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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange
Act of 1934
For The Fiscal Year Ended June 30, 2000
Commission File No. 0-22818
THE HAIN CELESTIAL GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3240619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Charles Lindbergh Boulevard
Uniondale, New York 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 237-6200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to Form
10-K. |_|
State the aggregate market value of the voting common equity held by non-
affiliates, computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days.
Class of Voting Stock and Number Market Value Held
of Shares Held by Non-Affiliates by Non-affiliates*
- -------------------------------- -----------------
24,826,086 shares of Common Stock $802,193,000
* Based on the last reported sale price for the Common Stock on Nasdaq National
Market on September 19, 2000
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date. Common Stock, par value $.01
per share, 32,053,361 shares outstanding as of September 19, 2000.
Documents Incorporated by Reference
Document Part of the Form 10-K
into which Incorporated
The Hain Celestial Group, Inc. Definitive Part III
Proxy Statement for the Annual Meeting
of Stockholders to be Held December 5, 2000
TABLE OF CONTENTS
PART I
Page
Item 1. Business 1
Note Regarding Forward Looking Information 1
General 1
Product Overview 4
Products 5
New Product Initiatives Through Research and Development 6
Sales and Distribution 6
Marketing 6
Manufacturing Facilities 7
Suppliers of Ingredients and Packaging 7
Co-packed Product Base 8
Trademarks 9
Competition 9
Government Regulation 10
Independent Certification 11
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 54
PART III
Item 10. Directors and Executive Officers of
the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership and Certain Beneficial
Owners and Management 54
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K 54
Signatures 56
PART I
THE HAIN CELESTIAL GROUP, INC.
Item 1. Business.
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 and
Section 21E of the Exchange Act. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, levels of activity, performance or achievements of the Company (as
defined below), or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; the ability of the Company
to implement its business and acquisition strategy; the ability to effectively
integrate its acquisitions; the ability of the Company to obtain financing for
general corporate purposes; competition; availability of key personnel; and
changes in, or the failure to comply with government regulations. As a result of
the foregoing and other factors, no assurance can be given as to the future
results, levels of activity and achievements and neither the Company nor any
person assumes responsibility for the accuracy and completeness of these
statements.
General
The Hain Celestial Group, Inc., a Delaware corporation, and its
subsidiaries (the "Company") manufacture, market, distribute and sell natural,
specialty, organic and snack food products under brands names which are sold as
"better-for-you" products. At June 30, 2000, the Company is a leader in 13 of
the top 15 natural food categories, with such well-known natural food brands as
Celestial Seasonings (R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R),
Arrowhead Mills(R), Health Valley(R), Breadshop's(R), Casbah(R), Garden of
Eatin'(R), Terra Chips(R), DeBoles(R), Earth's Best(R), and Nile Spice(R). The
Company's principal specialty product lines include Hollywood(R) cooking oils,
Estee(R) sugar-free products, Weight Watchers(R) dry products, Kineret(R) kosher
foods, Boston Better Snacks(R), and Alba Foods(R). The Hain Celestial Group's
website can be found at www.hain-celestial.com.
The Company's 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. During fiscal 2000, approximately 55% of the
Company's revenues were manufactured within its own facilities. The remaining
45% of the Company's revenues were derived from products which are produced by
independent food manufacturers ("co-packers") using proprietary specifications
controlled by the Company.
On May 30, 2000, the Company, previously known as The Hain Food Group,
Inc. ("Hain"), completed a merger (the "Merger") with Celestial Seasonings, Inc.
("Celestial") by issuing 10.3 million shares of Hain common stock in exchange
for all of the outstanding common stock of Celestial. Each share of Celestial
common stock was exchanged for 1.265 shares of Hain common stock. Hain
subsequently changed its name to The Hain Celestial Group, Inc. Celestial, the
common stock of which was previously publicly traded, is the market leader in
speciality teas.
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The Merger was accounted for as a pooling-of-interests and,
accordingly, all prior period consolidated financial statements of Hain have
been restated to include the results of operations, financial position and cash
flows of Celestial.
Since its formation, the Company has completed a number of acquisitions
of companies and brands. The principal companies and brands acquired are as
follows:
Kineret Foods Corporation, a kosher foods company, acquired in November
1993.
Hain Pure Food Co., Inc., a natural food product company, including
Hollywood Foods, a maker of cooking oils, condiments and vegetable juice
under the Hollywood brand, acquired in April 1994.
The Estee Company, a maker of sugar-free, medically directed food
products under the Estee brand, acquired in November 1995.
Weight Watchers dry products, which the Company sells under a license
from H.J. Heinz Company ("Heinz") granted in March 1997.
Boston Better Snacks ("Boston Popcorn"), a snack foods producer,
acquired in May 1997.
Westbrae Natural, Inc. through which the Company sells natural foods
under the Westbrae, Westsoy, Little Bear and Bearitos labels, acquired
in October 1997.
In 1999, the Company purchased the trademarks of Earth's Best natural
baby food products from Heinz. Prior thereto, Earth's Best products
were sold by the Company to natural food stores pursuant to a license
from Heinz acquired in May 1998, and further to United States retail
grocery and natural food stores under an April 1999 expansion of the
licensing agreement.
On July 1, 1998, the Company acquired the following businesses and
brands from The Shansby Group and other investors:
Arrowhead Mills, Inc., a natural food company.
DeBoles Nutritional Foods, Inc., a natural pasta products company.
Dana Alexander, Inc. the maker of Terra Chips natural vegetable chips.
Garden of Eatin', Inc., a natural snack products company.
On December 8, 1998, the Company acquired the Nile Spice soup and meal
cup ("Nile Spice") business from The Quaker Oats Company. The Nile Spice product
line includes premium soups and meals packaged in cups that are sold under the
Nile Spice and Near East brands. The Near East brand is sold under a licensing
agreement through December 2000.
On May 18, 1999, the Company acquired Natural Nutrition Group, Inc. and
its subsidiaries ("NNG"). NNG is a manufacturer and marketer of premium natural
and organic food products primarily under its Health Valley, Breadshop's and
Sahara Natural brands.
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Celestial is the largest manufacturer and marketer of herb teas in the
United States, with an estimated 50% share of the herb tea category. The Company
developed and popularized the herb tea category in the United States as a
flavorful and non-caffeinated alternative to other hot beverages. Currently the
Company markets over 60 tea varieties under the Celestial Seasonings(R) brand.
At June 30, 2000, the Company also owned the Farm Foods, Harry's
Premium Snacks, Featherweight, and Alba Foods brands from acquisitions in prior
years.
The Company's brand names are well recognized in the various market
categories they serve. The Company has acquired its brands over the past seven
years and will seek future growth through internal expansion, as well as the
acquisition of complementary brands.
On September 27, 1999, the Company entered into a global strategic
alliance with Heinz related to the production and distribution of natural
products domestically and internationally. In connection with the alliance, the
Company acquired the Earth's Best trademarks and issued to the Heinz Subsidiary
approximately 3.5 million shares of its common stock. The Company and the Heinz
Subsidiary also entered into an Investors Agreement under which the Heinz
Subsidiary agrees to limit its holdings to 19.5% of the Company's common stock
for an 18 month period ending March 27, 2001. See Note 11 of the Notes to the
Consolidated Financial Statements for further information regarding this
transaction.
The Company's overall mission is to be a leading marketer and seller of
natural, organic, beverage and speciality food products by integrating all of
its brands under one management team and employing a uniform marketing, sales
and distribution program. The Company's business strategy is to capitalize on
the brand equity and the distribution previously achieved by each of the
Company's acquired product lines and to enhance revenues by strategic
introductions of new product lines that complement existing products. The
foundation of this strategy has been established through the acquisitions
referred to above and the introduction of a number of new products that
complement existing product lines. The Company believes that by integrating its
various brand groups, it will achieve efficiencies of scale and enhanced market
penetration. The Company considers the acquisition of natural, organic and
speciality food companies and product lines as an integral part of its business
strategy. To that end, the Company from time to time reviews and conducts
preliminary discussions with acquisition candidates.
As of June 30, 2000, the Company employed a total of 940 full-time
employees. Of these employees, 80 were in sales, 440 in production and the
remaining 420 were management and administrative. Certain employees at the
Health Valley facility have elected to be represented by the Bakery,
Confectionary and Tobacco Workers' Union (the "Union"). The Company, and NNG
prior to its acquisition by the Company, have been engaged in negotiations with
the Union since November 1997; however, no agreement has been reached. As of
this date, the Company continues to negotiate with the Union while union
employees continue to work, however, there can be no assurance that the Company
and its employees will satisfactorily negotiate a contract in terms acceptable
to both the Company and the employees. The Company understands from sources
believed to be reliable that the Union and its membership are now considering
various actions, including a potential work stoppage. In contemplation of a
possible work stoppage , the Company has developed a contingency plan that it
believes will minimize the
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impact of a labor action. Accordingly, while there can be no assurances, the
Company believes any labor action would not have a material adverse effect on
the Company's business, results of operations or financial condition.
Product Overview
Natural and Organic Food Products
The Company's Hain, Westbrae, Westsoy, Little Bear, Bearitos, Arrowhead
Mills, Terra Chips, DeBoles, Garden of Eatin', Health Valley, Sahara Natural,
Breadshop's, Nile Spice, Earth's Best, Harry's Premium Snacks and Farm Foods
businesses market and distribute a full line of natural food products. At June
30, 2000, the Company is a leader in 13 of the top 15 natural food categories.
Natural foods are defined as foods which are minimally processed, largely or
completely free of artificial ingredients, preservatives, and other
non-naturally occurring chemicals, and are as near to their whole natural state
as possible. Many of the Company's products are also made with "organic"
ingredients which are grown without dependence upon artificial pesticides,
chemicals or fertilizers.
