnic Gourmet® frozen meals and Rosetto® frozen pasta; a tofu facility in Boulder, Colorado, which produces our TofuTown® and WhiteWave® fresh meat-free alternative products; JASON®, in Culver City, California, which produces personal care products; and Hain Pure Protein in Fredericksburg, Pennsylvania and Plainville, New York, which processes natural and organic antibiotic-free chickens and turkeys.
Outside the United States, we have the following manufacturing facilities: Yves Veggie Cuisine® in Vancouver, British Columbia, which produces soy-based meat alternative products; Hain Celestial Belgium, with its Grains Noirs® facility in Brussels, Belgium, which prepares fresh organic appetizers, salads, sandwiches and other full-plated dishes; Natumi in Eitorf, Germany, which produces soymilk and other non-dairy beverages; our Luton, England facility where we produce fresh prepared foods; our Fakenham, England facility where we produce meat-free frozen foods; and our Manchester, England facility, where we produce non-dairy beverages.
We own the manufacturing facilities in Moonachie, New Jersey; Boulder, Colorado; Hereford, Texas; Shreveport, Louisiana; West Chester, Pennsylvania; Fredericksburg, Pennsylvania; Plainville, New York; Vancouver, British Columbia and Fakenham, England. During 2007, 2006 and 2005, approximately 46%, 47% and 47%, respectively, of our revenue was derived from products manufactured at our 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 a limited number of ingredients not available domestically or purchased to complement our domestic supply, which is not sufficient to meet our demand, is purchased from the Far East, including China.
All of our ingredients are purchased based upon requirements designed to meet rigid specifications for food safety and comply with applicable regulations. The Company works with reputable suppliers who assure the quality and safety of their ingredients. These assurances are supported by signed affidavits, certificates of analysis and analytical testing. Additionally, many of our food products receive independent third-party organic and kosher certification.
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 selected 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), the U.S. Department of Agriculture (USDA) and the U.S. Environmental Protection Agency (EPA).
Currently, independent manufacturers, who are referred to in our industry as co-packers, manufacture many of our products, including our Health Valley®, Breadshop’s®, Casbah®, Bearitos®, Nile Spice®, Harry’s Premium Snacks®, Boston’s The Best You’ve Ever Tasted®, Alba®, Estee®, Earth’s Best’s®, Garden of Eatin’®, Hain Pure Foods®, Hollywood®, Little Bear Organic Foods®, Westbrae Natural®, WestSoy®, Rice Dream®, Soy Dream®, Imagine®, Walnut Acres Organic®, Spectrum Naturals®, Spectrum Essentials®, Lima®, Avalon Organics®, Alba Botanica®, Queen Helene®, Batherapy® , Shower Therapy®, Footherapy®, Zia® and some of our Terra®, Rosetto®,
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Arrowhead Mills®, Yves Veggie Cuisine® and Ethnic Gourmet® product lines. During 2007, 2006 and 2005, approximately 54%, 53% and 53%, respectively, of our revenue was derived from products manufactured at independent co-packers.
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®, Bearitos®, Breadshop’s®, Casbah®, Spectrum Naturals®, Spectrum Essentials®, Celestial Seasonings®, DeBoles®, Earth’s Best®, Estee®, Ethnic Gourmet®, Garden of Eatin’®, Hain Pure Foods®, Health Valley®, Imagine®, JASON®, Zia®, Orjene®, Shaman Earthly Organics® , Heather’s®, Little Bear Organic Foods®, Nile Spice®, Harry’s Premium Snacks®, Boston’s The Best You’ve Ever Tasted®, Rice Dream®, Rosetto®, Soy Dream®, Terra®, Walnut Acres Organic®, Westbrae Natural®, WestSoy®, Lima®, Grains Noirs™, Natumi®, Granose®, Realeat®, FreeBird™, Yves Veggie Cuisine® , Avalon Organics®, Alba Botanica®, Queen Helene®, Batherapy®, Shower Therapy® and Footherapy® brands.
Celestial Seasonings® has trademarks for most of its best-selling teas, including Sleepytime®, Lemon Zinger®, Mandarin Orange Spice®, Red Zinger®, Wild Berry Zinger®, Tension Tamer®, Country Peach Passion® and Raspberry Zinger®.
We market the Linda McCartney® and WhiteWave® brands under license.
We operate in highly competitive geographic and product markets, and some of these markets are dominated by competitors with greater resources. For example, we compete for limited retailer shelf space for our products. Larger competitors include mainstream food companies such as Dean Foods Company, General Mills, Inc., Nestle S.A., Kraft Foods, Inc., Groupe Danone, Kellogg Company, Unilever PLC, Pepsico, Inc., The J. M. Smucker Company, Campbell Soup Company and Sara Lee Corporation. The principal competitors in natural personal care products include Kiss My Face, Colgate-Palmolive’s Tom’s of Maine, Nature’s Gate and The Clorox Company’s Burt’s Bees. These products also compete with natural and conventional personal care products from much larger competitors such as Johnson & Johnson and Estee Lauder Inc. Retailers also market competitive products under their own private labels.
The beverage market for tea is large and highly competitive. Competitive factors in the tea industry include product quality and taste, brand awareness among consumers, variety of specialty tea flavors, interesting or unique product names, product packaging and package design, supermarket and grocery store shelf space, alternative distribution channels, reputation, price, advertising and promotion. Celestial Seasonings currently competes in the specialty tea market segment which includes herb tea, green tea, wellness tea, black tea and organic teas. 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 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. Additional competitors include a number of regional specialty tea companies such as Golden Temple of Oregon, Inc., with its Yogi brand, Traditional Medicinals and The Stash Tea Company.
Along with our manufacturers, brokers, distributors and co-packers, we are subject to extensive regulation in the United States by federal, state and local authorities. The federal agencies governing our business include the Federal Trade Commission (FTC), FDA, 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
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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.
Internationally, we are subject to the laws of the foreign jurisdictions in which we manufacture and sell our products. In Europe, we must comply with the requirements of the European Commission, as well as the local requirements in each of the countries in which our products are sold.
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, Star K Kosher Certification, Kosher Overseers Associated of America and Upper Midwest Kashruth.
The following information can be found on our corporate website at http://www.hain-celestial.com:
| • | 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); |
| • | 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 accounting officer) that we have adopted to meet the requirements set forth in the rules and regulations of the SEC; and |
| • | the charters of the Audit, Compensation and Corporate Governance and 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 1A. | Risk Factors. |
Our business, operations and financial condition are subject to various risks and uncertainties. The most significant of these risks include those described below; however, there may be additional risks and uncertainties not presently known to us or that we currently consider immaterial. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. These risk factors should be read in conjunction with the other information in this Annual Report on Form 10-K and in the other documents that we file from time to time with the SEC.
Matters related to the investigation into our historical stock option granting practices and the restatement of our financial statements could result in additional litigation, regulatory proceedings and government enforcement actions.
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As described in the Explanatory Note immediately preceding Part I, Item 1 of this report, in Note 3 “Restatement of Consolidated Financial Statements” to the consolidated financial statements and in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as a result of an informal inquiry by the Securities and Exchange Commission (“SEC”) into our historical stock option granting practices and the related accounting and disclosures, four of our independent directors, with the assistance of independent counsel, conducted an investigation into the Company’s historical stock option granting practices. The findings of the investigation resulted in revisions to the measurement dates for certain options granted in prior years, requiring the restatement of our historical financial statements. This has exposed us to greater risks associated with litigation, regulatory proceedings and government enforcement actions. While we intend to continue to cooperate with the SEC, the Company does not know what further actions the SEC may take or what may be required of the Company in order to resolve this inquiry.
No assurance can be given regarding the outcomes from litigation, regulatory proceedings or government enforcement actions relating to our past stock option practices. The resolution of these matters may be time consuming and expensive, and may distract management from the conduct of our business. We have incurred substantial expenses for legal, accounting and other professional services related to the investigation, restatement and related activities to date. Furthermore, if we are subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, we could be required to pay damages or penalties or have other remedies imposed, which could harm our business, financial condition, results of operations and cash flows.
In addition, in September 2007, we received a Nasdaq staff determination letter stating that, as a result of the delayed filing of our annual report on Form 10-K for the year ended June 30, 2007, we were not in compliance with the filing requirements for continued listing as set forth in Marketplace Rule 4310(c) (14) and were therefore subject to delisting from the Nasdaq Global Select Market. We received an additional Nasdaq staff determination letter with respect to our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. We requested and subsequently attended a hearing before the Nasdaq Listing Qualifications Panel, which was held on October 31, 2007, to appeal the staff determination and present a plan to cure the filing deficiencies and regain compliance. On November 21, 2007 we submitted additional information to assist the Nasdaq Listing Qualifications Panel in their assessment of our listing status. On December 19, 2007, the Nasdaq Listing Qualifications Panel granted our request for continued listing, provided that we supply NASDAQ with certain information regarding the findings of the options investigation on or about January 21, 2008 and file this Form 10-K and the quarterly report on Form 10-Q for the period ended September 30, 2007 by January 31, 2008. With the filing of this report and the filing of our quarterly report on Form 10-Q for the period ended September 30, 2007, the Company believes that it has remedied its non-compliance with Marketplace Rule 4310(c) (14), subject to Nasdaq’s affirmative completion of its assessment and its notification to us accordingly. However, if Nasdaq disagrees with our position or if the SEC disagrees with the manner in which we have accounted for and reported, or not reported, the financial impact of past stock option grants, there could be further delays in filing subsequent SEC reports or other actions that might result in delisting our common stock from the Nasdaq Global Select Market.
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 but not limited to Dean Foods Company, General Mills, Inc., Nestle S.A., Kraft Foods Inc., Groupe Danone, Kellogg Company, PepsiCo, Inc., The J.M. Smucker Company, Campbell Soup Company and Sara Lee Corporation and mainstream personal care products companies including but not limited to Johnson & Johnson and Estee Lauder Inc., also may be able to benefit from economies of scale, pricing advantages or the introduction of new products that compete with our products. Retailers also market competitive products under their own private labels.
One example of the competitiveness of the markets in which we participate is in the tea portion of the beverage market. 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,
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supermarket and grocery store shelf space, alternative distribution channels, reputation, price, advertising and promotion. Our principal competitors on a national basis in the U.S. 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 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 do. 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 also compete with other manufacturers in the procurement of natural and organic product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future along with increasing public demand for natural and organic products. This could cause our expenses to increase or could limit the amount of product that we can manufacture and sell.
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, cooking oils and personal care products which, if consumer demand for such categories were to decrease, could harm our business. Consumer trends could change based on a number of possible factors, including:
| • | nutritional values, such as a change in preference from fat free to reduced fat to no reduction in fat; and |
| • | 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 meat alternative products, medically-directed food products and other specialty food items which are subject to evolving consumer preferences.
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 successfully:
| • | identify suitable acquisition candidates; |
| • | negotiate identified acquisitions on terms acceptable to us; or |
| • | integrate acquisitions that we complete. |
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 Brands 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:
| • | 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; |
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| • | that a business combination will enhance our competitive position and business prospects; |
| • | that we will not experience difficulties with customers, personnel or other parties as a result of a business combination; or |
| • | 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:
| • | integrating an acquired brand’s distribution channels with our own; |
| • | coordinating sales force activities of an acquired brand or in selling the products of an acquired brand to our customer base; or |
| • | integrating an acquired brand into our management information systems or integrating an acquired brand’s products into our product mix. |
Additionally, integrating an acquired brand 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 brands, our business could be harmed.
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, in addition to our own retail sales organization. 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. One of our distributors, United Natural Foods, Inc., which redistributes products to natural foods supermarkets, independent natural retailers and other retailers, accounted for approximately 20%, 21% and 22% of our net sales for the fiscal years ended June 30, 2007, 2006, and 2005, respectively. Our inability to enter into satisfactory brokerage agreements may inhibit our ability to implement our business plan or to establish markets necessary to develop 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 or Independent Co-Packers Could Harm Our Business
For the fiscal years ended June 30, 2007, 2006 and 2005, approximately 46%, 47% and 47%, 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 production.
During fiscal 2007, 2006 and 2005, approximately 54%, 53% and 53%, respectively, of our revenue was derived from products manufactured at independent co-packers. In some cases an individual co-packer may produce all of our requirements for a particular brand; however, no co-packer manufactured products representing as much as 10% of our revenue. 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.
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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 analyses on incoming ingredient shipments for the purpose of assuring that they meet our quality standards and those of the FDA.
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 climate 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 to find new suppliers, observe production standards for our foreign-procured products or continue our supply of botanicals from foreign sources could harm our business.
Our Future Results of Operations May be Adversely Affected by Escalating Fuel and Commodity Costs
Many aspects of our business have been, and continue to be, directly affected by the continuously rising cost of fuel and commodities. 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 distribution costs for our products and increased packaging costs. Commodities are subject to price volatility which can be caused by commodity market fluctuations, crop yields, changes in currency exchange rates, imbalances between supply and demand and government programs among other factors. 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 2007, approximately 24.9% of our net sales were generated outside the United States, while such sales outside the U.S. were 19.3% of net sales in 2006 and 21.1% in 2005.
Sales from outside our U.S. markets may 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:
| • | periodic economic downturns and unstable political environments; |
| • | price and currency exchange controls; |
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| • | fluctuations in the relative values of currencies; |
| • | unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; |
| • | compliance with applicable foreign laws; and |
| • | 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
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, beverage and personal care industry. Although we endeavor to protect our trademarks and trade names, there can be no assurance that these efforts will be successful, or that third parties will not challenge our right to use one or more of our trademarks or trade names. 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 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. In addition, similar regulations and requirements exist in the other countries in which we market our products. We currently manufacture over 1,100 organic products worldwide which are covered by these various 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.
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 require 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 became effective on January 1, 2006. Additionally, an allergen labeling law was passed and signed on August 3, 2004. This law requires that eight major allergens to be clearly labeled by January 1, 2006. We have revised our labels in order to be in compliance with the final rules. Additionally, Canada adopted new food labeling regulations that required implementation by December 12, 2005. These regulations require a Nutritional Facts panel to be on the packages. Our Yves Veggie Cuisine® products are subject to these regulations, as are all of our other products sold into Canada. Any change in labeling requirements for our products may lead to an increase in packaging costs or interruptions or delays in packaging deliveries.
Similar labeling regulations exist throughout the rest of the world. We continually monitor and modify packaging to be in compliance with the rules of the various countries where we sell our products. Our ability to meet local packaging regulations may impact our ability to sell products in these regions.
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 image could be harmed, which could have a material adverse effect on our business.
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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, beverage and personal care 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 naming us as an additional insured.
We Rely on Independent Certification for a Number of Our 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 organic 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 it is 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 and 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, our quarterly results of operations reflect seasonal trends resulting from increased demand for our 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 our future performance.
Our Growth is Dependent on Our Ability to Introduce New Products and Improve Existing Products
Our growth depends in large part on our ability to generate and implement improvements to our existing products and to introduce new products to consumers. The innovation and product improvements are affected by the level of funding that can be made available, the technical capability of our Research and Development Department in developing and testing product prototypes, and the success of our management in rolling out the resulting improvements in a timely manner. If we are unsuccessful in implementing product improvements that satisfy the demands of consumers, our business could be harmed.