Tea and Beverage Products
The Company's tea products contain no artificial preservatives, are made from
high-quality, natural ingredients and are generally offered in 20 and 40 count
packages sold in grocery, natural foods and other retail stores. The Company
develops high-quality, flavorful, natural products with attractive, colorful and
thought-provoking packaging. The Company's products include Sleepytime(R), Lemon
Zinger(R), Peppermint, Chamomile, Mandarin Orange Spice(R), Wild Cherry
Blackberry, Cinnamon Apple Spice, Red Zinger(R), Raspberry Zinger(R), Tension
Tamer(R), Country Peach Passion(R) and Wild Berry Zinger(R) herb teas, a line of
green teas, a line of wellness teas, a line of organic teas, and a line of
specialty black teas.
Snack Food Products
The Company manufactures, markets and sells a variety of potato and
vegetable chips, organic tortilla style chips, pretzels, popcorn and potato
chips under the Terra Chips, Garden of Eatin', Little Bear, Boston Popcorn and
Harry's Original names.
Medically-Directed and Weight Management Products
The Company's Estee and Featherweight businesses market and distribute
a full line of sugar-free, fructose sweetened and low sodium products targeted
towards diabetic and health conscious consumers and persons on medically-
restricted diets. Under a license agreement, the Company manufactures, markets
and sells Weight Watchers weight-loss and portion control dry grocery products.
Specialty Cooking Oil Products
The Company's Hollywood Foods business markets a line of specialty
cooking oils that are enhanced with Vitamin E to maintain freshness and quality.
The Hollywood product line also includes carrot juice, mayonnaise and margarine.
Hollywood products are primarily sold directly to supermarkets and other mass
market merchandisers.
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Kosher Food Products
The Company's Kineret business markets and distributes a line of frozen
and dry kosher food products. Kosher foods are products that are prepared in a
manner consistent with Kosher dietary laws.
Products
The Company's natural and organic food product lines consist of
approximately 1,000 branded items and include non-dairy drinks (soy and rice
milk), popcorn cakes, cookies, crackers, flour and baking mixes, hot and cold
cereals, pasta, baby food, condiments, cooking oils, granolas, granola bars,
cereal bars, canned and instant soups, chilis, packaged grain, nut butters and
nutritional oils, as well as other food products. For fiscal 2000 and 1999,
non-dairy drinks accounted for approximately 14% and 12%, respectively, of total
net sales.
The Company's beverage and tea products consist of: Herb teas which are
made from all natural ingredients and are offered in a wide variety of flavors.
The Company's top-selling herb tea products include Sleepytime(R), Chamomile,
Lemon Zinger(R), Peppermint, Raspberry Zinger(R), Tension Tamer(R), Wild Berry
Zinger(R), Country Peach Passion(R), Mandarin Orange Spice(R) and Red Zinger(R);
Green teas which includes Authentic Green Tea, Decaffeinated Green Tea, Emerald
Gardens(R) Green Tea, Honey Lemon Ginseng Green Tea and Misty Jasmine(TM) Green
Tea; Wellness teas, whose product line includes Sleepytime EXTRA, Tension Tamer
EXTRA, Detox A.M.(TM), Diet Partner, Echinacea, Echinacea Complete Care(TM),
GingerEase(TM), GinkgoSharp(TM), Ginseng Energy(TM), LaxaTea(TM) and Mood
Mender(TM) and Specialty Black Teas which are made exclusively from natural
ingredients. Black tea products include Earl Grey, English Breakfast, Fast
Lane(R), Vanilla Maple, Ceylon Apricot Ginger and Black Raspberry. For fiscal
2000 and 1999, tea beverages accounted for approximately 24% and 32%,
respectively, of total net sales.
Terra Chips natural food products consist of approximately 50 items
comprised of varieties of potato chips, sweet potato chips and other vegetable
chips.
Garden of Eatin' natural food products substantially consist of a
variety of organic tortilla chip products.
Boston Popcorn and Harry's products consist of approximately 50
varieties of popcorn, potato chips, tortilla chips and other snack food items.
The Company's Hollywood brand products are sold principally through the
supermarket distribution channel. Principal products are safflower, canola, and
peanut oils, and carrot juice. Hollywood cooking oils are enhanced with Vitamin
E.
The Estee line of products consists of sugar-free and fructose
sweetened food products which are distributed nationwide to supermarkets, food
service distributors, specialty groceries, mass merchandisers, drug stores and
other merchants.
Kineret offers a line of kosher frozen food products under the Kineret
and Kosherific labels. The Kineret products include fish products, potato
pancakes, blintzes, challah bread, pastry dough, and assorted other food
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products. Recently, the Company introduced a line of dry grocery products for
Passover.
The Company continuously evaluates its existing products for taste,
nutritional value and cost and makes improvements where possible. The Company
will discontinue products or stock keeping units when sales of those items do
not warrant further production.
New Product Initiatives Through Research and Development
The Company considers research and development of new products to be a
significant part of its overall philosophy and commitment to developing high-
quality products. A team of professional product developers works with a sensory
technologist to test product prototypes with consumers. The research and
development department incorporates product ideas from all areas of the Company
in order to formulate new products. In addition to developing new products, the
research and development department routinely reformulates and revises existing
products. During the years ended June 30, 2000, 1999 and 1998, amounts expensed
for Company-sponsored research and development activities were approximately
$1.5, $1.4 and $1.1 million, respectively.
Sales and Distribution
The Company's products are sold in all 50 states and in approximately
50 countries. Certain of the Company's product lines have seasonality
fluctuations (e.g. the Company's tea products sales are stronger in cold months
while its snack food product lines are stronger in the warmer months); however,
in the aggregate, the Company believes that such seasonality has limited effect
on operations.
A majority of the products marketed by the Company are sold through
independent distributors. Over half of the sales orders are received from
third-party food brokers. Over the past two years, the Company has been
increasing its direct sales force for sales into natural food stores and
reducing its reliance on food brokers. Food brokers act as agents for the
Company within designated territories, usually on a non-exclusive basis, and
receive commissions. Food distributors purchase products from the Company for
resale to retailers. Because food distributors take title to the products upon
purchase, product pricing decisions on sales of the Company's products by the
distributors are generally made in their sole discretion, although the Company
may participate in product pricing during promotional periods.
The Company's customer base consists principally of mass-market
merchandisers, natural food distributors, supermarkets, drug store chains, club
stores and grocery wholesalers. During the year ended June 30, 2000, sales to
Tree of Life and affiliates, and United Naturals, Inc. accounted for
approximately 18% and 17%, respectively, of the Company's net sales. During the
year ended June 30, 1999, sales to Tree of Life and United Naturals, Inc.
accounted for approximately 18% each of the Company's net sales. Net sales to
export customers represent less than 5% of the total net sales.
Marketing
The Company uses a mix of trade and consumer promotions, as well as
advertising, to market its products. The Company uses trade advertising and
promotion, including placement fees, cooperative advertising and feature
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advertising in distribution catalogs. The Company also utilizes advertising and
sales promotion expenditures via national and regional consumer promotion
through television and magazine advertising, couponing and other trial use
programs.
Manufacturing Facilities
The Company operates and manages five manufacturing facilities located
throughout the United States, where manufacturing is performed for products
representing approximately 55% of the Company's net sales in fiscal 2000. These
facilities are located and produce the following product lines: Terra Chips(R),
in Brooklyn, New York, produces vegetable chips; Arrowhead Mills, in Hereford,
Texas, produces hot and cold cereals, and baked goods; Deboles(R) pasta, in
Shreveport, Louisiana, produces organic pasta; Health Valley in Irwindale,
California, produces hot and cold cereals, baked goods, granola, granola bars,
dry soups and other products under the Health Valley(R) Breadshop(R), Casbah(R)
and Nile Spice(R) labels, and Celestial Seasonings teas, in Boulder, Colorado.
The facilities in Brooklyn, New York and Irwindale, California are
under operating leases through 2004. The Company owns the Hereford, Shreveport
and Boulder facilities.
An interruption in or the loss of operations at one or more of these
facilities or failure to maintain our labor force at one or more of these
facilities could delay or postpone production of our products, which could have
a material adverse effect on our business, results of operations and financial
condition until we could secure an alternate source of supply. We cannot assure
that an alternate source of supply could be obtained on reasonable terms, or at
all. In addition, the Company believes it has sufficient capacity in all of its
facilities except for the Brooklyn, New York facility, which is currently at
capacity. In the fourth quarter of fiscal 2000, the demand for the Company's
Terra Chips products exceeded the production capacity of its Brooklyn, New York
facility. The Company is pursuing additional sources of supply to alleviate
these ongoing capacity restraints.
Suppliers of Ingredients and Packaging
The Company's natural and organic ingredients, and packaging are
obtained from various sources of suppliers, located principally in the United
States.
The Company's 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.
The Company maintains long-term relationships with most of its
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.
The Company's 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. The Company
performs laboratory analysis on incoming ingredient shipments for the purpose of
assuring that they meet the Company's quality standards and those
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of the U.S. Food and Drug Administration ("FDA") and/or in accordance with the
California Organic Foods Act of 1990.
The Company's ability to ensure a continuing supply of ingredients at
competitive prices depends on many factors beyond its control, such as foreign
political situations, embargoes, changes in national and world economic
conditions, currency fluctuations and unfavorable climatic conditions. The
Company takes steps intended to lessen the risk of an interruption of botanical
supplies, including identification of alternative sources and maintenance of
appropriate inventory levels. The Company has, in the past, maintained
sufficient supplies for its ongoing operations.
Celestial purchases most of its packaging materials domestically. The
Fort James Corporation, a packaging materials supplier, was the largest single
supplier in 2000. The ability of Celestial to continue its current packaging of
waxed carton liner depends upon the continued access to waxed carton liner.
Celestial currently obtains all of its waxed carton liner from a single domestic
supplier, however, the Company is reviewing and analyzing two alternative
suppliers whose packaging products are being tested for production. If this
supplier ceases to supply liners to Celestial and if Celestial is unable to
obtain a reliable alternative waxed carton liner source, Celestial could be
forced to reformat its packaging, which could have a material adverse effect on
our business, results of operations and financial condition following the
merger.
Co-Packed Product Base
During fiscal 2000, approximately 45% of the Company's revenue was
derived from products manufactured at independent co-packers. Currently,
independent food manufacturers, who are referred to in our industry as co-
packers, manufacture many of Hain's product lines. These product lines include
our Estee(R), Garden of Eatin'(R), Hain Pure Foods(R),Kineret(R), Little Bear
Organic Foods(R), Terra Chips(R) (Yukon Gold(R) line), Westbrae(R), and
Westsoy(R) product lines.
The Company presently obtains:
- all of our requirements for non-dairy beverages from four co-
packers, all of which are under contract;
- all of our requirements for rice cakes from two co-packers;
- all of our cooking oils from one co-packer, which is under
contract;
- principally all of our tortilla chips from two suppliers, one of
which is under contract;
- all of our requirements for Terra's Yukon Gold line from one
supplier, which is under contract; and
- the requirements for our canned soups from two suppliers.
In addition, Heinz manufactures the Earth's Best baby food products for
the Company under contract. The loss of one or more co-packers, or our failure
to retain co-packers for newly acquired products or brands, could delay or
postpone production of our products, which could have a material adverse
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effect on our business, results of operations and financial condition until such
time as an alternate source could be secured, which may be on less favorable
terms.
Trademarks
The Company's trademarks and brand names for the product lines referred
to herein are registered in the United States and a number of foreign countries
and the Company intends to keep these filings current and seek protection for
new trademarks to the extent consistent with business needs. The Company also
copyrights certain of its artwork and package designs. The Company owns the
trademarks for the principal products, including Arrowhead Mills, Bearitos,
Breadshop's, Casbah, Celestial Seasonings, DeBoles, Earth's Best, Estee, Garden
of Eatin', Hain Pure Foods, Health Valley, Kineret, Little Bear Organic Foods,
Nile Spice, Terra, Westbrae, and Westsoy. The Company sells Weight Watchers
products pursuant to licenses from Heinz. Celestial has trademarks for most of
its best-selling brands, including Sleepytime, Lemon Zinger, Mandarin Orange
Spice, Red Zinger, Wild Berry Zinger, Tension Tamer, Country Peach Passion,
Raspberry Zinger and Gingko Sharp.
The Company believes that brand awareness is a significant component in
a consumer's decision to purchase one product over another in the highly
competitive food and beverage industry. Our failure to continue to sell our
products under our established brand names could have a material adverse effect
on our business, results of operations and financial condition. The Company
believes that its trademarks and trade names are significant to the marketing
and sale of the Company's products and that the inability to utilize certain of
these names could have a material adverse effect on the Company's business,
results of operations and financial condition.
Competition
The Company operates in highly competitive geographic and product
markets, and some of the Company's markets are dominated by competitors with
greater resources. The Company cannot be certain that it 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 the Company competes for limited retailer shelf
space for its products. Larger competitors, such as mainstream food companies
including Nabisco, General Mills, Nestle S.A., Kraft Foods, Groupe Danone,
Kellogg Company, Sara Lee Corporation, B&G Foods, Inc. and Triarc Beverage
Holdings Corporations also may be able to benefit from economies of scale,
pricing advantages or the introduction of new products that compete with the
Company's products. Retailers also market competitive products under their own
private labels.
The beverage market is large and highly competitive. The tea portion of
the beverage market is also highly competitive. Competitive factors in the tea
industry include product quality and taste, brand awareness among consumers,
variety of specialty tea flavors, interesting or unique product names, product
packaging and package design, supermarket and grocery store shelf space,
alternative distribution channels, reputation, price, advertising and promotion.
Celestial currently competes in the specialty tea market segment which consists
of herb tea, green tea, wellness tea and specialty black tea. Celestial's
specialty herb tea products, like other specialty tea products, are priced
higher than most commodity black tea products.
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Celestial's principal competitors on a national basis in the specialty
teas market segment are Thomas J. Lipton Company, a division of Unilever PLC,
and R.C. Bigelow, Inc. Unilever has substantially greater financial resources
than the Company. Additional competitors include a number of regional specialty
tea companies. There may be potential entrants which are not currently in the
specialty tea market who may have substantially greater financial resources than
the Company. Private label competition in the specialty tea category is
currently minimal.
In the future the Company's competitors may introduce other products
that compete with its products and these competitive products may have an
adverse effect on our business, results of operations and financial condition.
Government Regulation
The Company and its manufacturers, distributors and co-packers are
subject to extensive regulation by federal, state and local authorities that
affect business. The federal agencies governing our business include the Federal
Trade Commission ("FTC"), the FDA, the United States Department of Agriculture
("USDA") and the Occupational Safety and Health Administration ("OSHA"). These
agencies regulate, among other things, the production, sale, safety,
advertising, labeling of and ingredients used in the Company's products. Under
various statutes these agencies prescribe the requirements and establish the
standards for quality, purity and labeling. Among other requirements, the FDA
must approve the Company's products, including a review of the manufacturing
processes and facilities used to produce these products before these products
can be marketed in the United States. In addition, advertising of the Company's
business is subject to regulation by the FTC. The Company's activities are also
regulated by state agencies as well as county and municipal authorities. The
Company is also subject to the laws of the foreign jurisdictions in which we
sell our products.
The USDA has proposed certain regulations with respect to organic
labeling and certification. These regulations are currently in a comment period
through the middle of the third calendar quarter of 2000. Based upon
certification by a third-party organic certifier the Company believes it meets
the requirements of the USDA as proposed. In addition, new government laws and
regulations may be introduced in the future that could result in additional
compliance costs, seizures, confiscation, recall or monetary fines, any of which
could prevent or inhibit the development, distribution and sale of our products.
If we fail to comply with applicable laws and regulations, we may be subject to
civil remedies, including fines, injunctions, recalls or seizures, as well as
potential criminal sanctions, which could have a material adverse effect on our
business, results of operations and financial condition.
Celestial products are also subject to the Dietary Supplement Health
and Education Act of 1994, or DSHEA, which went into effect in March 1999. DSHEA
defines dietary supplements as a new category of food, separate from
conventional food. DSHEA requires specific nutritional labeling requirements for
dietary supplements and permits substantiated, truthful and non-misleading
statements of nutritional support to be made in labeling, such as statements
describing general well-being resulting from consumption of a dietary
ingredient, or the role of a nutrient or dietary ingredient in affecting or
maintaining a structure or function of the body.
-10-
Independent Certification
The Company relies on independent certificates, 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 the Company's market position as a natural
and specialty food company, which could have a material adverse effect on its
business, results of operations and financial condition.
The Company complies with the requirements of independent organizations
or certification authorities in order to label our product as certified. For
example, we can lose our "organic" certification if a plant becomes contaminated
with non-organic materials, or if not properly cleaned after a production run.
In addition, all raw materials must be certified organic. Similarly, we can lose
our "kosher" certification if a plant and raw materials do not meet the
requirements of the appropriate kosher supervision organization, such as The
Union of Orthodox Jewish Congregations, The Organized Kashruth Laboratories,
"KOF-K" Kosher Supervision, Kosher Overseers Associated of America and Upper
Midwest Kashruth.
Item 2. Properties.
The Company's corporate headquarters are located in approximately
17,000 square feet of leased office space located at 50 Charles Lindbergh
Boulevard, Uniondale, New York. This lease, as amended, runs through October
2003. The current annual rental is approximately $450,000.
The Company owns a manufacturing and office facility in Boulder,
Colorado, built in 1990 on 42 acres of Company-owned land. The facility has
approximately 167,000 square feet, of which 50,000 square feet is office space
and 117,000 square feet is manufacturing space.
The Company leases 60,000 square feet of warehouse space in Boulder,
Colorado which is used for the storage and shipment of its tea and beverage
products. The lease expires in 2004, and provides for a current annual rental of
approximately $500,000.
The Company leases 100,000 square feet of space in a building located
in Compton, California, consisting of 90,000 square feet of warehouse space and
10,000 square feet of office space. The lease expires during fiscal 2003 and
provides for a current annual rental of approximately $396,000. This facility
serves as one of the Company's West Coast distribution centers for principally
all of the Company's product lines. In August 2000, the Company entered into a
new lease for a new consolidated distribution facility in Ontario, California.
The Company intends to sublet the Compton, California facility. The Ontario,
California facility has approximately 375,000 square feet, expires June 30, 2007
with minimum annual rentals of $1.3 million.
The Company leases 27,000 square feet of space in Brooklyn, New York
through December 2001. This facility is used to manufacture and distribute its
Terra potato and vegetable chip products. The lease provides for minimum annual
rentals of $225,000.
The Company operates a 7,000 square foot warehouse and distribution
center located in East Hills, New York which it utilizes to distribute its
frozen kosher food products. This lease, which provides for annual net rental of
approximately $55,000, expires in fiscal 2005.
-11-
As part of the NNG acquisition, the Company extended the then existing
leases of Health Valley to provide 180,000 square feet of manufacturing,
warehouse and distribution space in Irwindale, California. These leases provide
for combined annual rentals of approximately $900,000 and expire June 2004.
The Company owns and operates two other manufacturing and distribution
centers in Hereford, Texas and Shreveport, Louisiana for certain of its natural
food product lines. These facilities also support certain administrative
functions.
In addition to the foregoing distribution facilities operated by the
Company, the Company also utilizes bonded public warehouses from which it makes
deliveries to customers.
Item 3. Legal Proceedings.
On May 5, 1995, a purported stockholder of Celestial filed a lawsuit,
Schwartz v. Celestial Seasonings, Inc. et al., in the United States District
Court for the District of Colorado (Civil Action Number: 95-K-1045), in
connection with disclosures by Celestial concerning Celestial's license
agreement with Perrier Group of America, Inc. which was terminated on January
1, 1995. In addition to Celestial, the complaint names as defendants certain
of Celestial's then present and former directors and officers, PaineWebber,
Inc., Shearson/Lehman Brothers, Inc., and Vestar/Celestial Investment Limited
Partnership. The complaint, which was pled as a class action on behalf of
persons who acquired Celestial's common stock from July 12, 1993 through May
18, 1994, sought money damages from Celestial and the other defendants for the
class in the amount of their loss on their investment in Celestial's common
stock, punitive damages, costs and expenses of the action, and such other
relief as the court may order.