The Profitability of Our Operations is Dependent on Our Ability to Manage Our Inventory
Our profit margins depend on our ability to manage our inventory efficiently. As part of our effort to manage our inventory more efficiently, we carried out a SKU rationalization program in fiscal 2005, which resulted in the discontinuation of numerous lower-margin or low-turnover SKUs. However, a number of factors, such as changes in customers’ inventory levels, access to shelf space and changes in consumer preferences, may lengthen the number of days we carry certain inventories, hence impeding our effort to manage our inventory efficiently.
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Our Officers and Directors May Be Able to Control Our Actions
Our officers and directors beneficially owned (assuming the exercise of all stock options held by them) approximately 9% of our common stock as of June 30, 2007. 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 amended and restated 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.
We have civil litigation pending that relates to our stock option granting practices, and we cannot predict the ultimate outcome of this litigation, or whether additional similar lawsuits will be filed
Two purported shareholder derivative actions were filed in September and October 2006 against the Company (solely as a nominal defendant) and certain current and former officers and directors in the Supreme Court of the State of New York, County of Suffolk, alleging breaches of fiduciary duties and unjust enrichment in connection with the Company’s past stock option practices. The complaints seek unspecified damages, disgorgement of options, attorneys fees and expenses, and other unspecified equitable relief from the defendants. These actions are in their preliminary stages. We could be required to pay significant legal fees and damages in connection with this litigation. We could also become subject to additional lawsuits in the future relating to our past stock option practices.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
Our primary facilities, which are leased except where otherwise indicated, are as follows:
| Primary Use |
Location |
Approximate Square Feet |
Expiration of Lease | |||
| Headquarters Office |
Melville, NY | 35,000 | 2012 | |||
| Manufacturing and offices (Tea) |
Boulder, CO | 158,000 | Owned | |||
| Manufacturing & Distribution (Grocery) |
Hereford, TX | 136,000 | Owned | |||
| Manufacturing (Frozen foods) |
West Chester, PA | 105,000 | Owned | |||
| Manufacturing (Vegetable chips) |
Moonachie, NJ | 75,000 | Owned | |||
| Processing plant (Protein) |
Fredericksburg, PA | 58,000 | Owned | |||
| Manufacturing & distribution (Grocery) |
Shreveport, LA | 37,000 | Owned | |||
| Processing plant (Protein) |
Plainville, NY | 34,000 | Owned | |||
| Manufacturing (Personal care) |
Culver City, CA | 24,000 | 2010 | |||
| Manufacturing (Meat alternatives) |
Boulder, CO | 21,000 | Owned | |||
| Distribution center (Grocery & snacks) |
Ontario, CA | 375,000 | 2012 | |||
| Distribution center (Tea) |
Boulder, CO | 81,000 | 2011 | |||
| Distribution center and offices (Personal care) |
Petaluma, CA | 56,000 | 2009 | |||
| Distribution center (Personal care) |
Inglewood, CA | 40,000 | 2008 | |||
| Distribution center (Meat alternatives) |
Boulder, CO | 29,000 | 2008 | |||
| Distribution center (Personal care) |
Culver City, CA | 26,000 | 2010 |
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| Manufacturing and offices (Meat alternatives) |
Vancouver, B.C., Canada | 76,000 | Owned | |||
| Manufacturing and offices (Soymilk & other non-dairy products) |
Eitorf, Germany | 46,000 | 2012 | |||
| Manufacturing (Fresh prepared appetizers and sandwiches) |
Brussels, Belgium | 30,000 | 2010 | |||
| Distribution center and offices (Natural & organic food products) |
Maldegem, Belgium | 58,000 | Cancellable with 6 months notice | |||
| Operations & marketing offices |
Maldegem, Belgium | 26,000 | Owned | |||
| Manufacturing & offices (Meat-free frozen products) |
Fakenham, England | 101,000 | Owned | |||
| Manufacturing & offices (Fresh prepared food products) |
Luton, England | 97,000 | 2011 |
We own approximately 600,000 sq. ft. of barns in Plainville, NY used in our turkey production.
We also lease space for other smaller offices and facilities in the United States, Canada and Europe.
In addition to the foregoing distribution facilities operated by us, we also utilize bonded public warehouses from which deliveries are made to customers.
For further information regarding our lease obligations, see Note 16 to the Consolidated Financial Statements.
| Item 3. | Legal Proceedings. |
From time to time, we are involved in litigation incidental to the ordinary conduct of our business. Disposition of pending litigation related to these matters is not expected by management to have a material adverse effect on our business, results of operations or financial condition.
A purported shareholder derivative action was filed against the Company (solely as a nominal defendant) and certain current and former officers and directors on September 21, 2006 in the Supreme Court of the State of New York, County of Suffolk, alleging breaches of fiduciary duties and unjust enrichment in connection with the Company’s past stock option practices. The plaintiff seeks unspecified damages, disgorgement of options, attorneys’ fees and expenses, and other unspecified equitable relief from the defendants. A second purported shareholder derivative action was filed on October 31, 2006 in the same court, against substantially the same defendants and containing substantially the same allegations, adding a claim of breach of fiduciary duty. The Company is defending these lawsuits. Plaintiffs have filed a motion to consolidate the two actions. The motion is pending.
On June 15, 2007 the Company announced that it had been informed by the SEC that it was conducting an informal inquiry into its stock option practices. The Company is cooperating in the SEC’s investigation.
A complaint was filed by Change to Win against the Company on January 10, 2008 in the Court of Chancery of the State of Delaware seeking to compel the Company to conduct its 2007 Annual Meeting pursuant to 8 Del. C. §211, which entitles the Company’s stockholders to an annual meeting within thirteen months of the last annual meeting.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
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| 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 listed on the NASDAQ Global Select Market (under the ticker symbol HAIN). The following table sets forth the reported high and low sales prices for our Common Stock for each fiscal quarter from July 1, 2005 through December 31, 2007.
| Common Stock | ||||||||||||||||
| FY 2008 | FY 2007 | FY 2006 | ||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||
| First Quarter |
32.33 | 26.16 | $ | 26.99 | $ | 19.88 | $ | 20.59 | $ | 17.84 | ||||||
| Second Quarter |
35.14 | 29.69 | 31.93 | 25.09 | 22.75 | 18.11 | ||||||||||
| Third Quarter |
31.31 | 28.20 | 26.67 | 20.73 | ||||||||||||
| Fourth Quarter |
31.50 | 26.78 | 27.94 | 24.20 | ||||||||||||
As of January 23, 2008, there were 460 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 under our Credit Facility (as defined below) and our outstanding senior notes, our general financial condition and general business conditions.
Issuer Purchases of Equity Securities
We made no purchases of our Common Stock during the fiscal years ended June 30, 2007 and 2006. As of June 30, 2007, there remained 900,300 shares authorized for repurchase under our publicly-announced Common Stock repurchase plan.
Unregistered Sales of Equity Securities and Use of Proceeds
On May 30, 2007, the Company and Yeo Hiap Seng Limited (“YHS”), a Singapore based natural food and beverage company listed on the Singapore Exchange, exchanged $6 million in equity investments in each other, resulting in the issuance of an aggregate of 196,464 shares of the Company’s common stock to YHS and one of its subsidiaries and the issuance of 4,044,800 ordinary shares of YHS to the Company. This issuance of the Company’s common stock was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended, as the issuance did not involve a public offering.
Performance Graph
The following graph compares the performance of our common stock to the S&P 500 Index and to the Standard & Poor’s Packaged Foods and Meats Index (in which we are included) for the period from June 30, 2002 through June 30, 2007. The comparison assumes $100 invested on June 30, 2002.
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| Item 6. | Selected Financial Data. |
The information presented in the following table has been adjusted to reflect the restatement of our financial results, which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1, in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 3, “Restatement of Consolidated Financial Statements,” in the notes to consolidated financial statements included in Item 8 of this Form 10-K. The selected consolidated financial data as of June 30, 2007 and 2006 and for the years ended June 30, 2007, 2006 and 2005 is derived from our audited consolidated financial statements as adjusted for the matters described in Note 3. The selected consolidated financial data as of June 30, 2005, 2004 and 2003 and for the years ended June 30, 2004 and 2003 is derived from our historical consolidated financial statements as adjusted for the matters described in Note 3.
The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. We have not amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K.
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| Year Ended June 30 | |||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||
| (As restated) | (As restated) | (As restated) | (As restated) | ||||||||||||
| Operating results: |
|||||||||||||||
| Net sales |
$ | 900,432 | $ | 738,557 | $ | 619,967 | $ | 544,058 | $ | 466,459 | |||||
| Net income |
$ | 47,482 | $ | 36,367 | $ | 24,061 | $ | 25,263 | $ | 24,751 | |||||
| Basic earnings per common share |
$ | 1.21 | $ | .97 | $ | .66 | $ | .72 | $ | .73 | |||||
| Diluted earnings per common share |
$ | 1.16 | $ | .93 | $ | .65 | $ | .70 | $ | .71 | |||||
| Financial position: |
|||||||||||||||
| Working capital |
$ | 198,524 | $ | 172,933 | $ | 123,541 | $ | 129,190 | $ | 82,925 | |||||
| Total assets |
$ | 1,058,456 | $ | 877,684 | $ | 707,136 | $ | 684,231 | $ | 581,548 | |||||
| Long-term debt |
$ | 215,446 | $ | 151,229 | $ | 92,271 | $ | 104,294 | $ | 59,455 | |||||
| Stockholders’ equity |
$ | 696,956 | $ | 618,092 | $ | 531,206 | $ | 500,351 | $ | 445,288 | |||||
Effects of the Restatement Adjustments
The following table presents the effects of the restatement adjustments upon the Company’s previously reported consolidated statements of operations for the fiscal years ended June 30, 2006 and 2005 (in thousands, except per share data):
| Year ended June 30, 2006 | Year ended June 30, 2005 | |||||||||||||||||||
| As Originally Reported |
Adjustments | As Restated |
As Originally Reported |
Adjustments | As Restated | |||||||||||||||
| Net sales |
$ | 738,557 | — | $ | 738,557 | $ | 619,967 | — | $ | 619,967 | ||||||||||
| Cost of sales |
525,205 | — | 525,205 | 449,010 | — | 449,010 | ||||||||||||||
| Gross profit |
213,352 | — | 213,352 | 170,957 | — | 170,957 | ||||||||||||||
| Selling, general and administrative expenses |
147,878 | $ | 417 | 148,295 | 132,769 | $ | (2,353 | ) | 130,416 | |||||||||||
| Operating income |
65,474 | (417 | ) | 65,057 | 38,188 | 2,353 | 40,541 | |||||||||||||
| Interest and other expense, net |
5,911 | — | 5,911 | 3,677 | — | 3,677 | ||||||||||||||
| Income before income taxes |
59,563 | (417 | ) | 59,146 | 34,511 | 2,353 | 36,864 | |||||||||||||
| Provision for income taxes |
22,496 | 283 | 22,779 | 12,641 | 162 | 12,803 | ||||||||||||||
| Net income |
$ | 37,067 | $ | (700 | ) | $ | 36,367 | $ | 21,870 | $ | 2,191 | $ | 24,061 | |||||||
| Net income per share: |
||||||||||||||||||||
| Basic |
$ | 0.98 | $ | (0.01 | ) | $ | 0.97 | $ | 0.60 | $ | 0.06 | $ | 0.66 | |||||||
| Diluted |
$ | 0.95 | $ | (0.02 | ) | $ | 0.93 | $ | 0.59 | $ | 0.06 | $ | 0.65 | |||||||
| Weighted average shares outstanding: |
||||||||||||||||||||
| Basic |
37,643 | — | 37,643 | 36,407 | — | 36,407 | ||||||||||||||
| Diluted |
38,912 | — | 38,912 | 37,153 | — | 37,153 | ||||||||||||||
The following table presents the effects of the stock-based compensation, related tax impact and other adjustments upon the Company’s previously reported consolidated balance sheet as of June 30, 2006 (in thousands):
| As Originally Reported |
Adjustments | As Restated | ||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 48,875 | — | $ | 48,875 | |||
| Accounts receivable, net |
80,764 | — | 80,764 | |||||
| Inventories |
105,883 | — | 105,883 | |||||
| Deferred income taxes |
2,986 | — | 2,986 | |||||
| Prepaid expenses and other current assets |
21,968 | — | 21,968 | |||||
| Total current assets |
260,476 | — | 260,476 | |||||
| Property, plant and equipment, net |
119,830 | — | 119,830 | |||||
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| Goodwill |
421,002 | — | 421,002 | |||||||||
| Trademarks and other intangible assets |
61,626 | — | 61,626 | |||||||||
| Other assets |
14,750 | — | 14,750 | |||||||||
| Total assets |
$ | 877,684 | — | $ | 877,684 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable |
$ | 55,341 | — | $ | 55,341 | |||||||
| Accrued expenses and other current liabilities |
26,553 | $ | 308 | 26,861 | ||||||||
| Income taxes payable |
3,083 | 1,193 | 4,276 | |||||||||
| Current portion of long-term debt |
1,065 | — | 1,065 | |||||||||
| Total current liabilities |
86,042 | 1,501 | 87,543 | |||||||||
| Long-term debt, less current portion |
151,229 | — | 151,229 | |||||||||
| Deferred income taxes |
19,086 | (3,192 | ) | 15,894 | ||||||||
| Total liabilities |
256,357 | (1,691 | ) | 254,666 | ||||||||
| Minority interest |
4,926 | — | 4,926 | |||||||||
| Commitments and contingencies |
||||||||||||
| Stockholders’ equity |
||||||||||||
| Preferred stock |
— | — | — | |||||||||
| Common stock |
396 | — | 396 | |||||||||
| Additional paid-in capital |
446,319 | 13,393 | 459,712 | |||||||||
| Retained earnings |
165,034 | (11,702 | ) | 153,332 | ||||||||
| Foreign currency translation adjustment |
17,397 | — | 17,397 | |||||||||
| 629,146 | 1,691 | 630,837 | ||||||||||
| Less: treasury stock, at cost |
(12,745 | ) | — | (12,745 | ) | |||||||
| Total stockholders’ equity |
616,401 | 1,691 | 618,092 | |||||||||
| Total liabilities and stockholders’ equity |
$ | 877,684 | — | $ | 877,684 | |||||||
The following table presents the effects of the stock-based compensation, related impact and other adjustments upon the Company’s previously reported operating results included in selected financial data for the years ended June 30, 2004 and 2003 (in thousands):
| Year ended June 30, 2004 | Year ended June 30, 2003 | |||||||||||||||||||
| As Originally Reported |
Adjustments | As Restated |
As Originally Reported |
Adjustments | As Restated | |||||||||||||||
| Net income |
$ | 27,008 | $ | (1,745 | ) | $ | 25,263 | $ | 27,492 | $ | (2,741 | ) | $ | 24,751 | ||||||
| Net income per share: |
||||||||||||||||||||
| Basic |
$ | 0.77 | $ | (0.05 | ) | $ | 0.72 | $ | 0.81 | $ | (0.08 | ) | $ | 0.73 | ||||||
| Diluted |
$ | 0.74 | $ | (0.04 | ) | $ | 0.70 | $ | 0.79 | $ | (0.08 | ) | $ | 0.71 | ||||||
| Working capital |
$ | 129,949 | $ | (759 | ) | $ | 129,190 | $ | 83,324 | $ | (399 | ) | $ | 82,925 | ||||||
| Stockholders’ equity |
$ | 496,765 | $ | 3,586 | $ | 500,351 | $ | 440,797 | $ | 4,491 | $ | 445,288 | ||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Restatement of Previously Issued Financial Statements
In this Form 10-K for the fiscal year ended June 30, 2007 (the “2007 Form 10-K”), the Company is restating its consolidated balance sheet as of June 30, 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the fiscal years ended June 30, 2006 and 2005. This restatement resulted from the findings of an investigation of our historical stock option grant processes and related accounting that was undertaken by a group of our independent directors. This 2007 Form 10-K also reflects the restatement of “Selected Financial Data” in Item 6 for the fiscal years ended June 30, 2006, 2005, 2004 and 2003.