On November 6, 1995, the federal district court granted a motion by
Celestial and the other defendants to dismiss the case. On September 5, 1997,
however, the court of appeals reversed the decision of the district court and
returned the case to the district court for further proceedings. The case was
certified as a class action.
On November 4, 1999, Celestial reached a settlement with the plaintiff,
which resulted in a pre-tax charge of $1.2 million during Celestial's fourth
quarter of its fiscal year ending 1999. The settlement was subject to a
completion of a definitive settlement stipulation to be filed in the district
court and court approval of the settlement. On April 25, 2000, the settlement
was approved by the courts. The settlement has become final. The Company does
not expect any additional shareholder lawsuits related to this matter.
In April 1999, an arbitrator ruled in favor of a former financial
advisor of Westbrae who claimed fees and expenses due in connection with the
sale of Westbrae to the Company in October 1997. The Company paid approximately
$1.3 million, including legal fees, as a result of the arbitrator's decision,
which amount had been provided for in connection with the 1997 acquisition of
Westbrae.
From time to time, the Company is involved in litigation, incidental to
the conduct of its business. In the opinion of management, disposition of
pending litigation will not have a material adverse effect on the Company's
business, results of operations or financial condition.
-12-
Item 4 Submission of Matters to a Vote of Security Holders.
A special meeting of stockholders of the Company was held on May 30,
2000 for the following purposes:
(i) To consider and vote upon a proposal to issue shares of the
Company's common stock in the merger of Hain Acquisition
Corp., a wholly-owned subsidiary of the Company, with and into
Celestial, upon the terms and subject to the conditions set
forth in the merger agreement dated as of March 5, 2000
between Hain and Celestial;
(ii) To amend the Company's certificate of incorporation to change the
Company's corporate name to The Hain Celestial Group, Inc.,
effective upon consummation of the merger;
(iii) To amend the Hain certificate of incorporation to
increase the authorized number of shares of Hain
common stock from 40 million to 100 million;
(iv) To amend the Hain 1994 Long Term Incentive and Stock Award
Plan to (a) increase the number of shares issuable over the
term of the plan by 3 million shares to 6.4 million shares in
the aggregate and (b) increase the upper limit on the number
of shares for which options or stock appreciation rights may
be granted to any participant under the plan during any
calendar year to 1 million shares; and
(v) To adopt the Hain 2000 Directors Stock Option Plan.
The stockholders approved the issuance of Hain common stock shares in
the merger casting 15,458,015 shares for, 11,190 shares against and 11,465
shares abstaining.
The stockholders approved an amendment to the Company's certificate of
incorporation to change its name to The Hain Celestial Group, Inc. casting
15,451,647 shares for, 19,758 shares against and 9,265 shares abstaining.
The stockholders approved an amendment to the Company's certificate of
incorporation to increase the authorized number of shares of Hain common stock
from 40 million to 100 million casting 14,858,716 shares for, 605,802 shares
against and 16,152 abstaining.
The stockholders approved the amendments to the 1994 Long Term
Incentive and Stock Award Plan casting 9,737,043 shares for, 5,722,339 shares
against and 21,288 shares abstaining.
The stockholders approved the adoption of the 2000 Directors Stock
Option Plan casting 13,989,033 shares for, 1,420,457 shares against and 71,180
shares abstaining.
-13-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The outstanding shares of Common Stock, par value $.01 per share, of
the Company are traded on Nasdaq's National Market System (under the ticker
symbol HAIN). The following table sets forth the reported high and low closing
prices for the Common Stock for each fiscal quarter from July 1, 1998 through
September 19, 2000.
Common Stock
------------------------
Fiscal 2000 Fiscal 1999
----------------- --------------
High Low High Low
-------- --------- -------- -------
First Quarter $ 28 7/16 $21 3/16 $ 27 3/4 $ 14 7/8
Second Quarter 26 7/16 22 1/4 25 12 1/8
Third Quarter 37 1/8 21 1/16 23 1/8 15 1/8
Fourth Quarter 36 11/16 22 3/4 21 1/2 16 1/16
July 1 - September 19, 2000 37 1/2 27 1/2
As of September 19, 2000, there were 305 holders of record of the
Company's Common Stock.
As previously disclosed in the Company's Form 10-Q, on September 27,
1999, the Company announced that it had entered into a global strategic alliance
with Heinz related to the production and distribution of natural products
domestically and internationally. In connection with the alliance, the Company
issued 2,837,343 shares of its common stock, par value $.01 per share to a
wholly-owned subsidiary of Heinz (the "Heinz Subsidiary"), for an aggregate
purchase price of $82,383,843 under a Securities Purchase Agreement dated
September 24, 1999 between the Company and the Heinz Subsidiary. In addition, as
part of the consideration paid by the Company to the Heinz Subsidiary in
connection with the Company's acquisition of the Earth's Best trademarks, the
Company issued 670,234 shares of its common stock to the Heinz Subsidiary.
In addition, on June 19, 2000, the Heinz subsidiary executed its
preemptive right under the aforementioned Securities Purchase Agreement, to
purchase additional shares of the Company's common stock. The Company issued
2,582,774 additional shares to the Heinz Subsidiary for an aggregate purchase
price of $79,743,147.
The issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of Securities
Act for transactions by an issuer not involving any public offering.
The Company has not paid any dividends on its Common Stock to date. The
Company intends to retain all future earnings for use in the development of its
business and does not anticipate declaring or paying any dividends in the
foreseeable future. The payment of all dividends will be at the discretion of
the Company's Board of Directors and will depend on, among other things, future
earnings, operations, capital requirements, contractual restrictions, the
general financial condition of the Company and general business conditions.
-14-
Item 6. Selected Financial Data.
On May 30, 2000, the Company, previously known as The Hain Food Group,
Inc. ("Hain"), completed a merger (the "Merger") with Celestial Seasonings, Inc.
("Celestial") by issuing 10.3 million shares of Hain common stock in exchange
for all of the outstanding common stock of Celestial. Each share of Celestial
common stock was exchanged for 1.265 shares of Hain common stock. Hain
subsequently changed its name to The Hain Celestial Group, Inc. Celestial, the
common stock of which was previously publicly traded, is the market leader in
speciality teas.
The Merger was accounted for as a pooling of interests and,
accordingly, all prior period consolidated financial statements of Hain have
been restated to include the results of operations, financial position and cash
flows of Celestial.
The following information has been summarized from the Company's
financial statements and should be read in conjunction with such financial
statements and related notes thereto (in thousands, except per share amounts):
Year Ended June 30
--------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Operating results:
Net sales $ 403,543 $ 315,820 $206,450 $144,392 $141,604
Income (loss) before
extraordinary item and
cumulative change in
accounting principle (11,403) 13,517 11,390 6,733 7,157
Extraordinary item (1,940) - (1,342) - -
Cumulative change in
accounting principle (3,754) - - - -
-------- -------- -------- -------- --------
Net income (loss) $(17,097) $ 13,517 $ 10,048 $ 6,733 $ 7,157
======== ======== ======== ======== ========
Basic earnings per
common share:
Income (loss) before
extraordinary item and
cumulative change in
accounting principle $ (.41) $ .56 $ .55 $ .36 $ .37
Extraordinary item (.07) - (.06) - -
Cumulative change in
accounting principle (.13) - - - -
-------- -------- ------- -------- -------
Net income (loss) $ (.61) $ .56 $ .49 $ .36 $ .37
======== ======== ======= ======== ========
-15-
Year Ended June 30
-------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Diluted earnings per common share (a):
Income (loss) before
extraordinary item and
cumulative change in
accounting principle $ (.41) $ .51 $ .50 $ .35 $ .37
Extraordinary item (.07) - (.06) - -
Cumulative change in
accounting principle (.13) - - - -
-------- -------- ------- -------- ----
Net income (loss) $ (.61) $ .51 $ .44 $ .35 $ .37
======== ======== ======= ======= =======
Financial Position:
Working Capital $ 89,750 $ 37,983 $37,669 $15,070 $14,422
Total Assets 416,017 362,669 170,938 107,266 102,345
Long-term Debt 5,622 141,138 27,311 16,829 21,162
Stockholders' Equity 351,724 164,489 104,567 68,110 61,641
(a) As a result of the net loss for the year ended June 30, 2000, diluted
earnings per share is the same as basic earnings per share as the effects of
dilutive stock options and warrants are not calculated as the results would be
antidilutive.
-16-
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
On May 30, 2000, Hain completed a merger (the "Merger") with Celestial
by issuing 10.3 million shares of Hain common stock in exchange for all of the
outstanding common stock of Celestial. The Merger was accounted for as a pooling
of interests and, accordingly, all prior period financial statements of Hain
have been restated to include the results of operations, financial position and
cashflows of Celestial.
The Company made the following acquisitions or entered into licensing
agreements during the three years ended June 30, 2000:
On October 14, 1997, the Company acquired all of the capital stock of
Westbrae Natural, Inc. ("Westbrae").
On May 31, 1998, the Company acquired Harry's Premium Snacks.
On May 1, 1998, the Company entered into a license agreement with Heinz
to market and sell Earth's Best baby food products to natural food stores. On
April 6, 1999, the Company expanded this licensing agreement with Heinz whereby
the Company was given the exclusive sale and distribution rights of the Earth's
Best baby food products into the United States retail grocery and natural food
channels. On September 27, 1999, the Company announced it had purchased the
trademarks of Earth's Best from Heinz, which terminated the April 1, 1999
license agreement, and allows the Company the opportunity to sell Earth's Best
both in domestic and international markets and provides the Company with the
ability to develop new products.
On July 1, 1998, the Company acquired the following businesses and
brands from The Shansby Group and other investors: Arrowhead Mills, DeBoles
Nutritional Foods, Terra Chips, and Garden of Eatin', Inc.
On December 8, 1998, the Company acquired the Nile Spice soup and meal
cup ("Nile Spice") business from The Quaker Oats Company. The Nile Spice product
line includes premium soups and meals packaged in cups that are sold under the
Nile Spice and Near East brands. The Near East brand is sold under a licensing
agreement through December 2000.
On May 18, 1999, the Company acquired NNG. NNG is a manufacturer and
marketer of premium natural and organic food products primarily under its Health
Valley, Breadshop's and Sahara brands.
All of the foregoing acquisitions ("the acquisitions" or "acquired
businesses") have been accounted for as purchases. Consequently, the operations
of the acquired businesses are included in the results of operations from their
respective dates of acquisition. Each of the acquired businesses markets and
sells natural food products unless otherwise noted.
As disclosed in the Company's joint proxy statement/prospectus relating
to the Merger, the Merger, as well as the other acquisitions, involved the
integration of two companies that had previously operated independently, and the
Company's future success is dependent upon, among other things, its ability to
realize potential available marketing opportunities and cost savings from the
integration of Hain and Celestial. In addition, as discussed
-17-
in the joint proxy statement/prospectus, the integration of Hain and Celestial
may distract management from the day-to-day operations of the Company's
business. The Company's financial results discussed below reflect the financial
impact of the Merger during fiscal 2000. As discussed, the Company plans to
complete the integration process during fiscal 2001 and, as described above,
plans to continue to evaluate other potential acquisition candidates as part of
its overall growth strategy.
Results of Operations
Fiscal 2000 Compared to Fiscal 1999:
Net sales for fiscal 2000 were $403.5 million, an increase of 28% over
net sales of $315.8 million. 81% of the increase was derived from net sales of
acquired businesses or net sales resulting from licensing agreements entered
into during the fourth quarter of fiscal 1999. The remainder of the increase was
derived from internal growth, primarily from the non-dairy beverages of Westsoy,
and Terra Chips.
Gross profit for 2000 increased by $29.4 million to $176.1 million
(43.6% of net sales) as compared to $146.7 million (46.4% of net sales). The
increase in gross profit dollars was a direct result of increased sales levels
in 2000. The decline in gross profit percentage was due to a combination of
changes in sales mix, additional write-offs and reserves associated with the
previously announced decision to cease production of the 30-count supplement
product line, as well as certain reserves related to expected returns of the
60-count supplement product line, the write-off of certain inventories,
including raw materials and packaging, related to the Company's decision to
discontinue certain items, inefficiencies within certain co-packers, additional
freight costs incurred due to fuel surcharges assessed to the Company that were
not passed onto customers and higher warehouse costs primarily a result of the
transition to our new west coast consolidated warehouse.
Selling, general and administrative expenses increased by approximately
$36.3 million to $148.1 million in 2000 as compared to $111.8 million in 1999.
Such expenses, as a percentage of net sales, amounted to 36.7% in 2000 compared
with 35.4% in 1999. The increase of 1.3% is due to: 2% of higher trade
promotional expenses over expected amounts offset by approximately a 1%
improvement in other selling, general and administrative component costs
resulting from the realization of reduced administrative expenses from
integration of certain operations of the acquired businesses within the
Company's infrastructure. While significant headway has been made in the
integration process, not all of the Company's administrative functions of the
businesses acquired during fiscal 1999, as well as the Merger in May 2000, have
as yet been integrated. It is expected that the integration process will
continue through the end of fiscal 2001.
During the fourth quarter of fiscal 2000, the Company recorded charges
of $15.6, $3.7 and $3.5 million, before taxes, related to: merger related
charges associated with the Merger; costs for restructuring certain non-core
businesses and the consolidation of warehouse and information systems within the
Company's distribution and operating network; and impaired long-lived assets,
principally goodwill and other long term assets associated with its supplement
product line, respectively. Included in both the fiscal 2000 and 1999 periods
within restructuring and other nonrecurring charges is a
-18-
September 1999, $1.2 million settlement agreement relating to a shareholder
lawsuit.
The components of the $3.7 million restructuring charge are
approximately $2.0 million of write-downs of fixed and other assets, $1.2
million for lease exit and related incremental costs, $.2 million for severance
and related benefits associated with the consolidation and closure of certain
warehouses and streamlining certain business costs. At June 30, 2000, no amounts
have been charged against the accrual provided.
Amortization of goodwill and other intangible assets increased from
$4.8 million in 1999 to $6.3 million in fiscal 2000. The increase of $1.5
million is attributable to goodwill and other intangibles (principally
trademarks) in connection with the acquisitions during fiscal 1999 and 2000.
Operating income decreased from $28.9 million in 1999 to a loss of $2.4
million in 2000. The decrease was due to the aforementioned decline in gross
profit and increase in selling, general and administrative dollars along with
the $22.8 million of merger, restructuring and impairment of long-lived asset
charges, recorded during the fourth quarter of fiscal 2000, as well as increased
amortization of goodwill and other intangible assets.
The Company's other income in fiscal 2000 (there was no other income in
the comparable period) primarily resulted from gains on proceeds received from
sale of assets ($.9 million) along with investment gains of $.7 million on
marketable securities bought and sold during the second quarter of fiscal 2000.
Interest and finance costs increased from $6.4 million in 1999 to $6.7
million in fiscal 2000. The increase of $.3 million was due to the debt incurred
in connection with the fiscal 1999 acquisitions offset by the September 1999 and
June 2000 $75 million and $44 million, respectively, repayments on this debt, as
more fully described in Note 9 to the Consolidated Financial Statements. The
infusion of equity has enabled the Company to achieve a debt to equity ratio of
2% at June 30, 2000.
Income before income taxes, extraordinary item and cumulative change in
accounting principle decreased from $22.4 million in 1999 to a loss of $7.5
million in 2000. This $30 million decrease is a result of the aforementioned
decline in operating income offset by higher other income.
During fiscal 2000, the Company recorded a $3.9 million (52%) tax
provision on a pre-tax loss of $7.5 million as compared to a tax provision of
$8.9 million (40%) on a pre-tax income of $22.4 million during 1999. The fiscal
2000 tax expense, even though there was a pre-tax loss, was primarily a result
of the add back of nondeductible merger and asset write-down charges along with
higher nondeductible goodwill amortization brought on by the 1999 acquisitions.
Extraordinary charge
During the fourth quarter of fiscal 2000, the Company recorded a $1.9
million (net of tax benefit of $1.2 million) extraordinary charge related to the
early extinguishment of the Company's existing credit facility and the write-off
of the related debt financing costs.
-19-
Change in Accounting Principle
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 became effective beginning on July 1, 1999, and required
the start-up costs capitalized prior to such date to be written-off as a
cumulative effect of an accounting change as of July 1, 1999. Any future
start-up costs are to be expensed as incurred. Start up activities are broadly
defined as those one time activities related to introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer or commencing some new operation. In accordance with SOP 98-5,
the Company recorded a one-time non-cash charge in the first quarter of fiscal
2000 reflecting the cumulative effect of a change in accounting principle, in
the amount of $3.8 million, net of tax benefit, representing such start-up costs
capitalized as of the beginning of fiscal year 2000.
Fiscal 1999 Compared to Fiscal 1998:
Net sales for fiscal 1999 were $315.8 million, an increase of 53% over
net sales of $206.5 million in fiscal 1998. 87% of the increase was derived from
revenues of acquired businesses or revenues resulting from licensing agreements
entered into during fiscal 1999 with the remaining 13% coming from internal
growth primarily non-dairy soy beverages, Terra Chips and green and wellness tea
products, offset by decreases in Celestial's supplement product line.
Gross profit for 1999 increased by approximately $38.7 million to
$146.7 million (46.4% of net sales) as compared to $108 million (52.3% of net
sales) in 1998. The increase in gross profit dollars was a direct result from
the increased sales level in 1999. The decline in the gross profit percentage
was due to: sales mix and decreased margins of Celestial supplements product
lines associated with high manufacturing costs for inventory write-downs.
Selling, general and administrative expenses increased by $28.3 million
to $111.8 million in 1999 as compared to $83.5 million in 1998. Such expenses,
as a percentage of net sales, amounted to 35.4% in 1999 compared with 40.4% in
the 1998 period. The improvement of 5% results from certain of the acquired
businesses having lower selling expenses than the Company's other product lines,
and the realization of reduced administrative expenses from integration of
certain operations of the acquired businesses within the Company's existing
infrastructure.
Amortization of goodwill and other intangible assets increased by $2.2
million from 1998 to 1999. All of this increase was attributable to amortization
of goodwill acquired in connection with the acquisitions during fiscal 1999.
Amortization expense, amounted to 1.5% of net sales in 1999, compared with 1.3%
in 1998.
Operating income increased by $7 million compared to the 1998 period.
Approximately 95% of the increase was derived from higher sales volume due to
the businesses acquired in 1999. Operating income as a percentage of net sales,
amounted to 9.1%, a decrease of 1.5% over the 1998 period. This resulted
principally from lower gross margin as a percentage of net sales, higher
goodwill amortization resulting from the acquisitions offset by lower selling,
general and administrative expenses as a percentage of net sales.
-20-
Interest and financing costs for 1999 amounted to $6.4 million, an
increase of $3.2 million over the 1998 period. The increase was due to the debt
incurred in connection with the fiscal year 1999 acquisitions, partially offset
by reduced interest costs resulting from the prepayment in April 1998 of the
Company's then 12.5% subordinated debentures. The debentures were retired with
the proceeds of senior debt carrying an interest rate of approximately 7.8%.
Income before income taxes for 1999 increased to $22.4 million (7.1% of
net sales) from $18.7 million (9.1% of net sales) in 1998. This decline in
profitability, as a percentage of net sales, was attributable to the
aforementioned decrease in operating income as a percentage of sales and higher
interest costs.
Income taxes increased to $8.9 million in 1999 compared to $7.3 million
in 1998. The effective tax rate was 40% in 1999 compared with 39% in 1998.