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Review of Historical Equity Granting Process
On June 15, 2007, we announced that the Company had received an informal inquiry from the SEC concerning the Company’s stock option granting practices and the related accounting and disclosures. Shortly thereafter, a group of four independent directors (the “Independent Directors”) was established by Hain Celestial’s Board of Directors to conduct an independent investigation relating to the Company’s historical stock option practices. With the assistance of independent legal counsel and experts retained by counsel, the Independent Directors conducted an extensive review of historical stock option practices, including all awards made by the Company since its initial public offering in November 1993 through May 6, 2005, the last date on which stock options were granted. The investigation also included review of the Company’s accounting policies, accounting records, supporting documentation, email communications and other documentation, as well as interviews with a number of current and former directors, officers and employees. Based on this review, the Company has determined that additional pre-tax, non-cash charges for stock-based compensation expense aggregating $16.9 million over the twelve-year period from 1994 through 2005 should be recognized.1 The Company granted options to purchase approximately 12 million shares to more than 1,200 employees and directors on 125 separate grant dates during the approximate twelve-year fiscal period reviewed. The grants included (1) broad-based grants to large numbers of Hain Celestial employees, (2) new hire/promotion grants, (3) grants to senior executives and (4) director grants.
On January 29, 2008, the Independent Directors reported to the Board their final findings. The Independent Directors indicated that they and their advisors received the Company’s full cooperation throughout the review. As described in more detail below, the review of the Company’s stock option grants and procedures identified various deficiencies in the process of granting and documenting stock options. The stock option granting process was informal and inadequately documented throughout much of the period under review. In addition, for many grants there were insufficient or incomplete approvals and inadequate or incomplete establishment of the terms of the grants, including the list of individual recipients.
The Independent Directors’ review found, among other things, that:
| • | There was inadequate documentation supporting the measurement dates for a number of company-wide annual grants as well as some executive grants and grants to new employees; |
| • | Approximately one-third of all options granted were priced at quarterly or annual lows; |
| • | Some grant dates in earlier periods appear to have been selected with hindsight. Beginning in 2003, documentation relating to annual and other grants improved, although some errors occurred thereafter in the form of additions, corrections or adjustments to lists of grant recipients after the recorded measurement dates; |
| • | No information came to the attention of the Independent Directors which caused them to believe that any current officers, directors or employees of the Company engaged in any knowing or intentional misconduct with regard to the Company’s option granting process. |
The Company’s Stock Option Plans and the Option Granting Process
The vast majority of the Company’s stock option grants were made pursuant to five stock option plans – two employee stock option plans adopted in 1994 and 2002 (the “1994 Plan” and the “2002 Plan”), two stock option plans for non-employee directors adopted in 1996 and 2000 (the “1996 Directors Plan” and the “2000 Directors Plan”), and the 1993 Executive Stock Option Plan (the “1993 Plan”). The 1993 Plan, 1994 Plan and the 2002 Plan for employee stock options provided for administration by the Compensation Committee of the Board of Directors and gave the Committee the authority to determine the exercise price of options granted and the date of grant. The 1994
| 1 | As discussed below, the Company has determined that, based on the revised measurement dates, the pre-tax, non-cash charges for stock-based compensation expense aggregated $20.5 million (before the reversal of the 2005 stock option vesting acceleration charge of $3.6 million) over the twelve-year period from 1994 through 2005. |
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Plan and the 2002 Plan also, however, allowed the Compensation Committee to delegate any of its functions to officers or managers of the Company, except as to awards to Section 16 officers. As discussed below, the Independent Directors’ review found that while the Compensation Committee did meet telephonically or in person on a number of occasions to approve option grants to Mr. Simon, typically with a representative of the Company, and, from time to time, outside counsel present, documentation of the Compensation Committee’s actions was often not available in the Company’s records. The members of the Compensation Committee relied upon the Company to document the Committee’s actions and apply the appropriate accounting treatment. The Independent Directors’ review found that this lack of available documentation in the Company’s records of actions by the Compensation Committee made the determination of the dates of approval of grants to Mr. Simon difficult. For grants after 2002 better documentation of the timing of approval of grants to Mr. Simon was available, and no additional compensation expense for grants to Mr. Simon after 2002 has been recognized.
As to grants to other officers and employees, possibly including Section 16 officers, delegation of approval authority to the Chief Executive Officer appears to have been the standard practice. For most of the period from 1994 to 2004 the Chief Executive Officer of the Company, assisted by the Chief Financial Officer, the Vice President for Human Resources, and the executive heads of various divisions, determined the recipients and amounts of stock option awards to employees of the Company, with the final required action being the Chief Executive Officer’s approval.
The Independent Directors found that the Company’s practice on pricing of option grants was inconsistent – at times the Company used the closing price of the Company’s stock the day before approval, and at other times the closing price on the day of approval. In its restatement the Company has adjusted options pricing to uniformly use the closing price on the day of the approval of the options as the preferable pricing method.
Of the $20.5 million in additional compensation expense recognized, approximately $7.2 million is attributable to grants awarded to current or former Section 16 officers, $0.4 million is attributable to grants awarded to directors, and the remaining $12.9 million is attributable to grants awarded to other employees.
Broad-Based Grants to Employees
For broad-based grants to employees, the required granting action was the approval of the awards by the Chief Executive Officer. The Independent Directors’ review found that, prior to February 2003, this approval was not thoroughly documented if at all. The Independent Directors’ review found that from February 2003 forward the Company’s option granting processes included better documentation of approval, and a more formal granting process was implemented. The Independent Directors conducted a grant-by-grant analysis using the available evidence for each grant, determined the date when grants were fixed with finality, and revised measurement dates if necessary.
New Hire or Promotion Grants
The Independent Directors’ review found that it was the practice at the Company for some senior executives to receive stock options as part of their negotiated compensation package upon joining the Company or upon assuming a more senior position within the Company. It was noted in the review that some offer or promotion letters included a statement that the employee would receive options at the lowest price within a several-month period. Review of selected personnel files for active and terminated employees demonstrated that: 1) option grants for new hires and promotions were the exception, rather than the rule, and 2) even for those new hires and promoted employees who received stock options as part of their compensation this “lowest price” language was unusual. For grants to employees whose new hire or promotion letter included such “lowest price” language the Company has considered whether that language led to the issuance of a discounted option and accounted for the grant accordingly.
The Independent Directors’ review also found a number of instances in which new hire or promotion option grants did not follow the terms outlined in the new hire or promotion letters. Those grants have been treated as repricings and given variable accounting treatment.
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Grants to Senior Executives
The Company is recognizing $1,371,000 of compensation expense related to options granted to Mr. Simon between 1995 and 2001. Mr. Simon, who has been the Company’s Chief Executive Officer since its founding, did not have the ability to authorize grants to himself. Rather, all of Mr. Simon’s grants were approved by the Compensation Committee of the Board of Directors or, as discussed below, in some cases by the full Board. Stock options were a significant part of Mr. Simon’s compensation and were specifically provided for in his several employment agreements with the Company as disclosed in the Company’s annual proxy statements. The Independent Directors’ review found that the Compensation Committee did meet telephonically or in person on a number of occasions to approve option grants to Mr. Simon, typically with a representative of the Company, and, from time to time, outside counsel present. The members of the Compensation Committee relied upon the Company to document the Committee’s actions and apply the appropriate accounting treatment. The Independent Directors’ review found that documentation of the Compensation Committee’s actions was often not available in the Company’s records. This lack of available documentation in the Company’s records of actions by the Compensation Committee made the Independent Directors’ determination of the dates of approval difficult. For grants after 2002 better documentation of the timing of approval of grants to Mr. Simon was available, and no additional compensation expense for grants to Mr. Simon after 2002 has been recognized.
Mr. Simon received 600,000 stock options with a July 31, 2000 date and a strike price of $26.63. The evidence indicates that by approving a term sheet for Simon’s new employment agreement on June 30, 2000 the Board of Directors expressed its intent to grant 300,000 of those options on June 30, 2000 and 300,000 on July 1, 2000. Accordingly, the change in the language of Mr. Simon’s final employment agreement to grant and date the options on or before July 31, 2000 was effectively a repricing of the options, resulting in variable accounting treatment for the life of the grant. This change resulted in approximately $3.5 million of compensation expense in the quarter ended December 31, 2000; however, in accordance with the requirements of variable accounting, such compensation expense reversed in its entirety in the following quarters as the market price of the Company’s stock dropped below $26.63. The market price remained below $26.63 for all subsequent quarters with the exception of the quarter ended December 31, 2001, until variable accounting treatment was eliminated by the adoption of SFAS No. 123R. As a result, the repricing of this option did not have any impact on the cumulative effect recorded as of July 1, 2004.
The Independent Directors’ review found that a grant of 300,000 options to Mr. Simon at the July 11, 2001 closing price, which was the low price of the stock for that month, was approved by the full Hain Celestial Board of Directors at a meeting on August 7, 2001. Although the Board was advised that a grant with a July 2001 date was required (Mr. Simon’s employment agreement provided that his options would be granted between July 1 and July 31 of each year) in effect the Board approved the award of a stock option grant at a discounted price on August 7. Because the approval action for this grant occurred on August 7, 2001, that is the revised measurement date for this grant. This change resulted in approximately $1.2 million in compensation expense in the current restatement.
In determining the appropriate measurement dates for Mr. Simon’s option grants, the Company generally has relied upon the earliest contemporaneous documentary evidence for the grant. One exception is a grant made to Mr. Simon in connection with the Company’s acquisition of Natural Nutrition Group in May, 1999. For that specific grant of options to purchase 300,000 shares the Independent Directors’ review found that interview evidence of the Compensation Committee’s intent and approval of the grant contingent upon the closing of the acquisition was sufficient, although contemporaneous documentary evidence was not available, and the historic grant date of May 18, 1999 (the date the acquisition closed) was not changed.
Mr. Simon received a grant of 25,000 options dated October 16, 1995 at the exercise price of $2.94. The Independent Directors’ review found no contemporaneous documentation of granting action by the Compensation Committee or the Board of Directors for this grant. This grant has been remeasured to the date of the earliest available documentary evidence that the grant was fixed and final, which was September 27, 1996, the date on which the Company filed Form 10-KSB in which Mr. Simon’s grant was included in the earnings per share calculation. The closing price of the Company’s stock on September 27, 1996 was $3.88, which was used as the remeasured price for this grant in computing additional compensation expense to the Company.
Mr. Simon was entitled by his 2000 Employment Agreement to an annual grant each July of options to purchase 300,000 shares through July 2002. Mr. Simon received a grant of 300,000 options dated July 22, 2002 at the exercise price of $14.25 for which the Independent Directors’ review found no contemporaneous documentation of granting action by the Compensation Committee or the Board of Directors. Mr. Simon’s grant agreement appears to
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have been signed on October 22, 2002, which has been used as the remeasurement date for this grant. On October 22, 2002, the closing price of the Company’s stock was $13.62, so the remeasurement of this grant resulted in no additional compensation expense.
Mr. Simon was granted 300,000 options dated July 30, 2004 at the exercise price of $16.53. The Independent Directors’ review determined that this grant was considered and approved by the Compensation Committee on August 5, 2004, and that a unanimous written consent was executed by the members of the Committee between August 17, 2004 and August 26, 2004. August 5, 2004 has been used as the revised measurement date for this grant. Because the closing price of the Company’s stock on August 5, 2004 was $16.01, lower than the grant’s exercise price of $16.53, the Company has incurred no additional compensation expense for this grant.
Two option grants to Mr. Ira Lamel, the Company’s current Chief Financial Officer, have been given revised measurement dates as a result of the Independent Directors’ review. The Independent Directors’ review found that a grant to Mr. Lamel of 75,000 options on August 13, 2002 at the price of $12.13 was not supported by contemporaneous documentary evidence. Because the grant was disclosed in the Company’s proxy statement filed on October 15, 2002, Mr. Lamel’s grant has been assigned a revised measurement date of October 15, 2002 at the price of $14.80. Mr. Lamel also received a grant of 100,000 shares priced at $11.84 per share on February 4, 2003, which was the closing price of the Company’s stock on February 3, 2003. Because Mr. Lamel’s grant was approved on February 4, 2003 that grant has been remeasured using the closing price at that date, which was $12.39.
Grants to Outside Directors
For most of the Company’s history stock option awards were the only compensation provided to outside directors, apart from expense reimbursement. The directors’ plans provided for automatic grants to outside directors on their date of first election to the Board and on the date of the annual shareholder meeting, and also authorized the Board to make additional discretionary grants. The Chief Executive Officer appears to have been of the view that he had the authority to make discretionary grants to directors himself, but the Independent Directors’ review found no documentary evidence of such authority having been delegated to him by the Board. Accordingly, discretionary grants to outside directors have been measured on the date of approval of the grant by the Board of Directors, or on the date of the earliest other documentary evidence that the grant was fixed and final. Because under both the 1996 Directors Plan and the 2000 Directors Plan newly elected and re-elected directors were entitled to an automatic grant of options to purchase a certain numbers of shares on the date of the Annual Meeting of Shareholders, the number of non-discretionary shares provided under the Plans was considered by management to have been appropriately dated and priced on the date of the annual meeting even if the option documents were actually issued at a later date.
The Independent Directors’ review found that each of the Company’s outside directors received a grant of 15,000 options dated February 12, 2002, which was a quarterly low in the price of the Company’s stock. Board minutes for a meeting held on April 2, 2002 stated that the Board had approved grants of 15,000 options to each non-employee director “as of February 12, 2002.” Because the April 2002 minutes of the Board of Directors accurately reflected the date of the option granting activity, the Independent Directors’ review concluded that there was no intent to mislead on the part of the recipient directors. Those option grants have been remeasured to April 2, 2002.
Two outside directors received grants of 10,000 options dated August 13, 2002, which was an annual low in the Company’s stock price. Although the Independent Directors’ review found evidence that the Chief Executive Officer may have considered a grant to at least one of those directors on that date, and that the Chief Executive Officer was of the view that he could make such discretionary grants on his own authority, the Independent Directors concluded that the Chief Executive Officer was not so authorized. Accordingly, those two discretionary grants to directors have been remeasured to October 8, 2002, when the grants were considered and approved by the full Board.