Approximately .8% of the increase in the effective tax rate was caused by the
higher federal statutory rate resulting from the Company's higher level of
income, with approximately a .8% increase in the amortization of nondeductible
goodwill arising from current year acquisitions. Offsetting these increases was
the availability of additional tax deductions generated from the Company's
contributions of 30-count supplements to a qualified organization.
Income before extraordinary item for 1999 increased by $2.1 million
over 1998 and amounted to 4.3% of net sales, compared with 5.5% in the 1998
period. The decrease, as a percentage of net sales, was a result of a lower
level of operating income discussed above offset by higher interest costs and
higher effective tax rates. In addition, in 1998 the Company recorded an
extraordinary charge of $1.3 million, net of tax benefit, resulting from the
aforementioned prepayment of its 12.5% subordinated debentures in April 1998.
Liquidity and Capital Resources
The Company requires liquidity for working capital needs and debt service
requirements.
The Company had working capital and a current ratio of $89.8 million and
2.69 to 1, respectively, at June 30, 2000 as compared to $38 million and 1.67 to
1, respectively, at June 30, 1999. The increase in working capital and the
current ratio is primarily attributable to the proceeds from the Company's
private equity stock offering, which allowed the Company to paydown its Senior
Term Loans. In addition to the private equity stock offering which is discussed
below, the Company has increased its working capital due to cash flow provided
by operations. The Company has reduced its days sales outstanding from 41 days
in 1999 to 35 days in 2000. The improvement is a result of certain acquired
businesses having days sales outstanding lower than the historical levels and
improved credit and collection efforts. The increase in inventories, which were
financed by the Company's operating cash flows in 2000, are due to the Company's
need to hold inventory for increasing sales. The inventory turnover rate
improved from 4.4 in 1999 to 5.2 in 2000. The Company expects inventory turnover
to remain consistent with that of 2000.
On May 18, 1999, in connection with the acquisition of NNG, the Company
arranged for a $160 million senior secured loan facility ("Amended Facility"),
which provided for a $30 million credit facility and $130 million of term loans.
This Amended Facility was used to complete the acquisition of NNG, refinance the
Company's then existing indebtedness, ($57.3
-21-
million) and provide for ongoing working capital needs. Under the Amended
Facility, the term loans consisted of a $75 million Tranche I loan and a $55
million Tranche II loan.
On September 27, 1999, the Company announced that it had entered into a
global strategic alliance with Heinz related to the production and distribution
of natural products domestically and internationally. In connection with the
alliance, the Company issued 2,837,343 shares of its common stock, par value
$.01 per share a wholly owned subsidiary of Heinz, (the "Heinz Subsidiary") for
an aggregate purchase price of $82.4 million under a Securities Purchase
Agreement dated September 24, 1999 between the Company and the Heinz Subsidiary.
The Company used $75 million of the proceeds from this private equity offering
to reduce its borrowings under its debt facility. The remainder of the proceeds
were used to pay transaction costs. Included as part of the alliance was a
provision that Heinz would have the preemptive right to purchase additional
equity in the Company to maintain it's investment level at 19.5% of the
outstanding stock of the Company. The Heinz investment level was diluted
following the merger by Hain with Celestial Seasonings on May 30, 2000. Under
the terms of the agreement, on June 20, 2000 the Company issued 2,582,774 shares
of its common stock, par value $.01 per share to the Heinz Subsidiary for an
aggregate purchase price of $79.7. The Company used approximately $44 million of
the proceeds from this private equity offering to repay the remainder of its
borrowings under its debt facility. The remainder of the funds are invested at
June 30, 2000.
The Company believes its cash on hand of $38.3 million at June 30,
2000, as well as cash flows from operations are sufficient to fund its working
capital needs, anticipated capital expenditures, other operating expenses, as
well as provide liquidity to pay down the remaining merger related and
restructuring accruals (aggregating $13 million) existing at June 30, 2000, of
which approximately $12 million will be utilized during fiscal 2001. The Company
is currently investing its cash on hand in highly liquid short-term investments
yielding approximately 6% interest.
In addition, in July 2000, the Company entered into a short-term
revolving credit facility with a bank providing the Company with $50 million of
revolving credit to fund operations. No borrowings exist on this facility as at
September 19, 2000.
-22-
Supplementary Quarterly Financial Data:
Unaudited quarterly financial data (in thousands, except per share
amounts) for fiscal 2000 and 1999 is summarized as follows:
Three Months Ended
------------------------------------
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
------ ------ ------ -----
Net sales $ 87,940 $ 116,675 $ 111,916 $ 87,012
Gross profit 33,331 56,203 54,614 31,978
Merger costs - - - 15,633
Restructuring and
other non-recurring
charges 1,200 - - 3,733
Impairment of long-
lived assets - - - 3,468
Income (loss) before
income taxes,
extraordinary item
and cumulative change
in accounting principle (2,300) 14,639 14,541 (34,383)
Extraordinary item - - - (1,940)
Cumulative change in
accounting principle (3,754) - - -
Net income (loss) (4,966) 8,501 8,637 (29,269)
Basic earnings (loss)per
common share before
extraordinary item
and cumulative change in
accounting principle $ (.05) $ .30 $ .30 $ (.93)
Diluted earnings (loss)
per common share before
extraordinary item and
cumulative change in
accounting principle $ (.05) $ .28 $ .28 $ (.93)
During the three month period ended June 30, 2000, in addition to the
merger costs, restructuring and other non-recurring charges and impairment of
long-lived assets, the Company recorded an additional $2.5 million of costs
associated with Celestial's previously announced decision to cease production of
its 30-count supplement product line at September 30, 1999, as well as certain
reserves related to expected returns of the Company's 60-count supplement sales.
These decisions were primarily related to a management change along with
prevailing market conditions affecting the supplement industry.
Shortly after the Merger was consummated on May 30, 2000, the Company
initiated a program to reduce the amount of tea inventory in the hands of
distributors by changing Celestial's trade practices. During the fourth quarter,
this program reduced Celestial's revenue by an estimated 450,000 cases, or
approximately $9.6 million, resulting in lower operating profit by approximately
$4.8 million. In addition, during the period after announcement of the Merger,
an environment of significant uncertainty regarding integration
-23-
of the companies existed within the Company's sales organization, as well as
within the Company's customer base. The Company believes that this uncertainty
further impacted revenue from non-core brands thereby reducing operating profit
by approximately $2.3 million. The Company was also impacted by lower revenues
from Earth's Best products as a result of the lack of availability of certain
ingredients. The Company anticipated resolving this issue by early June 2000,
however, the problems were not fully resolved until shortly after fiscal
year-end.
In addition, during the fourth quarter, the Company incurred
approximately $8.3 million of trade promotional expenses over expected amounts.
These costs were primarily due to: (1) a concerted effort to gain additional
distribution, (2) increased deductions by customers in the face of our announced
merger (these deductions are currently being researched and discussed with
customers and, although there can be no assurance of such, may result in future
collections), (3) a higher level of actual spending over amounts estimated and
accrued by Celestial at March 31, 2000, and (4) the implementation of a new
trade promotion tracking system at Celestial which has accelerated the
availability of information and allowed the Company to better match these costs
with related revenues. Gross profit margin was negatively impacted by
approximately $3.1 million primarily due to: (1) a change in sales mix, (2) the
write-off of certain inventories, including raw materials and packaging, related
to the Company's decision to discontinue certain items, (3) inefficiencies
within certain co-packers, (4) additional freight costs incurred due to fuel
surcharges assessed to the Company, that were not passed onto customers and (5)
higher warehouse costs primarily due to increased inventory levels in
anticipation of a new distribution agreement for the Company's medically
directed products together with the transition to the Company's new West Coast
consolidated warehouse.
The supplementary quarterly financial data for the year ended June 30,
2000, includes the results of operations of Hain and Celestial for each quarter
presented. The quarter ended September 30, 1999, however, includes the results
of operations of Celestial two times as a result of the need to change
Celestial's year end to be the same as that of Hain. Consequently, the quarter
ended September 30, 1999 includes the following duplicated information for
Celestial: net sales of $19.9 million after reduction for 30-count supplement
returns of $5.1 million; gross profit of $5.3 million after cost of sales
charges of $4.0 million for the 30-count supplement product line; the $1.2
million charge related to the shareholder lawsuit settlement, and net loss of
$3.9 million.
Three Months Ended
-------------------------------
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
------ ----- ------ -----
Net sales $ 81,158 $ 82,178 $71,570 $80,914
Gross profit 40,434 41,487 33,044 31,714
Operating income 8,841 10,155 8,875 1,019
Income before income taxes 7,275 8,718 7,575 (1,120)
Net income 4,360 5,177 4,395 (415)
Basic earnings per
common share $ .18 $ .21 $ .18 $ (.02)
Diluted earnings per
common share $ .17 $ .20 $ .17 $ (.02)
Year 2000
The "Year 2000" issue is the result of computer systems that were programmed
in prior years using a two digit representation for the year. Consequently, in
the year 2000, date sensitive computer programs may interpret the date "00" as
1900 rather than 2000. The Company completed an assessment of both its
information and non-information systems affected by the Year 2000 issue and
found only minor issues that required attention. Since January 1, 2000, the
Company has not experienced any material adverse effects on either it's
information or non-information systems, nor any material adverse effects with
its suppliers, customers or other third parties.
Seasonality
Sales of food products and beverage consumed generally decline to some
degree during the Summer months (the first quarter of the Company's fiscal
year). However, the Company believes that such seasonality has a limited effect
on operations.
Inflation
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
-24-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable, except as reported on in Item 7.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of The Hain Celestial Group,
Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets - June 30, 2000 and 1999
Consolidated Statements of Operations - Years ended June 30, 2000, 1999 and
1998
Consolidated Statements of Cash Flows - Years ended June 30, 2000, 1999 and
1998
Consolidated Statements of Stockholders' Equity - Years ended June 30, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of The Hain Celestial
Group, Inc. and subsidiaries is included in Item 14 (a):
Schedule II Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
-25-
Report of Independent Auditors
The Stockholders and Board of Directors
The Hain Celestial Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Hain
Celestial Group, Inc. (formerly The Hain Food Group, Inc.) and Subsidiaries as
of June 30, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 2000. Our audits also included the financial statement
schedule listed in the index at Item 14(a). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements and schedule of Celestial Seasonings, Inc. prior to their
restatement for the 2000 pooling of interests described in Note 2, which
statements reflect total assets of $80,847,000 as of September 30, 1999, and
total revenues of $109,851,000 and $102,197,000, for the years ended September
30, 1999 and 1998, respectively. Those statements were audited by other
auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Celestial Seasonings, Inc., is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, 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, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000, in conformity with 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 discussed in Note 5 to the financial statements, in fiscal year 2000 the
Company changed its method of accounting for start-up costs.
/s/ Ernst & Young LLP
Melville, New York
September 13, 2000
-26-
INDEPENDENT AUDITOR'S REPORT
To the Stockholder's and Board of Directors of Celestial Seasonings, Inc.
We have audited the consolidated balance sheet of Celestial Seasonings, Inc. and
subsidiaries as of September 30, 1999 and the related consolidated statements of
income, stockholders' equity and cash flows for each of the two years in the
period ended September 30, 1999 (none of which are presented herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Celestial Seasonings, Inc. and its
subsidiaries at September 30, 1999 and the results of their operations and their
cash flows for each of the two years in the period ended September 30, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Denver, Colorado
November 3, 1999
-27-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
June 30,
---------------------------
2000 1999
------------- -----------
ASSETS
Current assets:
Cash $ 38,308 $ 1,147
Accounts receivable, less allowance for doubtful 36,120 41,163
accounts of $929 and $1,287
Inventories 48,139 39,929
Recoverable income taxes 7,982 911
Deferred income taxes 8,724 3,675
Other current assets 3,611 7,533
------------- -----------
Total current assets 142,884 94,358
Property, plant and equipment, net of accumulated 39,340 41,487
depreciation and amortization of $18,987 and $15,103
Goodwill, net of accumulated amortization of $13,109 188,212 193,144
and $8,631
Trademarks and other intangible assets, net of 40,265 17,922
accumulated amortization of $16,743 and $16,002
Deferred financing costs, net of accumulated 238 4,051
amortization of $328 and $2,500
Deferred income taxes - 961
Other assets 5,078 10,746
------------- -----------
Total assets $ 416,017 $ 362,669
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 43,039 $ 45,558
Accrued merger related charges 9,414 -
Current portion of long-term debt 681 10,817
------------- -----------
Total current liabilities 53,134 56,375
Long-term debt, less current portion 5,622 141,138
Deferred income taxes 5,537 -
Other liabilities - 667
------------- -----------
Total liabilities 64,293 198,180
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value, authorized 5,000,000 - -
shares, no shares issued
Common stock - $.01 par value, authorized 100,000,000 321 247
shares, issued 32,147,261 and 24,684,079 shares
Additional paid-in capital 326,641 126,316
Retained earnings 25,037 38,201
------------- -----------
351,999 164,764
Less: 100,000 shares of treasury stock, at cost (275) (275)
------------- -----------
Total stockholders' equity 351,724 164,489
------------- -----------
Total liabilities and stockholders' equity $ 416,017 $ 362,669
============= ===========
See notes to consoldiated financial statements.
-28-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended June 30,
----------------------------------
2000 1999 1998
------------- ------------ -----------
Net Sales $ 403,543 $ 315,820 $ 206,450
Cost of sales 227,417 169,141 98,435
------------- ------------ -----------
Gross profit 176,126 146,679 108,015
Selling, general & administrative expenses 148,133 111,802 83,469
Merger costs 15,633 - -
Restructuring and other non-recurring charges 4,933 1,200 -
Impairment of long-lived assets 3,468 - -
Amortization of goodwill and other intangible assets 6,346 4,787 2,619
------------- ------------ -----------
Operating income (loss) (2,387) 28,890 21,927
Other income 1,585 - -
Interest and financing costs (6,701) (6,442) (3,233)
------------- ------------ -----------
Income (loss) before income taxes, extraordinary item (7,503) 22,448 18,694
and cumulative change in accounting principle
Provision for income taxes 3,900 8,931 7,304
------------- ------------ -----------
Income (loss) before extraordinary item and (11,403) 13,517 11,390
cumulative change in accounting principle
Extraordinary item - costs in connection with early (1,940) - (1,342)
extinguishment of debt, net of income tax benefit
of $1,182 in 2000 and $791 in 1998
Cumulative change in accounting principle, net of (3,754) - -
income tax benefit of $2,547
------------- ------------ -----------
Net income (loss) $ (17,097) $ 13,517 $ 10,048
============= ============ ===========
Basic earnings per common share:
Income (loss) before extraordinary item and $ (0.41) $ 0.56 $ 0.55
cumulative change in accounting principle
Extraordinary item (0.07) - (0.06)
Cumulative change in accounting principle (0.13) - -
------------- ------------ -----------
Net income (loss) $ (0.61) $ 0.56 $ 0.49
============= ============ ===========
Diluted earnings per common share:
Income (loss) before extraordinary item and $ (0.41) $ 0.51 $ 0.50
cumulative change in accounting principle
Extraordinary item (0.07) - (0.06)
Cumulative change in accounting principle (0.13) - -
------------- ------------ -----------
Net income (loss) $ (0.61) $ 0.51 $ 0.44
============= ============ ===========
Weigted average common shares outstanding:
Basic 27,952 24,144 20,705
============= ============ ===========
Diluted 27,952 26,636 22,939
============= ============ ===========
.
See notes to consoldidated financial statements.
-29-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
---------------------------------
2000 1999 1998
----------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (17,097) $ 13,517 $ 10,048
Adjustment for change in year-end of Celestial 3,933 - -
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Non-cash merger related charge 175 - -
Non-cash restructuring charge 1,994 - -
Non-cash impairment of long-lived assets 3,468 - -
Extraordinary item 1,940 - 1,342
Cumulative change in accounting principle 3,754 - -
Depreciation and amortization of property and equipment 4,986 2,530 1,563
Amortization of goodwill and other intangible assets 6,053 4,787 2,619
Amorization of deferred financing costs 718 589 668
Provision for doubtful accounts 432 313 468
Deferred income taxes 4,373 80 777
Gain on disposal of assets (922) 63 -
Other 46 46 77
Increase (decrease) in cash attributable to changes in
assets and liabilities, net of amounts applicable to
acquired businesses:
Accounts receivable 4,211 (5,033) (10,184)
Inventories (8,607) 8,441 (16,968)
Other current assets 2,090 (2,979) (1,884)
Other assets (2,771) (7,014) (288)
Accounts payable and accrued expenses 3,882 (1,164) 4,712
Recoverable taxes, net of income tax payable (2,094) 2,332 1,081
------------ ----------- ----------
Net cash provided by (used in) operating activities 10,564 16,508 (5,969)
------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses (4,673) (95,270) (24,653)
Purchases of property and equipment and other (4,298) (7,601) (4,430)
intangible assets
Proceeds from sale of assets 1,583 148 -
------------ ----------- ----------
Net cash used in investing activities (7,388) (102,723) (29,083)
------------ ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments)/proceeds from bank revolving credit facility, (5,080) (6,270) 9,100
Proceeds from term loan facilities - 190,000 39,100
Repayment of term loan facilities (130,000) (78,600) (25,347)
Payments on economic development revenue bonds (317) (300) (300)
Prepayment of 12.5% subordinated debentures - - (9,112)
Costs in connection with bank financing (26) (2,542) (950)
Proceeds from public offering, net of related expenses - - 20,852
Proceeds from private equity offering, net of expenses 160,332 - -
Proceeds from exercise of warrants and options, net of 9,354 4,490 3,739
related expenses
Collections of receivables from equipment sales - 116 382
Payment of debt of acquired company - (20,678) (2,103)
Payment of other long-term debt and other liabilities (278) (1,882) (329)
------------ ----------- ----------
Net cash provided by financing activities 33,985 84,334 35,032
------------ ----------- ----------
Net increase (decrease) in cash and cash equivalents 37,161 (1,881) (20)
Cash and cash equivalents at beginning of year 1,147 3,028 3,048
------------ ----------- ----------
Cash and cash equivalents at end of year $ 38,308 $ 1,147 $ 3,028
============ =========== ==========
See notes to consolidated financial statements.
-30-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
(In thousands, except per share and share data)
Common Stock
------------------------- Treasury Stock
Additional ------------------
Amount Paid-in Retained
Shares at $.01 Capital Earnings Shares Amount Total
----------------------------------------------------------------------------
Balance at June 30, 1997, as previously reported 8,881,899 $ 89 $ 20,804 $ 4,991 300,000 $ (825) $ 25,059
Celestial Seasonings Pooling-of-interests 10,270,765 103 33,303 9,645 - 43,051
----------------------------------------------------------------------------
Balance at June 30, 1997 19,152,664 192 54,107 14,636 300,000 (825) 68,110
Issuance of 2,500,000 shares in public offering,
net of related expenses 2,500,000 25 20,827 20,852
Exercise of common stock, warrants, net of
related expenses 743 (200,000) 550 1,293
Exercise of stock options 509,116 5 2,441 2,446
Non-cash compensation charge 27 27
Value ascribed to warrants 883 883
Tax benefit from stock options 908 908
Net income 10,048 10,048
----------------------------------------------------------------------------
Balance at June 30, 1998 22,161,780 222 79,936 24,684 100,000 (275) 104,567
Issuance of shares in connection with the
acquisitions of businesses 1,716,111 17 39,733 39,750
Exercise of common stock warrants, net
of related expense 340,930 3 1,986 1,989
Exercise of stock options 471,658 5 2,638 6,400 (142) 2,501
Retirement of treasury shares (6,400) (142) (6,400) 142
Non-cash compensation charge 46 46
Tax benefit from stock options 2,119 2,119
Net income 13,517 13,517
----------------------------------------------------------------------------
Balance at June 30, 1999 24,684,079 247 126,316 38,201 100,000 (275) 164,489
Issuance of shares to Heinz, net
of related expenses 6,090,351 61 177,642 177,703
Conversion of promissory notes 442,538 4 9,973 9,977
Exercise of common stock warrants, net
of related expenses 345,853 3 1,922 1,925
Exercise of stock options 584,440 6 7,423 7,429
Non-cash compensation charge 46 46
Tax benefit from stock options 3,319 3,319
Adjustment for change in year-end of Celestial 3,933 3,933
Net loss (17,097) (17,097)
----------------------------------------------------------------------------
Balance at June 30, 2000 32,147,261 $ 321 $ 326,641 $ 25,037 100,000 $ (275) $ 351,724
============================================================================
See notes to consolidated financial statements.