All of the Company’s outside directors received option grants dated February 26, 2004, which was the date of the first Board meeting in which four new directors participated. The Independent Directors’ review found that 7,500 of the options granted to the already-appointed directors on that date should have been granted automatically under the 2000 Directors Stock Option Plan on the date of the previous annual shareholders meeting, December 4, 2003. The Independent Directors’ review further found that grants of 15,000 options to each of the four new directors should have been automatic upon their appointment to the Board in a telephonic meeting on January 30, 2004. Accordingly, the portion of each grant that should have been final at an earlier date, either December 4, 2003 or January 30,
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2004, has been accounted for with variable accounting beginning on February 26, 2004, reflecting management’s view that those portions of the grants were effectively repriced on that date. The remaining portions of those grants have not been remeasured.
In addition, four other stock option grants to the directors were assigned revised measurement dates, resulting in a total additional compensation expense of approximately $94,000. A grant dated December 5, 1995 was assigned a revised measurement date without accounting consequence, because the grant was conditioned on shareholder approval of the 1996 directors’ plan during the annual meeting in 1996 and on the date of approval the price of the Company’s stock was lower than the grant price. Grants to the directors dated December 5, 2000 and December 11, 2001 were assigned revised measurement dates without accounting consequence, because part of each grant was an automatic annual grant to which the directors were entitled upon their re-election at the annual shareholders meeting, under the 1996 and 2000 directors’ plans, and the remainder was a discretionary grant for which direct contemporaneous documentation of finalization could not be located. The share prices on the revised measurement dates for these grants were lower than the grant prices and accordingly have no accounting consequence. Lastly, the independent directors found that a stock option grant to the directors dated April 12, 2005 was a repricing of the automatic annual grant to which the directors had been entitled on their re-election at the annual shareholders meeting in December of 2004. This last grant resulted in a variable accounting charge of approximately $94,000 in the fourth quarter of fiscal year 2005.
Revision of Measurement Dates as a Result of the Review
As a result of the deficiencies, the Independent Directors recommended, among other things, that the Company revise the accounting measurement dates for 48 dates (from among the 125 dates on which options grants were made in the Company’s history) where the market price of the Company’s stock on the revised dates was higher than on the measurement dates previously used by the Company. A number of these revised measurement dates impacted stock option grants made to senior management and directors of the Company. To determine the revised measurement dates for these options, we applied the guidance in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which deems the measurement date as the first date on which all of the following are known: (1) the individual employee who is entitled to receive the option grant; (2) the number of options that an individual employee is entitled to receive; and (3) the option’s exercise price. In addition, the measurement date cannot be earlier than the date on which the grant is approved. We applied judgment in determining whether to revise measurement dates for prior option grants. In addition, if we determined that a measurement date needed to be revised, judgment was applied in determining the appropriate revised measurement date. In instances where we determined we could not rely on the original grant date for an option, we determined revised measurement dates based on our ability to establish or confirm, in our reasonable judgment, whether through other documentation or credible circumstantial information, that all requirements for the proper granting of the option had been satisfied under applicable accounting principles.
The Company previously accounted for its stock option grants as fixed grants under APB Opinion No. 25 and its related Interpretations, using a measurement date of the recorded grant date, through its fiscal year ended June 30, 2005, after which the Company adopted SFAS No. 123(R). For all grants issued with an exercise price equal to the fair market value of our common stock on the recorded grant date or closing price on the day preceeding when the grant was approved,2 we originally recorded no stock-based compensation expense and provided the required pro forma disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation.” Under APB Opinion No. 25, a non-cash, stock-based compensation expense was required to be recognized for any option for which the exercise price was below the fair market value on the actual grant date. This expense should have been amortized over the vesting period of the option. We also determined that variable accounting treatment was required under APB Opinion No. 25 for certain stock option grants for which evidence indicated that the original exercise price of the option
| 2 | As noted above, the Independent Directors found that the Company’s practice on pricing of option grants was inconsistent – at times the Company used the closing price of the Company’s stock the day before approval, and at other times the closing price on the day of approval. In its restatement the Company has adjusted options pricing to uniformly use the closing price on the day of the approval of the options as the preferable pricing method. |
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was subsequently modified. The application of variable accounting to stock option grants requires the remeasurement of the intrinsic value of the options be reported as compensation expense in the consolidated statements of income at the end of each reporting period until the options are exercised, canceled or expire.
The Company has determined that, based on the revised measurement dates, the pre-tax, non-cash charges for stock-based compensation expense aggregated $20.5 million (before the reversal of the 2005 stock option vesting acceleration charge of $3.6 million) over the approximate twelve-year fiscal period from 1994 through 2005. The annual changes in stock-based compensation expense, other costs related to stock-based compensation (payroll taxes, interest and penalties), income taxes and net income are as follows:
| Increase (decrease) | |||||||||||||||||||
| Fiscal Year |
Stock-based Compensation Expense |
Reversal of Acceleration Charge |
Other Related Costs |
Income Taxes |
Net Income |
||||||||||||||
| 1994 |
$ | 187 | $ | (73 | ) | $ | (114 | ) | |||||||||||
| 1995 |
38 | (15 | ) | (23 | ) | ||||||||||||||
| 1996 |
25 | (1 | ) | (24 | ) | ||||||||||||||
| 1997 |
584 | (188 | ) | (396 | ) | ||||||||||||||
| 1998 |
941 | $ | 118 | (390 | ) | (669 | ) | ||||||||||||
| 1999 |
1,507 | 141 | (639 | ) | (1,009 | ) | |||||||||||||
| 2000 |
1,391 | 118 | (581 | ) | (928 | ) | |||||||||||||
| 2001 |
2,803 | 353 | (1,221 | ) | (1,935 | ) | |||||||||||||
| 2002 |
5,242 | (94 | ) | (1,539 | ) | (3,609 | ) | ||||||||||||
| 2003 |
4,440 | (36 | ) | (1,663 | ) | (2,741 | ) | ||||||||||||
| 2004 |
2,099 | 356 | (710 | ) | (1,745 | ) | |||||||||||||
| Total 1994 – 2004 effect |
19,257 | — | 956 | (7,020 | ) | (13,193 | ) | ||||||||||||
| 2005 (1) |
1,201 | $ | (3,581 | ) | 27 | 162 | 2,191 | ||||||||||||
| 2006 |
— | — | 417 | 283 | (700 | ) | |||||||||||||
| Total |
$ | 20,458 | $ | (3,581 | ) | $ | 1,400 | $ | (6,575 | ) | $ | (11,702 | ) | ||||||
| (1) | The increase to net income in 2005 results principally from the reversal of substantially all of the charge previously recorded in connection with the acceleration of vesting of stock options in June 2005 due to the misapplication of the relevant accounting rules made at the time of the acceleration. At the time of the acceleration, the Company recognized additional compensation expense of $3.7 million, representing the intrinsic value of all accelerated options. The additional charge should have been limited to options held only by those individuals who were expected to benefit from the acceleration. |
In light of the judgment used in establishing revised measurement dates as discussed above, alternate approaches to those used by us could have resulted in different compensation expense charges than those noted above. For grants that were not supported by conclusive evidence of the date the terms of the grant were fixed and approved with finality, the grant window includes the period during which the terms of the awards reasonably could have been fixed with finality. Changing the measurement dates to the highest prices and lowest prices in the grant windows used could have resulted in an increase of $8.7 million to the compensation charges of $20.5 million recognized or a decrease of $18.4 million to these charges.
The Company also evaluated the impact of the restatement on its income tax provisions. In the United States, the Company is able to claim a tax deduction relative to certain exercised stock options. As a result, the Company has recorded a deferred tax asset, totaling $2.6 million at June 30, 2007, to reflect future tax deductions to the extent the Company believes such deferred tax assets to be recoverable.
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The income statement impact of the restatement is as follows:
| Years ended June 30, |
2006 | 2005 | Cumulative effect at July 1, 2004 |
|||||||||
| Net income as previously reported |
$ | 37,067 | $ | 21,870 | ||||||||
| Additional compensation expense resulting from incorrect measurement dates for stock option grants |
(1,201 | ) | $ | (19,257 | ) | |||||||
| Reversal of acceleration charge (1) |
3,581 | |||||||||||
| Other matters related to stock-based compensation |
(417 | ) | (27 | ) | (956 | ) | ||||||
| Income tax related effects |
(283 | ) | (162 | ) | 7,020 | |||||||
| Total cumulative effect adjustment at July 1, 2004 |
$ | (13,193 | ) | |||||||||
| Net income, as restated |
$ | 36,367 | $ | 24,061 | ||||||||
| (1) | The Company reversed substantially all of the charge previously recorded in connection with the acceleration of vesting of stock options in June 2005 due to the misapplication of the relevant accounting rules made at the time of the acceleration. At the time of the acceleration, the Company recognized additional compensation expense of $3.7 million, representing the intrinsic value of all accelerated options. The additional charge should have been limited to options held only by those individuals who were expected to benefit from the acceleration. |
The cumulative effect of the restatements through June 30, 2004 increased additional paid-in capital by $16.7 million from $391.9 million to $408.6 million, decreased non-current deferred tax liabilities by $4.2 million from $14.8 million to $10.6 million, decreased retained earnings by $13.2 million from $106.1 million to $92.9 million, and increased current liabilities by $0.7 million from $68.4 million to $69.1 million. Total stockholders’ equity increased by $3.5 million from $496.8 million to $500.2 million.
For more information regarding our restated financial statements, see “Restatement of Consolidated Financial Statements” in Note 3 of the Notes to Consolidated Financial Statements.
Impact of Internal Revenue Code
As a result of the determination that certain grants were issued in prior periods with exercise prices below the fair market value of our stock on the actual grant date, we have evaluated the potential tax consequences under various sections of the Internal Revenue Code (IRC).
As part of this restatement, we determined that certain grants which had incorrect measurement dates for accounting purposes, had originally been issued as incentive stock options, or ISO’s, but no longer qualified for ISO tax treatment. The resulting conversion of these options to non-qualified stock options exposes us to additional withholding taxes and penalties for failure to withhold taxes on the exercise of those options. We recorded a liability for payroll taxes in the event such grants would not be treated as ISO’s. These adjustments are included in the total of other related costs noted above.
Under IRC Section 409A, for stock options vesting after December 31, 2004 (“409A Affected Options”) the employee must report taxable income prior to the exercise date if the option was granted with an exercise price below the fair market value of the stock on the actual date of grant. In addition, the option holder is subject to a penalty tax under IRC Section 409A (and, as applicable, similar penalty taxes under state tax laws). The Company recognizes that numerous employees who were not involved in the stock option granting process received misdated options that may subject the employee to certain taxes and penalties under Section 409A of the tax code. As a result, the Board of Directors is considering various remedial actions available to alleviate this tax burden for non-Section 16 employees which, if adopted, would cause the Company to incur a charge to earnings in the range of $1.2 million to $1.5 million. Any action the Company takes with respect to Section 409A taxes and penalties will be subject to approval by its Board of Directors.
Economic Remediation
Following completion of the stock option review, the Company’s current Section 16 officers and directors holding incorrectly priced and unexercised stock options agreed to voluntarily reprice such options, upon a finding of the Independent Directors that such options were improperly priced, to the closing share price on the revised measurement date. The Section 16 officers and directors will not receive cash payments to compensate them for the increase
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in exercise price due to their voluntary agreements to reprice such options. Consistent with this recommendation, current Section 16 officers and directors also voluntarily agreed to repay to the Company (either in cash or through further repricing of outstanding options ) for options granted while they were Section 16 officers or directors an amount equal to the difference in the price at which stock options were exercised by them and the price at which the Independent Directors believe the stock options should have been priced, net of any allocable portion of income taxes paid in connection with such exercise.
Corporate Governance Remediation
On September 21, 2006, the Company’s Board of Directors approved revised approval procedures for equity grants. Pursuant to those procedures, all equity grants will be recommended by the Compensation Committee to the full Board for approval. All option grants will have an exercise price equal to the closing price of the Company’s stock on the date of the Board’s approval of the grant.
Following completion of the stock option review, the Independent Directors recommended and the Board of Directors approved, on January 29, 2008, the following additional changes:
| • | the Compensation Committee will be reconstituted and will be chaired by an independent director; |
| • | all equity awards other than new hire grants will generally be considered by the Compensation Committee and Board of Directors annually following each fiscal year end; |
| • | the Board of Directors will delegate to the Compensation Committee the authority to grant new hire grants during meetings on a quarterly basis, and will provide that these options will have an exercise price equal to the closing price of the Company’s stock on the last day of the quarter in which they were granted; |
| • | details of recommended grants will be circulated to the Compensation Committee in advance of meeting; |
| • | corporate counsel will attend all Compensation Committee meetings as secretary and will promptly prepare minutes of the meetings; |
| • | corporate counsel will oversee the documentation of equity grants; and |
| • | one Board meeting per year will be focused on corporate governance and compliance matters. |
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 retailers, drug stores, food service channels and club stores. 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.
Highlights of our accomplishments during fiscal year 2007 include:
| • | Achieved solid sales and earnings growth driven by increased consumption and margin enhancement |
| • | Introduced innovative new products across multiple product categories |
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| • | Implemented price increases to help offset rising input costs |
| • | Expanded and broadened our natural personal care products offerings with the acquisition of the Avalon Organics and Alba Botanica brands |
| • | Expanded our meat-free and non-dairy beverage offerings in the United Kingdom with the Haldane Foods acquisition and the re-launch of the Linda McCartney brand |
| • | Entered the tofu category with the acquisition of the meat-alternative business of WhiteWave Foods |
| • | Increased our equity investment in Yeo Hiap Seng as part of our stratagey to provide co-branded product offerings in Asia |
Our consolidated net sales increased 21.9% in fiscal 2007 compared to the year earlier period as a result of growth in our existing brands and the impact of acquisitions. We consider the acquisition of natural and organic products companies and product lines as an integral part of our business strategy. We made the following acquisitions during the three years ended June 30, 2007:
| • | On June 8, 2007 we acquired the tofu and meat-alternative business of WhiteWave Foods Company. The product line includes baked and grilled tofu, seitan, tempeh and other traditional tofu items which are sold under the TofuTown and WhiteWave (under license) brand names. |
| • | On January 12, 2007 we acquired Avalon Natural Products, Inc., including the Avalon Organics and Alba Botanica brands, a leader in the natural products category in the areas of skin care, hair care, bath and body and sun care. |
| • | On December 8, 2006 we acquired the business and certain assets of Haldane Foods Limited, a producer of meat-free food and non-dairy beverage products. |
| • | On June 12, 2006 we acquired the Linda McCartney brand (under license) and the frozen meat-free business from the H.J. Heinz Company, L.P. (“Heinz”), including a manufacturing facility in Fakenham, England. |
| • | On April 30, 2006 we acquired the fresh prepared food business based in Luton, England from Heinz. |
| • | On March 3, 2006 we acquired the business and assets of Para Laboratories, Inc., including the Queen Helene, Batherapy, Shower Therapy and Footherapy brands of skin care, hair care, and body care products for professional and personal use. |
| • | On December 16, 2005, we acquired Spectrum Organic Products, Inc., a leading manufacturer and marketer of natural and organic culinary oils, vinegars, condiments and butter substitutes under the Spectrum Naturals brand and nutritional supplements under the Spectrum Essentials brand. |
| • | On July 1, 2005 we acquired a 50.1% controlling interest in Hain Pure Protein Corporation, which specializes in natural, organic and antibiotic-free chickens. |
| • | On April 4, 2005 we acquired Zia Cosmetics, Inc., including the Zia Natural Skincare brand, a leader in therapeutic products for healthy, beautiful skin sold mainly through natural food retailers. |
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® and Kosherific® brands, which marketed and distributed a line of frozen and dry kosher food products. We acquired these brands in fiscal 1994.
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On August 31, 2006, we sold our Biomarché operations. Biomarché is a Belgium-based provider of fresh organic fruits and vegetables. We acquired the Biomarché operations in fiscal 2002.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are described in Note 2 to the consolidated financial statements. The policies below have been identified as the critical accounting policies we use which 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 possible that materially different amounts would be reported under different conditions or using assumptions different from those that we have consistently applied. Our critical accounting policies are as follows, including our methodology for estimates made and assumptions used:
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 in recent years. While one of our customers represented approximately 16% of our trade receivable balance at June 30, 2007, 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 during the most recent three fiscal years.
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 in 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 the 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.
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Accounting for Acquisitions
Part of our growth strategy has included the acquisition of numerous businesses. The purchase price of these acquisitions has been determined after due diligence of the acquired business, market research, strategic planning, and the forecasting of expected future results and synergies. Estimated future results and expected synergies are subject to revisions as we integrate each acquisition and attempt to leverage resources.
Our recent acquisitions have been accounted for using the purchase method of accounting as defined under SFAS No. 141, “Business Combinations.” Accounting for these acquisitions has resulted in the capitalization of the cost in excess of fair value of the net assets acquired in each of these acquisitions as goodwill. We estimated the fair values of the assets acquired in each acquisition as of the date of acquisition and these estimates are subject to adjustment. These estimates are subject to final assessments of the fair value of property, plant and equipment, intangible assets, operating leases and deferred income taxes. We complete these assessments within one year of the date of acquisition. We are not aware of any information that would indicate that the final purchase price allocations for acquisitions completed in fiscal 2007 would differ meaningfully from preliminary estimates. See Note 6 to the Notes to Consolidated Financial Statements.
In connection with some of our acquisitions, we have undertaken certain restructurings of the acquired businesses to realize efficiencies and potential cost savings. Our restructuring activities include the elimination of duplicate facilities, reductions in staffing levels, and other costs associated with exiting certain activities of the businesses we acquire. The estimated cost of these restructuring activities are included as costs of the acquisition and are recorded as goodwill consistent with the guidance of Emerging Issues Task Force (“EITF”) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” While we finalize our plans to restructure the businesses we acquire within one year of the date of acquisition, it may take more than one year to complete all activities related to the restructuring of an acquired business.
It is typical for us to rationalize the product lines of businesses acquired within the first year after an acquisition. These rationalizations often include elimination of portions of the product lines acquired, the reformulation of recipes and formulas used to produce the products, and the elimination of customers that do not meet our credit standards. In certain instances, it is necessary to change co-packers used to produce the products. Each of these activities soon after an acquisition may have the effect of reducing sales to a level lower than that of the business acquired and operated prior to our acquisition. As a result, pro forma information regarding sales cannot and should not be construed as representative of our growth rates.
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 six reporting units, and other intangible assets with indefinite useful lives are tested annually for impairment.
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 six 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 six reporting units are
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Grocery (including snacks); Tea; Personal Care; Protein; 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.
Recent Accounting Pronouncements
Adoption of Staff Accounting Bulletin No. 108
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. The transition provisions of SAB No. 108 permit the Company to adjust for the cumulative effect on retained earnings of immaterial errors relating to prior years. SAB No. 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments do not require previously filed reports with the SEC to be amended.
Historically, we have evaluated uncorrected differences utilizing the “rollover” approach. The rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statement. Thus, this approach ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years (i.e., it ignores the “carryover effects” of prior year misstatements). We believe that our assessment of uncorrected differences in prior periods and the conclusions reached regarding the qualitative and quantitative effects of such uncorrected differences were appropriate.
We adopted SAB No. 108 in fiscal 2007 and elected to record the effects of applying SAB No. 108 using the cumulative effect transition method which resulted in the correction of the carrying values of assets and liabilities as of July 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. We adjusted the beginning retained earnings for fiscal 2007 for “Accrued Trade Promotional Expenses”, described below.
Accrued Trade Promotional Expense
We adjusted our beginning retained earnings for fiscal 2007 to recognize a reserve for expected trade promotional expenses for certain locations. The Company determined that two of its reporting units were not recording trade promotional expenses on a basis consistent with the Company’s other reporting units. The total cumulative impact, net of tax, as of July 1, 2006 is as follows:
| Current assets |
$ | 3,290 | ||
| Current liabilities |
$ | (8,446 | ) | |
| Retained earnings |
$ | 5,156 |
The accrued trade promotional expense adjustment also resulted in corrections to the first three quarters of fiscal 2007. In conjunction with our adoption of SAB No. 108, our disclosure of selected quarterly information included in Item 8, Financial Statements and Supplementary Data, has been adjusted to reflect our adoption of SAB No. 108 as of July 1, 2006.
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Other Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute of tax positions taken or expected to be taken on a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for us for the fiscal year ending June 30, 2008. The adoption of FIN No. 48 will not have a material impact on our consolidated financial statements.
In June 2006, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF No. 06-3”). The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing activity between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF No. 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF No. 06-3 is effective for interim and annual periods beginning after December 15, 2006. EITF No. 06-3 did not impact the method for recording these taxes in our consolidated financial statements, as we currently present these taxes on a net basis and have elected not to change our presentation method.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not yet assessed the impact, if any, that the implementation of SFAS No. 157 will have on our consolidated results of operations or financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 allows companies to choose to measure certain financial instruments and certain other items at fair value. The statement requires that unrealized gains and losses are reported in earnings for items measured using the fair value option and establishes presentation and disclosure requirements. SFAS No. 159 is effective July 1, 2008 for the Company. We have not yet assessed the impact, if any, SFAS No. 159 may have on our consolidated financial statements.
Results of Operations
Fiscal 2007 Compared to Fiscal 2006
Net sales for the year ended June 30, 2007 were $900.4 million, an increase of $161.8 million, or 21.9%, over net sales of $738.6 million for the year ended June 30, 2006. Sales of grocery and snacks increased with the strong performance of our Earth’s Best, Garden of Eatin’, Arrowhead Mills, Health Valley and Spectrum brands and from successful new product introductions. Net sales of our Celestial Seasonings tea brand were down principally as a result of continued warmer than normal temperatures in North America and lower consumption of green tea. Sales of our personal care brands increased as a result of strong growth from our Jason brand, sales of the brands we acquired from Para Laboratories in the third quarter of 2006 and the inclusion of sales of our Avalon and Alba brands, acquired during the third quarter of fiscal 2007. Sales for our brands in Canada were flat, with increased sales of our refrigerated and frozen products offset by decreased sales of tea. Sales in Europe increased primarily as a result of the inclusion of our United Kingdom operations, acquired during the fourth quarter of fiscal 2006 and the second quarter of fiscal 2007.
Gross profit for the year ended June 30, 2007 was $261.4 million, an increase of $48.1 million, or 22.5%, from last year’s gross profit of $213.4 million. Gross profit in fiscal 2007 was 29.0% of net sales compared to 28.9% of net sales for 2006. The increase in gross profit percentage was principally the result of the addition of higher margin personal care products from our recently acquired Avalon and Alba brands, partially offset by approximately $1.7 million of start-up costs incurred in the first half of the year associated with a new production line at our West Chester frozen foods facility, lower relative contribution from our Celestial Seasonings tea brand and the inclusion of our
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United Kingdom operations which were acquired after the third quarter of fiscal 2006, for a full year. In the United Kingdom, we continue to co-pack for the previous owner at one of the facilities under an agreement allowing for a minimal margin and during the term of the co-pack arrangement our gross margin generated in the United Kingdom will be depressed even though the arrangement helps absorb what otherwise may be unabsorbed overhead. The effect on our gross profit percentage for the year ended June 30, 2007 was a 100 basis point reduction from the lower margins in the United Kingdom. Gross margin in 2006 included $0.9 million, or 0.1%, of charges for our 2005 SKU rationalization program. Our gross margin performance has also been negatively impacted by the increasing costs of petroleum, ingredients, health care and other input costs. We have offset these increasing costs with the successful implementation of price increases for selected products we sell, and with a sharper focus on operating efficiencies, including the positive effects of our 2005 SKU rationalization program.
Selling, general and administrative expenses increased by $29.2 million, or 19.7%, to $177.5 million in 2007 from $148.3 million in 2006. Selling, general and administrative expenses have increased primarily as a result of costs associated with the businesses we acquired in fiscal 2007 and 2006. In addition, we had increased amortization expense on purchased intangibles related to our recent acquisitions and increased professional fees during the year ended June 30, 2007. Selling, general and administrative expenses in fiscal 2006 included a $3.2 million expense for stock option compensation under SFAS 123R. Selling, general and administrative expenses as a percentage of net sales declined to 19.7% in fiscal 2007 as compared to 20.1% in fiscal 2006, primarily as a result of the reduction in stock option compensation expense.
Operating income was $84.0 million in 2007 compared to $65.1 million in 2006. Operating income as a percentage of net sales was 9.3% in 2007 compared to 8.8% in 2006. The increase in operating income is a result of our increased net sales and gross profit.
Interest and other expenses, net were $6.9 million for the year ended June 30, 2007 compared to $5.9 million for fiscal 2006. Interest expense totaled $11.3 million in 2007, which was primarily related to the $150 million of 5.98% senior notes we issued in the fourth quarter of last fiscal year and borrowings we made early in the third quarter of fiscal 2007 under our revolving credit facility to partially fund the acquisition of Avalon Natural Products, Inc. The interest expense was partially offset by $2.5 million of interest income earned. Interest expense in fiscal 2006 was approximately $6.5 million and was partially offset by interest income earned of $0.9 million. In the first quarter of fiscal 2007, we sold Biomarché, our Belgium-based provider of fresh organic fruits and vegetables and recognized a gain on the disposal of approximately $3.4 million, net of a $3.3 million write-off of allocated goodwill.
Income before income taxes in 2007 amounted to $77.1 million compared to $59.1 million in 2006. The increase is attributable to the aforementioned increase in operating income offset by the increase in interest and other expenses, net.
Our income tax expense was $29.6 million in fiscal 2007 compared to $22.8 million in 2006. Our effective tax rate was 38.4% in 2007 compared to 38.5% in 2006. Our effective tax rate in 2007 included the unfavorable impact of the $3.3 million of nondeductible goodwill expensed in connection with the sale of Biomarché.
Net income in 2007 was $47.5 million, or $1.16 per diluted share, compared to $36.4 million, or $0.93 per diluted share in 2006. The increase was attributable to the aforementioned increase in income before income taxes, and for per share amounts, offset by a 5.6% increase in the number of weighted average shares outstanding used in the computation.
Fiscal 2006 Compared to Fiscal 2005
Net sales in 2006 were $738.6 million, an increase of $118.6 million or 19.1% over net sales of $620.0 million in 2005. The increase in sales came from volume increases principally in our domestic grocery and snacks brands, which were up 9.8%, and our personal care brands, which were up 98.9%. These increases came from strong performance in grocery and snack brands such as Earth’s Best, Imagine soups, Garden of Eatin’, Walnut Acres Organic, and Westbrae Natural. With the 2005 SKU Rationalization Program affecting sales performance principally in the grocery and snacks brands, many of our other brands experienced slower or negative growth on actual shipments, while individual SKUs within brands accelerated. In our personal care unit, we saw strong increases from our Jason brand. Our Celestial Seasonings tea brand was up 1.4% for the year after experiencing the challenge of an
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extremely warm winter season when it typically has strong sales in cold months. Our Canada unit increased sales by 9.8% and in Europe we experienced increases of 8.8%. We saw sales increases from companies we acquired during both the 2006 and 2005 years, including our Hain Pure Protein antibiotic-free chicken unit, Spectrum Organic Products in grocery and snacks, Para Laboratories in personal care, and both the meat-free frozen operation and the fresh prepared foods operation in the United Kingdom.
Gross profit in 2006 was 28.9% of net sales as compared to 27.6% of net sales in 2005. Gross profit in 2006 was negatively impacted by the inclusion of the operations of our Hain Pure Protein antibiotic-free chicken unit and the new fresh prepared foods unit in Europe, each of which operates at margins significantly lower than our other units. Without the negative impact of these units’ gross margins, our gross margins would have been 30.1%, or 1.3% higher than our total. Gross margin was further affected by charges for our SKU Rationalization Program of $0.9 million, or 0.1% in 2006, and $9.0 million, or 1.2% in 2005. Our gross margin performance has also been negatively impacted by the increasing costs of petroleum, ingredients, health care and other input costs. We have offset these increasing costs with the successful implementation of price increases for selected products we sell, and with a sharper focus on operating efficiencies, including the positive effects of our SKU Rationalization Program. Our gross margin as a percentage of sales has been further diluted by the mix of our sales as our higher margin tea sales continue to contribute a lower proportion of our consolidated sales.
Selling, general and administrative expenses increased by $17.9 million to $148.3 million in 2006 from $130.4 million in 2005. These expenses as a percentage of net sales were 20.1% in 2006 compared to 21.0% in 2005. Selling, general and administrative expenses increased from the addition of $7.7 million of costs added with acquisitions in 2006, and were further increased by a $3.2 million charge associated with the adoption of FAS No. 123R (See Note 14 to Notes to Consolidated Financial Statements). Other increases resulted from the increased scale of our business.
Operating income was $65.1 million in 2006 compared to $40.5 million in 2005. Operating income as a percentage of net sales was 8.8% in 2006 compared to 6.5% in 2005. These changes are a result of higher sales and better gross margin performance, as well as the reduced results in 2005 having been caused by the $12.1 million of charges for our 2005 SKU Rationalization Program.
Interest and other expenses, net, amounted to $5.9 million in 2006 compared to $3.7 million in 2005. We incurred higher interest costs in 2006 resulting from borrowings for acquisitions and higher market interest rates. In May 2006, we completed a private placement of $150 million of 10-year 5.98% fixed rate notes.
Income before income taxes in 2006 amounted to $59.1 million compared to $36.9 million in 2005. The increase is attributable to the aforementioned increase in operating income offset by the increase in interest and other expenses, net.
Income taxes in 2006 amounted to $22.8 million compared to $12.8 million in 2005. Our effective tax rate was 38.5% in 2006 compared to 34.7% in 2005. Our lower effective tax rate in 2005 was attributable to a $1.3 reduction in tax liabilities resulting from the termination of certain outstanding tax matters.
Net income in 2006 amounted to $36.4 million, or $0.93 per diluted share, compared to $24.1 million, or $0.65 per diluted share in 2005. The increase was attributable to the aforementioned increase in income before income taxes, and for per share amounts, offset by a 4.7% increase in the number of weighted average shares used in the computation.
Liquidity and Capital Resources
We finance our operations and growth primarily with the cash flows we generate from our operations and from both long-term fixed-rate borrowings and borrowings available to us under our Credit Facility.
Our working capital was $198.5 million at June 30, 2007, an increase of $25.6 million from $172.9 million at the end of fiscal 2006. This was due principally to a $23.2 million increase in inventories, a $14.6 million increase in accounts receivable, an $11.6 million increase in cash and a $6.1 million increase in other current assets, offset by a $29.9 million increase in accounts payable and other current liabilities. The increases in our accounts receivable,
35
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inventories and accounts payable were partially attributable to the recent acquisitions we made. Our inventories also increased as a result of higher levels of inventory carried in the personal care unit, an inventory build-up in the United Kingdom as we integrate the Haldane frozen food factory into our Fakenham, England facility and increased inventory at Celestial Seasonings, as we built up for the launch of our new packaging in the first quarter of FY 2008. Accounts receivable also increased as a result of our higher sales volume, with our days’ sales in receivables slightly higher at 43 days compared to 41 days in the year-ago period.
Our cash balance increased $11.6 million during the year ended June 30, 2007 to $60.5 million as of June 30, 2007. We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of June 30, 2007, all of our investments mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. Cash provided by (used in) operating, investing and financing activities is summarized below.
| Years ended June 30, |
2007 | 2006 | 2005 | |||||||||
| Cash flows provided by (used in): |
||||||||||||
| Operating activities |
$ | 66,431 | $ | 54,166 | $ | 34,973 | ||||||
| Investing activities |
(139,708 | ) | (100,559 | ) | (20,988 | ) | ||||||
| Financing activities |
83,608 | 70,996 | (14,715 | ) | ||||||||
| Exchange rate changes |
1,312 | 133 | (2,620 | ) | ||||||||
| Net increase (decrease) in cash |
$ | 11,643 | $ | 24,736 | $ | (3,350 | ) | |||||
Net cash provided by operating activities was $66.4 million for the year ended June 30, 2007, compared to $54.2 million provided in fiscal 2006 and $35.0 million provided in fiscal 2005. The increase in cash provided by operations in 2007 resulted from the increase in our net income and other non-cash items, such as depreciation and amortization. Net cash provided by operations was higher in 2006 compared to 2005 as a result of our increased net income and improvements in our working capital management.
We used $139.7 million of cash in investing activities in the year ended June 30, 2007. We used $137.8 million of cash in connection with the acquisitions of Avalon Natural Products, Inc. (“Avalon”) in January 2007, the assets and business of Haldane Foods in the United Kingdom in December 2006 and the tofu and meat-alternative business of WhiteWave Foods Company in June 2007, $11.4 million for capital expenditures and $1.9 million for a loan to an affiliated joint venture (subsequently repaid in August 2007). This was partially offset by $8.2 million of proceeds from the sale of Biomarché, our Belgium-based provider of fresh organic fruits and vegetables, and $3.3 million of proceeds from the disposals of fixed assets. In the year ended June 30, 2006, we used $100.6 million of cash in investing activities, including $84.5 million for acquisitions and $14.5 million for the purchase of property, plant and equipment. During the year ended June 30, 2005, we used $21.0 million in investing activities, including $11.1 million for acquisitions and $9.9 million for the purchase of fixed assets.
Net cash of $83.6 million was provided by financing activities for the year ended June 30, 2007 and $71.0 million for the year ended June 30, 2006. Net cash of $14.7 million was used in financing activities for the year ended June 30, 2005. During the fiscal 2007 and 2006, we incurred borrowings to fund acquisitions made during each year. During fiscal 2007, we borrowed $75.0 million under our Credit Facility, of which $65.0 million remains outstanding, and received $18.4 million of proceeds from the exercise of stock options during the year. During 2006, we received the proceeds of our $150.0 million of fixed rate senior notes and repaid $89.7 million of borrowings under the Credit Facility. In addition, during 2006 we received $15.1 million of proceeds from the exercise of stock options and we incurred $1.2 million of costs in connection with our new financing arrangements. During 2005, we repaid $16.5 of borrowings and we acquired 189,700 shares of our common stock in open market purchases at a cost of approximately $3.5 million. This was partially offset by $5.2 million of proceeds received from the exercise of stock options and warrants.
On May 2, 2006, we issued $150 million in aggregate principal amount of senior notes due May 2, 2016 in a private placement. The notes bear interest at 5.98%, which is payable semi-annually on November 2 and May 2. Also on May 2, 2006, we entered into an Amended and Restated Credit Agreement, providing us with a $250 million revolving
36
Table of Contents
credit facility (the “Credit Facility”) expiring in May 2011. The Credit Facility provides for an uncommitted $100 million accordion feature, under which the facility may be increased to $350 million. The Credit Facility and the senior notes are guaranteed by substantially all of our current and future direct and indirect domestic subsidiaries. Loans under the Credit 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, 2007 and June 30, 2006, $150.0 million was outstanding under the senior notes at an interest rate of 5.98%. During January 2007 we borrowed $75 million under the Credit Facility to fund a portion of the acquisition of Avalon Natural Products, Inc., of which $65.0 million was outstanding at June 30, 2007, at an interest rate of 6.25%. We are required by the terms of the Credit Facility and the senior notes to comply with customary affirmative and negative covenants for facilities and notes of this nature. We were not in compliance with the financial reporting requirements regarding timely delivery of our financial statements under the credit agreement and the senior notes for the periods ended June 30, 2007 and September 30, 2007. The lenders under the Credit Facility and the holders of our senior notes agreed to extend the due dates for delivery of the financial statements for the periods noted above until January 31, 2008.
Obligations for all debt instruments, capital and operating leases and other contractual obligations as of June 30, 2007 are as follows:
| Payments Due by Period | |||||||||||||||
| Total | Less than 1 year |
1-3 years |
3-5 years |
Thereafter | |||||||||||
| Debt instruments (including interest) |
$ | 215,934 | $ | 540 | — | $ | 65,394 | $ | 150,000 | ||||||
| Capital lease obligations |
78 | 24 | $ | 54 | — | — | |||||||||
| Operating leases |
29,833 | 7,232 | 12,348 | 9,107 | 1,146 | ||||||||||
| Purchase and other obligations |
145,742 | 61,145 | 30,347 | 18,370 | 35,880 | ||||||||||
| Total contractual cash obligations |
$ | 391,587 | $ | 68,941 | $ | 42,749 | $ | 92,871 | $ | 187,026 | |||||
We believe that our cash on hand of $60.5 million at June 30, 2007, as well as projected cash flows from operations and availability under our Credit Facility are sufficient to fund our working capital needs in the ordinary course of business, anticipated fiscal 2008 capital expenditures of approximately $18 million, and the $7.8 million of debt and lease obligations described in the table above, during the 2008 fiscal year.
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:
| • | general economic and business conditions; |
| • | our ability to implement our business strategy; |
| • | our ability to integrate acquisitions; |
| • | our reliance on third party distributors, manufacturers, and suppliers; |
| • | competition; |
| • | changes in customer preferences; |
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| • | international sales and operations; |
| • | retention of key personnel; |
| • | the results of our stock option review and the SEC’s inquiry; and |
| • | compliance 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.
Supplementary Quarterly Financial Data:
Unaudited quarterly financial data (in thousands, except per share amounts) for fiscal 2007 and 2006 is summarized as follows:
| Three Months Ended | ||||||||||||
| September 30, 2006 (a) |
December 31, 2006 (a) |
March 31, 2007 (a) |
June 30, 2007 | |||||||||
| (As restated 1) | (As restated 1) | (As restated1 ) | ||||||||||
| Net sales |
$ | 209,895 | $ | 230,190 | $ | 238,027 | $ | 222,320 | ||||
| Gross profit (b) |
58,830 | 69,871 | 70,738 | 61,991 | ||||||||
| Operating income |
16,880 | 24,925 | 23,540 | 18,632 | ||||||||
| Income before income taxes |
15,060 | 23,171 | 20,248 | 18,613 | ||||||||
| Net income |
8,739 | 14,213 | 12,390 | 12,140 | ||||||||
| Basic earnings per common share |
$ | 0.23 | $ | 0.36 | $ | 0.31 | $ | 0.30 | ||||
| Diluted earnings per common share |
$ | 0.22 | $ | 0.34 | $ | 0.30 | $ | 0.29 | ||||
| Three Months Ended | ||||||||||||
| September 30, 2005 |
December 31, 2005 |
March 31, 2006 |
June 30, 2006 | |||||||||
| (As restated 1) | (As restated 1) | (As restated 1) | (As restated 1) | |||||||||
| Net sales |
$ | 161,097 | $ | 186,227 | $ | 196,443 | $ | 194,790 | ||||
| Gross profit (c) |
45,849 | 58,166 | 57,683 | 51,654 | ||||||||
| Operating income |
11,899 | 21,060 | 16,017 | 16,081 | ||||||||
| Income before income taxes |
11,031 | 19,751 | 14,435 | 13,929 | ||||||||
| Net income |
6,752 | 12,092 | 8,831 | 8,692 | ||||||||
| Basic earnings per common share |
$ | 0.18 | $ | 0.33 | $ | 0.23 | $ | 0.23 | ||||
| Diluted earnings per common share |
$ | 0.18 | $ | 0.31 | $ | 0.22 | $ | 0.22 | ||||
| (a) | The amounts for the first three quarters of fiscal 2007 reflect adjustments recorded in the fourth quarter of fiscal 2007 as a result of the adoption of SAB No. 108 as of July 1, 2006. For more information, see Note 2, “Summary of Significant Accounting Policies”, in the Notes to Consolidated Financial Statements. |
| (b) | Gross profit was negatively impacted by approximately $1.1 million ($0.7 million net of tax) for the three months ended September 30, 2006, and $0.6 million ($0.4 million net of tax) for the three months ended December 31, 2006, as the result of start-up costs associated with a new production line at the Company’s West Chester, PA frozen foods facility. |
| (c) | Gross profit was negatively impacted by approximately $0.9 million ($0.6 million net of tax) for the three months ended June 30, 2006, as the result of charges related to the Company’s 2005 SKU rationalization program. |
| (1) | See Note 3, “Restatement of Consolidated Financial Statements”, in the Notes to Consolidated Financial Statements. |
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The following tables present the effects of the adjustments for stock-based compensation and the adoption of SAB No. 108 made to our previously reported quarterly financial information as of June 30, 2007 (in thousands, except per share data):
| Quarter ended September 30, 2006 | Quarter ended December 31, 2006 | |||||||||||||||||||
| As Reported | Adjustments | As Restated (1) | As Reported | Adjustments | As Restated (1) | |||||||||||||||
| Net Sales |
$ | 210,207 | $ | (312 | ) | $ | 209,895 | $ | 230,909 | $ | (719 | ) | $ | 230,190 | ||||||
| Cost of Sales |
151,065 | — | 151,065 | 160,319 | — | 160,319 | ||||||||||||||
| Gross Profit |
59,142 | (312 | ) | 58,830 | 70,590 | (719 | ) | 69,871 | ||||||||||||
| Selling, general and administrative expenses |
41,846 | 104 | 41,950 | 44,799 | 147 | 44,946 | ||||||||||||||
| Operating income |
17,296 | (416 | ) | 16,880 | 25,791 | (866 | ) | 24,925 | ||||||||||||
| Interest and other expense, net |
1,820 | — | 1,820 | 1,754 | — | 1,754 | ||||||||||||||
| Income before income taxes |
15,476 | (416 | ) | 15,060 | 24,037 | (866 | ) | 23,171 | ||||||||||||
| Provision for income taxes |
6,442 | (121 | ) | 6,321 | 9,269 | (311 | ) | 8,958 | ||||||||||||
| Net income |
$ | 9,034 | $ | (295 | ) | $ | 8,739 | $ | 14,768 | $ | (555 | ) | $ | 14,213 | ||||||
| Net income per share: |
||||||||||||||||||||
| Basic |
$ | 0.23 | — | $ | 0.23 | $ | 0.38 | $ | (0.02 | ) | $ | 0.36 | ||||||||
| Diluted |
$ | 0.23 | $ | (0.01 | ) | $ | 0.22 | $ | 0.36 | $ | (0.02 | ) | $ | 0.34 | ||||||
| Weighted average shares outstanding: |
||||||||||||||||||||
| Basic |
38,746 | — | 38,746 | 39,173 | — | 39,173 | ||||||||||||||
| Diluted |
40,023 | — | 40,023 | 41,202 | — | 41,202 | ||||||||||||||
| Quarter ended March 31, 2007 | ||||||||||
| As Reported | Adjustments | As Restated (1) | ||||||||
| Net Sales |
$ | 237,905 | $ | 122 | $ | 238,027 | ||||
| Cost of Sales |
167,289 | — | 167,289 | |||||||
| Gross Profit |
70,616 | 122 | 70,738 | |||||||
| Selling, general and administrative expenses |
47,066 | 132 | 47,198 | |||||||
| Operating income |
23,550 | (10 | ) | 23,540 | ||||||
| Interest and other expense, net |
3,292 | — | 3,292 | |||||||
| Income before income taxes |
20,258 | (10 | ) | 20,248 | ||||||
| Provision for income taxes |
7,842 | 16 | 7,858 | |||||||
| Net income |
$ | 12,416 | $ | (26 | ) | $ | 12,390 | |||
| Net income per share: |
||||||||||
| Basic |
$ | 0.31 | — | $ | 0.31 | |||||
| Diluted |
$ | 0.30 | — | $ | 0.30 | |||||
| Weighted average shares outstanding: |
||||||||||
| Basic |
39,528 | — | 39,528 | |||||||
| Diluted |
41,500 | — | 41,500 | |||||||
| (1) | See Note 2, “Summary of Significant Accounting Policies” and Note 3, “Restatement of Consolidated Financial Statements.” |
39
Table of Contents
The following tables present the effects of the adjustments for stock-based compensation made to our previously reported quarterly financial information as of June 30, 2006 (in thousands, except per share data):
| Quarter ended September 30, 2005 | Quarter ended December 31, 2005 | |||||||||||||||||||
| As Reported | Adjustments | As Restated (1) | As Reported | Adjustments | As Restated (1) | |||||||||||||||
| Net Sales |
$ | 161,097 | — | $ | 161,097 | $ | 186,227 | — | $ | 186,227 | ||||||||||
| Cost of Sales |
115,248 | — | 115,248 | 128,061 | — | 128,061 | ||||||||||||||
| Gross Profit |
45,849 | — | 45,849 | 58,166 | — | 58,166 | ||||||||||||||
| Selling, general and administrative expenses |
33,869 | $ | 81 | 33,950 | 36,988 | $ | 118 | 37,106 | ||||||||||||
| Operating income |
11,980 | (81 | ) | 11,899 | 21,178 | (118 | ) | 21,060 | ||||||||||||
| Interest and other expense, net |
868 | — | 868 | 1,309 | — | 1,309 | ||||||||||||||
| Income before income taxes |
11,112 | (81 | ) | 11,031 | 19,869 | (118 | ) | 19,751 | ||||||||||||
| Provision for income taxes |
4,221 | 58 | 4,279 | 7,531 | 128 | 7,659 | ||||||||||||||
| Net income |
$ | 6,891 | $ | (139 | ) | $ | 6,752 | $ | 12,338 | $ | (246 | ) | $ | 12,092 | ||||||
| Net income per share: |
||||||||||||||||||||
| Basic |
$ | 0.19 | $ | (0.01 | ) | $ | 0.18 | $ | 0.33 | — | $ | 0.33 | ||||||||
| Diluted |
$ | 0.18 | — | $ | 0.18 | $ | 0.32 | $ | (0.01 | ) | $ | 0.31 | ||||||||
| Weighted average shares outstanding: |
||||||||||||||||||||
| Basic |
36,636 | — | 36,636 | 37,165 | — | 37,165 | ||||||||||||||
| Diluted |
37,560 | — | 37,560 | 38,434 | — | 38,434 | ||||||||||||||
| Quarter ended March 31, 2006 | Quarter ended June 30, 2006 | |||||||||||||||||||
| As Reported | Adjustments | As Restated (1) | As Reported | Adjustments | As Restated (1) | |||||||||||||||
| Net Sales |
$ | 196,443 | — | $ | 196,443 | $ | 194,790 | — | $ | 194,790 | ||||||||||
| Cost of Sales |
138,760 | — | 138,760 | 143,136 | — | 143,136 | ||||||||||||||
| Gross Profit |
57,683 | — | 57,683 | 51,654 | — | 51,654 | ||||||||||||||
| Selling, general and administrative expenses |
41,566 | $ | 100 | 41,666 | 35,455 | $ | 118 | 35,573 | ||||||||||||
| Operating income |
16,117 | (100 | ) | 16,017 | 16,199 | (118 | ) | 16,081 | ||||||||||||
| Interest and other expense, net |
1,582 | — | 1,582 | 2,152 | — | 2,152 | ||||||||||||||
| Income before income taxes |
14,535 | (100 | ) | 14,435 | 14,047 | (118 | ) | 13,929 | ||||||||||||
| Provision for income taxes |
5,472 | 132 | 5,604 | 5,272 | (35 | ) | 5,237 | |||||||||||||
| Net income |
$ | 9,063 | $ | (232 | ) | $ | 8,831 | $ | 8,775 | $ | (83 | ) | $ | 8,692 | ||||||
| Net income per share: |
||||||||||||||||||||
| Basic |
$ | 0.24 | $ | (0.01 | ) | $ | 0.23 | $ | 0.23 | — | $ | 0.23 | ||||||||
| Diluted |
$ | 0.23 | $ | (0.01 | ) | $ | 0.22 | $ | 0.22 | — | $ | 0.22 | ||||||||
| Weighted average shares outstanding: |
||||||||||||||||||||
| Basic |
38,212 | — | 38,212 | 38,561 | — | 38,561 | ||||||||||||||
| Diluted |
39,547 | — | 39,547 | 40,107 | — | 40,107 | ||||||||||||||
| (1) | See Note 3, “Restatement of Consolidated Financial Statements.” |
Table of Contents
The following tables present the effects of the adjustments for stock-based compensation and the adoption of SAB No. 108 on each line item of our interim condensed consolidated balance sheets during the fiscal year ended June 30, 2007 (in thousands):
| March 31, 2007 |
As Reported | Adjustments | As Restated (1) | |||||||||
| ASSETS |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 54,945 | — | $ | 54,945 | |||||||
| Accounts receivable, net |
112,181 | — | 112,181 | |||||||||
| Inventories |
124,179 | — | 124,179 | |||||||||
| Deferred income taxes |
4,487 | $ | 3,290 | 7,777 | ||||||||
| Prepaid expenses and other current assets |
22,236 | — | 22,236 | |||||||||
| Total current assets |
318,028 | 3,290 | 321,318 | |||||||||
| Property, plant and equipment, net |
117,329 | — | 117,329 | |||||||||
| Goodwill |
520,394 | — | 520,394 | |||||||||
| Trademarks and other intangible assets |
79,788 | — | 79,788 | |||||||||
| Other assets |
15,748 | — | 15,748 | |||||||||
| Total assets |
$ | 1,051,287 | $ | 3,290 | $ | 1,054,577 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable and accrued expenses |
$ | 112,601 | $ | 10,047 | $ | 122,648 | ||||||
| Income taxes payable |
13,435 | 776 | 14,211 | |||||||||
| Current portion of long-term debt |
572 | — | 572 | |||||||||
| Total current liabilities |
126,608 | 10,823 | 137,431 | |||||||||
| Long-term debt, less current portion |
223,877 | — | 223,877 | |||||||||
| Deferred income taxes |
20,847 | (2,109 | ) | 18,738 | ||||||||
| Total liabilities |
371,332 | 8,714 | 380,046 | |||||||||
| Minority interest |
5,531 | — | 5,531 | |||||||||
| Commitments and contingencies |
||||||||||||
| Stockholders’ equity |
||||||||||||
| Preferred stock |
— | — | — | |||||||||
| Common stock |
405 | — | 405 | |||||||||
| Additional paid-in capital |
467,349 | 12,310 | 479,659 | |||||||||
| Retained earnings |
201,252 | (17,734 | ) | 183,518 | ||||||||
| Foreign currency translation adjustment |
18,163 | — | 18,163 | |||||||||
| 687,169 | (5,424 | ) | 681,745 | |||||||||
| Less: treasury stock, at cost |
(12,745 | ) | — | (12,745 | ) | |||||||
| Total stockholders’ equity |
674,424 | (5,424 | ) | 669,000 | ||||||||
| Total liabilities and stockholders’ equity |
$ | 1,051,287 | $ | 3,290 | $ | 1,054,577 | ||||||
| December 31, 2006 |
As Reported | Adjustments | As Restated (1) | ||||||
| ASSETS |
|||||||||
| Current assets: |
|||||||||
| Cash and cash equivalents |
$ | 83,079 | — | $ | 83,079 | ||||
| Accounts receivable, net |
104,106 | — | 104,106 | ||||||
| Inventories |
115,665 | — | 115,665 | ||||||
| Deferred income taxes |
3,872 | $ | 3,290 | 7,162 | |||||
| Prepaid expenses and other current assets |
17,860 | — | 17,860 | ||||||
| Total current assets |
324,582 | 3,290 | 327,872 | ||||||
| Property, plant and equipment, net |
117,704 | — | 117,704 | ||||||
| Goodwill |
399,666 | — | 399,666 | ||||||
| Trademarks and other intangible assets |
79,939 | — | 79,939 | ||||||
| Other assets |
16,043 | — | 16,043 | ||||||
| Total assets |
$ | 937,934 | $ | 3,290 | $ | 941,224 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||
| Current liabilities: |
|||||||||
| Accounts payable and accrued expenses |
$ | 98,775 | $ | 10,037 | $ | 108,812 | |||
41
Table of Contents
| Income taxes payable |
10,940 | 760 | 11,700 | |||||||||
| Current portion of long-term debt |
400 | — | 400 | |||||||||
| Total current liabilities |
110,115 | 10,797 | 120,912 | |||||||||
| Long-term debt, less current portion |
151,409 | — | 151,409 | |||||||||
| Deferred income taxes |
19,086 | (2,350 | ) | 16,736 | ||||||||
| Total liabilities |
280,610 | 8,447 | 289,057 | |||||||||
| Minority interest |
5,378 | — | 5,378 | |||||||||
| Commitments and contingencies |
||||||||||||
| Stockholders’ equity |
||||||||||||
| Preferred stock |
— | — | — | |||||||||
| Common stock |
403 | — | 403 | |||||||||
| Additional paid-in capital |
459,098 | 12,551 | 471,649 | |||||||||
| Retained earnings |
188,836 | (17,708 | ) | 171,128 | ||||||||
| Foreign currency translation adjustment |
16,354 | — | 16,354 | |||||||||
| 664,691 | (5,157 | ) | 659,534 | |||||||||
| Less: treasury stock, at cost |
(12,745 | ) | — | (12,745 | ) | |||||||
| Total stockholders’ equity |
651,946 | (5,157 | ) | 646,789 | ||||||||
| Total liabilities and stockholders’ equity |
$ | 937,934 | $ | 3,290 | $ | 941,224 | ||||||
| September 30, 2006 |
As Reported | Adjustments | As Restated (1) | |||||||||
| ASSETS |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 78,143 | — | $ | 78,143 | |||||||
| Accounts receivable, net |
95,215 | — | 95,215 | |||||||||
| Inventories |
111,440 | — | 111,440 | |||||||||
| Deferred income taxes |
3,843 | $ | 3,290 | 7,133 | ||||||||
| Prepaid expenses and other current assets |
17,291 | — | 17,291 | |||||||||
| Total current assets |
305,932 | 3,290 | 309,222 | |||||||||
| Property, plant and equipment, net |
113,982 | — | 113,982 | |||||||||
| Goodwill |
416,836 | — | 416,836 | |||||||||
| Trademarks and other intangible assets |
62,260 | — | 62,260 | |||||||||
| Other assets |
16,001 | — | 16,001 | |||||||||
| Total assets |
$ | 915,011 | $ | 3,290 | $ | 918,301 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable and accrued expenses |
$ | 100,281 | $ | 9,171 | $ | 109,452 | ||||||
| Income taxes payable |
8,175 | 1,071 | 9,246 | |||||||||
| Current portion of long-term debt |
840 | — | 840 | |||||||||
| Total current liabilities |
109,296 | 10,242 | 119,538 | |||||||||
| Long-term debt, less current portion |
151,172 | — | 151,172 | |||||||||
| Deferred income taxes |
19,086 | (2,864 | ) | 16,222 | ||||||||
| Total liabilities |
279,554 | 7,378 | 286,932 | |||||||||
| Minority interest |
5,184 | — | 5,184 | |||||||||
| Commitments and contingencies |
||||||||||||
| Stockholders’ equity |
||||||||||||
| Preferred stock |
— | — | — | |||||||||
| Common stock |
398 | — | 398 | |||||||||
| Additional paid-in capital |
450,657 | 13,065 | 463,722 | |||||||||
| Retained earnings |
174,068 | (17,153 | ) | 156,915 | ||||||||
| Foreign currency translation adjustment |
17,895 | — | 17,895 | |||||||||
| 643,018 | (4,088 | ) | 638,930 | |||||||||
| Less: treasury stock, at cost |
(12,745 | ) | — | (12,745 | ) | |||||||
| Total stockholders’ equity |
630,273 | (4,088 | ) | 626,185 | ||||||||
| Total liabilities and stockholders’ equity |
$ | 915,011 | $ | 3,290 | $ | 918,301 | ||||||
| (1) | See Note 2, “Summary of Significant Accounting Policies” and Note 3, “Restatement of Consolidated Financial Statements.” |
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The following tables present the effects of the adjustments for stock-based compensation on each line of our interim condensed consolidated balance sheets during the fiscal year ended June 30, 2006 (in thousands):
| March 31, 2006 |
As Reported | Adjustments | As Restated (1) | |||||||||
| ASSETS |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 32,658 | — | $ | 32,658 | |||||||
| Accounts receivable, net |
90,310 | — | 90,310 | |||||||||
| Inventories |
102,608 | — | 102,608 | |||||||||
| Deferred income taxes |
5,671 | — | 5,671 | |||||||||
| Prepaid expenses and other current assets |
20,684 | — | 20,684 | |||||||||
| Total current assets |
251,931 | — | 251,931 | |||||||||
| Property, plant and equipment, net |
99,720 | — | 99,720 | |||||||||
| Goodwill |
417,977 | — | 417,977 | |||||||||
| Trademarks and other intangible assets |
61,376 | — | 61,376 | |||||||||
| Other assets |
11,596 | — | 11,596 | |||||||||
| Total assets |
$ | 842,600 | — | $ | 842,600 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable and accrued expenses |
$ | 79,805 | $ | 1,282 | $ | 81,087 | ||||||
| Income taxes payable |
11,152 | 136 | 11,288 | |||||||||
| Current portion of long-term debt |
2,322 | — | 2,322 | |||||||||
| Total current liabilities |
93,279 | 1,418 | 94,697 | |||||||||
| Long-term debt, less current portion |
133,002 | — | 133,002 | |||||||||
| Deferred income taxes |
15,773 | (3,333 | ) | 12,440 | ||||||||
| Total liabilities |
242,054 | (1,915 | ) | 240,139 | ||||||||
| Minority interest |
4,716 | — | 4,716 | |||||||||
| Commitments and contingencies |
||||||||||||
| Stockholders’ equity |
||||||||||||
| Preferred stock |
— | — | — | |||||||||
| Common stock |
393 | — | 393 | |||||||||
| Additional paid-in capital |
439,150 | 13,534 | 452,684 | |||||||||
| Retained earnings |
156,258 | (11,619 | ) | 144,639 | ||||||||
| Foreign currency translation adjustment |
12,774 | — | 12,774 | |||||||||
| 608,575 | 1,915 | 610,490 | ||||||||||
| Less: treasury stock, at cost |
(12,745 | ) | — | (12,745 | ) | |||||||
| Total stockholders’ equity |
595,830 | 1,915 | 597,745 | |||||||||
| Total liabilities and stockholders’ equity |
$ | 842,600 | — | $ | 842,600 | |||||||
| December 31, 2005 |
As Reported | Adjustments | As Restated (1) | |||||||||
| ASSETS |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 17,359 | — | $ | 17,359 | |||||||
| Accounts receivable, net |
85,798 | — | 85,798 | |||||||||
| Inventories |
104,743 | — | 104,743 | |||||||||
| Deferred income taxes |
5,671 | — | 5,671 | |||||||||
| Prepaid expenses and other current assets |
21,195 | — | 21,195 | |||||||||
| Total current assets |
234,766 | — | 234,766 | |||||||||
| Property, plant and equipment, net |
97,507 | — | 97,507 | |||||||||
| Goodwill |
393,837 | — | 393,837 | |||||||||
| Trademarks and other intangible assets |
61,399 | — | 61,399 | |||||||||
| Other assets |
12,193 | — | 12,193 | |||||||||
| Total assets |
$ | 799,702 | — | $ | 799,702 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable and accrued expenses |
$ | 79,421 | $ | 1,182 | $ | 80,603 | ||||||
| Income taxes payable |
9,009 | 4 | 9,013 | |||||||||
| Current portion of long-term debt |
4,016 | — | 4,016 | |||||||||
| Total current liabilities |
92,446 | 1,186 | 93,632 | |||||||||
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| Long-term debt, less current portion |
108,184 | — | 108,184 | |||||||||
| Deferred income taxes |
16,210 | (3,411 | ) | 12,799 | ||||||||
| Total liabilities |
216,840 | (2,225 | ) | 214,615 | ||||||||
| Minority interest |
4,790 | — | 4,790 | |||||||||
| Commitments and contingencies |
||||||||||||
| Stockholders’ equity |
||||||||||||
| Preferred stock |
— | — | — | |||||||||
| Common stock |
390 | — | 390 | |||||||||
| Additional paid-in capital |
431,090 | 13,612 | 444,702 | |||||||||
| Retained earnings |
147,195 | (11,387 | ) | 135,808 | ||||||||
| Foreign currency translation adjustment |
12,142 | — | 12,142 | |||||||||
| 590,817 | 2,225 | 593,042 | ||||||||||
| Less: treasury stock, at cost |
(12,745 | ) | — | (12,745 | ) | |||||||
| Total stockholders’ equity |
578,072 | 2,225 | 580,297 | |||||||||
| Total liabilities and stockholders’ equity |
$ | 799,702 | — | $ | 799,702 | |||||||
| September 30, 2005 |
As Reported | Adjustments | As Restated (1) | |||||||||
| ASSETS |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 20,021 | — | $ | 20,021 | |||||||
| Accounts receivable, net |
73,478 | — | 73,478 | |||||||||
| Inventories |
83,567 | — | 83,567 | |||||||||
| Deferred income taxes |
5,671 | — | 5,671 | |||||||||
| Prepaid expenses and other current assets |
21,213 | — | 21,213 | |||||||||
| Total current assets |
203,950 | — | 203,950 | |||||||||
| Property, plant and equipment, net |
93,120 | — | 93,120 | |||||||||
| Goodwill |
358,261 | — | 358,261 | |||||||||
| Trademarks and other intangible assets |
60,875 | — | 60,875 | |||||||||
| Other assets |
12,635 | — | 12,635 | |||||||||
| Total assets |
$ | 728,841 | — | $ | 728,841 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable and accrued expenses |
$ | 62,675 | $ | 1,064 | $ | 63,739 | ||||||
| Income taxes payable |
5,833 | (124 | ) | 5,709 | ||||||||
| Current portion of long-term debt |
4,148 | — | 4,148 | |||||||||
| Total current liabilities |
72,656 | 940 | 73,596 | |||||||||
| Long-term debt, less current portion |
90,785 | — | 90,785 | |||||||||
| Deferred income taxes |
16,421 | (3,646 | ) | 12,775 | ||||||||
| Total liabilities |
179,862 | (2,706 | ) | 177,156 | ||||||||
| Minority interest |
4,772 | — | 4,772 | |||||||||
| Commitments and contingencies |
||||||||||||
| Stockholders’ equity |
||||||||||||
| Preferred stock |
— | — | — | |||||||||
| Common stock |
378 | — | 378 | |||||||||
| Additional paid-in capital |
408,636 | 13,847 | 422,483 | |||||||||
| Retained earnings |
134,858 | (11,141 | ) | 123,717 | ||||||||
| Foreign currency translation adjustment |
13,080 | — | 13,080 | |||||||||
| 556,952 | 2,706 | 559,658 | ||||||||||
| Less: treasury stock, at cost |
(12,745 | ) | — | (12,745 | ) | |||||||
| Total stockholders’ equity |
544,207 | 2,706 | 546,913 | |||||||||
| Total liabilities and stockholders’ equity |
$ | 728,841 | — | $ | 728,841 | |||||||
| (1) | See Note 3, “Restatement of Consolidated Financial Statements.” |
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Seasonality
Our tea brand primarily 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. The winter of 2006-2007 was an unusually warm winter season and, therefore, sales of cooler weather products, which typically increase in our second and third fiscal quarters, were negatively impacted.
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.
| 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:
| • | interest rates on debt and cash equivalents, and |
| • | 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. As of June 30, 2007, we had $65.0 million of variable rate debt outstanding. Assuming current cash equivalents and variable rate borrowings, a hypothetical change in average interest rates of one percentage point would not have a material effect on our financial position, results of operations or cash flows over the next fiscal year.
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 2007, approximately 24.9% of our net sales were generated from sales outside the United States, while such sales outside the United States were 19.3% of net sales in 2006 and 21.1% of net sales in 2005.
We expect sales from non-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:
| • | periodic economic downturns and unstable political environments; |
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| • | price and currency exchange controls; |
| • | fluctuations in the relative values of currencies; |
| • | unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; |
| • | compliance with applicable foreign laws; and |
| • | difficulties in managing a global enterprise, including staffing, collecting accounts receivable and managing distributors. |
| Item 8. | Financial Statements and Supplementary Data. |
The following consolidated financial statements of The Hain Celestial Group, Inc. and subsidiaries are included in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets—June 30, 2007 and 2006 (as restated)
Consolidated Statements of Income—Years ended June 30, 2007, 2006 (as restated) and 2005 (as restated)
Consolidated Statements of Stockholders’ Equity—Years ended June 30, 2007, 2006 (as restated) and 2005 (as restated)
Consolidated Statements of Cash Flows—Years ended June 30, 2007, 2006 (as restated) and 2005 (as restated)
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.
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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, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2007. 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, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2007, 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.
As described in Note 1 to the consolidated financial statements, during the fourth quarter 2007, the Company adopted Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements (“SAB No. 108”). In accordance with the transition provisions of SAB No. 108, the Company recorded an adjustment to retained earnings effective July 1, 2006 for the correction of prior period misstatements.
As described in Note 3 to the consolidated financial statements, the Company has restated its financial statements for the years ended June 30, 2006 and 2005.
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, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 30, 2008 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
Melville, New York
January 30, 2008
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THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2007 and 2006
(In thousands, except share amounts)
| June 30 | ||||||||
| 2007 | 2006 | |||||||
| (As restated-see Note 3) | ||||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 60,518 | $ | 48,875 | ||||
| Accounts receivable, less allowance for doubtful accounts of $2,371 and $2,104 |
95,405 | 80,764 | ||||||
| Inventories |
129,062 | 105,883 | ||||||
| Recoverable income taxes, net |
3,687 | — | ||||||
| Deferred income taxes |
8,069 | 2,986 | ||||||
| Prepaid expenses and other current assets |
19,263 | 21,968 | ||||||
| Total current assets |
316,004 | 260,476 | ||||||
| Property, plant and equipment, net of accumulated depreciation and amortization of $62,803 and $55,053 |
114,901 | 119,830 | ||||||
| Goodwill |
509,336 | 421,002 | ||||||
| Trademarks and other intangible assets, net of accumulated amortization of $10,036 and $9,416 |
96,342 | 61,626 | ||||||
| Other assets |
21,873 | 14,750 | ||||||
| Total assets |
$ | 1,058,456 | $ | 877,684 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 70,510 | $ | 55,341 | ||||
| Accrued expenses and other current liabilities |
41,948 | 26,861 | ||||||
| Income taxes payable |
4,456 | 4,276 | ||||||
| Current portion of long-term debt |
566 | 1,065 | ||||||
| Total current liabilities |
117,480 | 87,543 | ||||||
| Long-term debt, less current portion |
215,446 | 151,229 | ||||||
| Deferred income taxes |
22,232 | 15,894 | ||||||
| Other noncurrent liabilities |
664 | — | ||||||
| Total liabilities |
355,822 | 254,666 | ||||||
| Commitments and contingencies |
||||||||
| Minority interest |
5,678 | 4,926 | ||||||
| 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 40,882,653 and 39,583,671 shares |
409 | 396 | ||||||
| Additional paid-in capital |
487,750 | 459,712 | ||||||
| Retained earnings |
195,658 | 153,332 | ||||||
| Foreign currency translation adjustment |
25,884 | 17,397 | ||||||
| 709,701 | 630,837 | |||||||
| Less: 861,256 shares of treasury stock, at cost |
(12,745 | ) | (12,745 | ) | ||||
| Total stockholders’ equity |
696,956 | 618,092 | ||||||
| Total liabilities and stockholders’ equity |
$ | 1,058,456 | $ | 877,684 | ||||
See notes to consolidated financial statements.
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Table of Contents
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2007, 2006 and 2005
(In thousands, except per share amounts)
| Year Ended June 30 | |||||||||
| 2007 | 2006 | 2005 | |||||||
| (As restated 1) | (As restated 1) | ||||||||
| Net sales |
$ | 900,432 | $ | 738,557 | $ | 619,967 | |||
| Cost of sales |
639,002 | 525,205 | 449,010 | ||||||
| Gross profit |
261,430 | 213,352 | 170,957 | ||||||
| Selling, general and administrative expenses |
177,453 | 148,295 | 130,416 | ||||||
| Operating income |
83,977 | 65,057 | 40,541 | ||||||
| Interest and other expenses, net |
6,885 | 5,911 | 3,677 | ||||||
| Income before income taxes |
77,092 | 59,146 | 36,864 | ||||||
| Provision for income taxes |
29,610 | 22,779 | 12,803 | ||||||
| Net income |
$ | 47,482 | $ | 36,367 | $ | 24,061 | |||
| Net income per share: |
|||||||||
| Basic |
$ | 1.21 | $ | .97 | $ | .66 | |||
| Diluted |
$ | 1.16 | $ | .93 | $ | .65 | |||
| Weighted average common shares outstanding: |
|||||||||
| Basic |
39,315 | 37,643 | 36,407 | ||||||
| Diluted |
41,108 | 38,912 | 37,153 | ||||||
| 1 |
See Note 3 |
See notes to consolidated financial statements.
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Table of Contents
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED JUNE 30, 2007, 2006 and 2005
(In thousands, except per share and share data)
| Common Stock | Additional Paid-In Capital |
Retained Earnings |
||||||||||
| Shares | Amount at $.01 |
|||||||||||
| (As restated 1) | (As restated 1) | |||||||||||
| Balance at June 30, 2004 as previously reported |
37,064,648 | $ | 371 | $ | 391,931 | $ | 106,097 | |||||
| Adjustments to opening stockholders’ equity |
16,655 | (13,193 | ) | |||||||||
| Balance at June 30, 2004 as restated 1 |
37,064,648 | 371 | 408,586 | 92,904 | ||||||||
| Exercise of stock options and warrants |
411,350 | 4 | 5,237 | |||||||||
| Purchase of treasury shares |
||||||||||||
| Non-cash compensation charge |
2,270 | |||||||||||
| Tax benefit from stock options |
470 | |||||||||||
| Comprehensive income: |
||||||||||||
| Net income |
24,061 | |||||||||||
| Translation adjustments |
||||||||||||
| Total comprehensive income |
||||||||||||
| Balance at June 30, 2005 |
37,475,998 | 375 | 416,563 | 116,965 | ||||||||
| Exercise of stock options and warrants |
1,009,099 | 10 | 15,408 | |||||||||
| Issuance of common stock |
1,098,574 | 11 | 21,784 | |||||||||
| Non-cash compensation charge |
4,213 | |||||||||||
| Tax benefit from stock options |
1,744 | |||||||||||
| Comprehensive income: |
||||||||||||
| Net income |
36,367 | |||||||||||
| Translation adjustments |
||||||||||||
| Total comprehensive income |
||||||||||||
| Balance at June 30, 2006 |
39,583,671 | 396 | 459,712 | 153,332 | ||||||||
| Cumulative effect of adjustments from the adoption of SAB No. 108, net of taxes |
(5,156 | ) | ||||||||||
| Adjusted balance at June 30, 2006 |
39,583,671 | 396 | 459,712 | 148,176 | ||||||||
| Exercise of stock options and warrants |
1,102,518 | 11 | 18,396 | |||||||||
| Issuance of common stock |
196,464 | 2 | 5,607 | |||||||||
| Non-cash compensation charge |
1,031 | |||||||||||
| Tax benefit from stock options |
3,004 | |||||||||||
| Comprehensive income: |
||||||||||||
| Net income |
47,482 | |||||||||||
| Translation adjustments |
||||||||||||
| Total comprehensive income |
||||||||||||
| Balance at June 30, 2007 |
40,882,653 | $ | 409 | $ | 487,750 | $ | 195,658 | |||||
| 1 |
See Note 3 |
See notes to consolidated financial statements.
50
Table of Contents
| Treasury Stock | Foreign Currency Translation Adjustment |
Total | Comprehensive Income | |||||||||||||
| Shares | Amount | |||||||||||||||
| (As restated 1) | (As restated 1) | |||||||||||||||
| Balance at June 30, 2004 as previously reported |
671,556 | $ | (9,285 | ) | $ | 7,651 | $ | 496,765 | ||||||||
| Adjustments to opening stockholders’ equity |
3,462 | |||||||||||||||
| Balance at June 30, 2004 as restated |
671,556 | (9,285 | ) | $ | 7,651 | $ | 500,227 | |||||||||
| Exercise of stock options and warrants |
5,241 | |||||||||||||||
| Purchase of treasury shares |
189,700 | (3,460 | ) | (3,460 | ) | |||||||||||
| Non-cash compensation charge |
2,270 | |||||||||||||||
| Tax benefit from stock options |
470 | |||||||||||||||
| Comprehensive income: |
||||||||||||||||
| Net income |
24,061 | $ | 24,061 | |||||||||||||
| Translation adjustments |
2,397 | 2,397 | 2,397 | |||||||||||||
| Total comprehensive income |
$ | 26,458 | ||||||||||||||
| Balance at June 30, 2005 |
861,256 | (12,745 | ) | 10,048 | 531,206 | |||||||||||
| Exercise of stock options and warrants |
15,418 | |||||||||||||||
| Issuance of common stock |
21,795 | |||||||||||||||
| Non-cash compensation charge |
4,213 | |||||||||||||||
| Tax benefit from stock options |
1,744 | |||||||||||||||
| Comprehensive income: |
||||||||||||||||
| Net income |
36,367 | $ | 36,367 | |||||||||||||
| Translation adjustments |
7,349 | 7,349 | 7,349 | |||||||||||||
| Total comprehensive income |
$ | 43,716 | ||||||||||||||
| Balance at June 30, 2006 |
861,256 | (12,745 | ) | 17,397 | 618,092 | |||||||||||
| Cumulative effect of adjustments from the adoption of SAB No. 108, net of taxes |
(5,156 | ) | ||||||||||||||
| Adjusted balance at June 30, 2006 |
861,256 | (12,745 | ) | 17,397 | 612,936 | |||||||||||
| Exercise of stock options and warrants |
18,407 | |||||||||||||||
| Issuance of common stock |
5,609 | |||||||||||||||
| Non-cash compensation charge |
1,031 | |||||||||||||||
| Tax benefit from stock options |
3,004 | |||||||||||||||
| Comprehensive income: |
||||||||||||||||
| Net income |
47,482 | $ | 47,482 | |||||||||||||
| Translation adjustments |
8,487 | 8,487 | 8,487 | |||||||||||||
| Total comprehensive income |
$ | 55,969 | ||||||||||||||
| Balance at June 30, 2007 |
861,256 | $ | (12,745 | ) | $ | 25,884 | $ | 696,956 | ||||||||
| 1 |
See Note 3 |
See notes to consolidated financial statements.
51
Table of Contents
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2007, 2006 and 2005
(In thousands)
| Year Ended June 30 | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (As restated 1) | (As restated 1) | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
| Net income |
$ | 47,482 | $ | 36,367 | $ | 24,061 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| SKU rationalization charges |
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