-31-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
The Hain Celestial Group, headquartered in Uniondale, NY, is a natural,
specialty and snack food company. The Company is a leader in many of the top
natural food categories, with such well-known natural food brands as Celestial
Seasonings (R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R), Arrowhead
Mills(R), Health Valley(R), Breadshop's(R), Casbah(R), Garden of Eatin(R), Terra
Chips(R), DeBoles(R), Earth's Best(R), and Nile Spice(R). The Company's
principal specialty product lines include Hollywood(R) cooking oils, Estee(R)
sugar-free products, Weight Watchers(R) dry and refrigerated products,
Kineret(R) kosher foods, Boston Better Snacks(R), and Alba Foods(R).
The Company and its subsidiaries operate in one business segment: the
sale of natural, organic and other food and beverage products. During fiscal
2000, approximately 55% of the Company's revenues were derived from products
which are manufactured within its own facilities with 45% produced by various
co-packers. In fiscal 2000 there were no co-packers who manufactured 10% or more
of the Company's products.
2. Basis of Presentation
The consolidated financial statements include the accounts of The Hain
Celestial Group, Inc. (formerly known as The Hain Food Group, Inc. ("Hain")) and
all wholly-owned subsidiaries (the "Company"). In the Notes to Consolidated
Financial Statements, all dollar amounts are in thousands of dollars unless
otherwise indicated.
Merger: On May 30, 2000, Hain completed a merger (the "Merger") with
Celestial Seasonings, Inc. ("Celestial") by issuing 10.3 million shares of Hain
common stock in exchange for all of the outstanding common stock of Celestial.
Each share of Celestial common stock was exchanged for 1.265 shares of Hain
common stock. In addition, Hain assumed all Celestial stock options previously
granted by Celestial. As part of the Merger, Hain changed its name to The Hain
Celestial Group, Inc. Celestial, the common stock of which was previously
publicly traded, is the market leader in speciality teas.
The Merger was accounted for as a pooling-of-interests and,
accordingly, all prior period consolidated financial statements of Hain have
been restated to include the results of operations, financial position and cash
flows of Celestial. Information concerning common stock, employee stock plans
and per share data has been restated on an equivalent share basis. The
accompanying consolidated financial statements as of and for the years ended
June 30, 1999 and 1998 include Hain's June 30 fiscal year amounts combined with
Celestial's September 30 fiscal year amounts. The consolidated financial
statements as of and for the year ended June 30, 2000 include the financial
position of both Hain and Celestial as of such date and the results of
operations and cash flows of Hain and Celestial for the year then ended.
Consequently, Celestial's results of operations and cash flows for the three
month period ended September 30, 1999 are included in both fiscal 2000 and 1999,
which results in the need to eliminate such duplication by an adjustment to
retained earnings. Since Celestial incurred a net loss of $3.9 million for the
three month period duplicated, the adjustment to retained earnings adds back
such loss. Summary information for Celestial's three month period ended
September 30, 1999 is as follows: net sales - $19.9 million; loss before income
taxes -
-32-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$7.3 million; net loss - $3.9 million; cash provided by operating activities -
$1.1 million; cash used in investing activities - $4.1 million; and cash
provided by financing activities - $3.4 million.
The reconciliations of operating results of Hain and Celestial for the
periods previously reported prior to the combination are as follows:
Nine months ended Years ended June 30,
March 31, 2000 1999 1998
--------------------- ------------------------
Net sales:
Hain $ 226,100 $205,900 $104,300
Celestial 90,400 109,900 102,200
--------------------- ----------- ------------
Combined $ 316,500 $315,800 $ 206,500
--------------------- ----------- ------------
Income before extraordinary
item and cumulative change
in accounting principle:
Hain $ 22,700 $ 11,000 $ 4,600
Celestial 4,200 2,500 6,800
--------------------- ----------- ------------
Combined $ 26,900 $ 13,500 $ 11,400
--------------------- ----------- ------------
Net income:
Hain $ 8,700 $ 11,000 $ 3,300
Celestial 3,400 2,500 6,700
--------------------- ----------- ------------
Combined $ 12,100 $ 13,500 $ 10,000
--------------------- ----------- ------------
There were no material adjustments required to conform the accounting
policies of the two companies. Certain amounts of Celestial have been
reclassified to conform to the reporting practices of Hain.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation Policy:
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly- owned. Material
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition:
Sales are recognized upon the shipment of finished goods to customers.
Allowances for cash discounts are recorded in the period in which the related
sale is recognized.
-33-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Costs:
Media advertising costs, which are included in selling, general and
administrative expenses, amounted to $1,980, $7,349 and $5,641, for fiscal 2000,
1999 and 1998, respectively. Such costs are expensed as incurred.
Income Taxes:
The Company follows the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined based on the
differences between the financial statement and tax bases of assets and
liabilities at enacted rates in effect in the years in which the differences are
expected to reverse.
Concentration of Credit Risk:
Substantially all of the Company's trade accounts receivable are due
from food distributors and food retailers located throughout the United States.
The Company performs credit evaluations of its customers and generally does not
require collateral. Credit losses are provided for in the consolidated financial
statements and consistently have been within management's expectations. During
the year ended June 30, 2000, sales to two customers and their affiliates
approximated 18% and 17%, respectively. These two customers also approximated
18% each of sales for the year ended June 30, 1999. At June 30, 2000 and 1999,
these two customers and their affiliates accounted for approximately 31.9% and
31.8%, respectively, of total accounts receivable outstanding.
Inventories:
Inventories consist principally of finished goods, raw materials and
packaging materials, and are stated at the lower of cost (first-in, first-out
basis) or market. Cost is determined principally on the standard cost method for
manufactured goods and on the average cost method for other inventories, each of
which approximates actual cost on the first-in, first-out method.
Fair Values of Financial Instruments:
At June 30, 2000 and 1999, the Company had no cash equivalents. The
Company believes that the interest rates set forth in the Company's debt
instruments approximate its current borrowing rate and, accordingly, the
carrying amounts of such debt at June 30, 2000 and 1999 approximate fair value.
Property, Plant and Equipment:
Property, plant and equipment are carried at cost and are depreciated
or amortized on a straight-line basis over the lesser of the estimated useful
lives or lease life, whichever is shorter.
Buildings 31-35 years
Machinery and equipment 5-10 years
Furniture and fixtures 3-7 years
Leasehold improvements 3-10 years
-34-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill, Trademarks and Other Intangible Assets:
Goodwill consists of the excess of the cost of acquired businesses over
the fair value of the assets and liabilities acquired or assumed, and is being
amortized over a period of 40 years from date of acquisition.
Other intangible assets, principally trademarks, are being amortized
over their respective applicable lives. The Company amortizes trademarks over
5-40 years.
Accounting for the Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the recorded value of
the asset may not be recoverable. The Company performs such a review at each
balance sheet date whether events and circumstances have occurred that indicate
possible impairment. The Company considers continued operating losses and
significant and long-term changes in prevailing market conditions to be its
primary indicators of potential impairment. In accordance with SFAS No. 121, the
Company uses an estimate of the future undiscounted net cash flows of the
related asset or asset grouping over the remaining life to measure whether the
assets are recoverable. During fiscal year 2000, the Company wrote-off
approximately $3.5 million of impaired long- lived assets. The write-off
included $1.4 million of goodwill and $2.1 million of barter credits related to
the Company's supplements products, which have experienced losses. The Company
determined that the product line had become impaired and does not expect to
recover their recorded values in the foreseeable future.
Deferred Financing Costs:
Eligible costs associated with obtaining debt financing are capitalized
and amortized over the related lives of the applicable debt instruments, which
approximates the effective interest method.
Earnings Per Share:
The Company reports basic and diluted earnings per share in accordance
with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per
share excludes any dilutive effects of options, warrants and convertible debt.
Diluted earnings per share includes only the dilutive effects of common stock
equivalents such as stock options and warrants, while the convertible promissory
notes have been excluded since the effect of such notes would be anti-dilutive.
-35-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128.
2000 1999 1998
------ ------ -----
Numerator:
Income (loss) before extraordinary
item and cumulative change in
accounting principle - numerator
for basic and diluted earnings
per share $ (11,403) $ 13,517 $ 11,390
Extraordinary item (1,940) - (1,342)
Cumulative change in accounting
principle (3,754) - -
--------- --------- ---------
Net income (loss) $ (17,097) $ 13,517 $ 10,048
========= ========= ========
Denominator:
Denominator for basic earnings
(loss) per share - weighted
average shares outstanding during
the period 27,952 24,144 20,705
Effect of dilutive securities (a):
Stock options - 1,863 1,572
Warrants - 629 662
-------- --------- --------
- 2,492 2,234
-------- --------- --------
Denominator for diluted earnings
(loss) per share - adjusted
weighted average shares and
assumed conversions 27,952 26,636 22,939
========= ========= ========
Basic earnings (loss) per share:
Income (loss) before extraordinary
item and cumulative change in
accounting principle $ (.41) $ .56 $ .55
Extraordinary item (.07) - (.06)
Cumulative change in accounting
principle (.13) - -
--------- --------- --------
Net income (loss) $ (.61) $ .56 $ .49
========= ========= ========
Diluted earnings (loss) per share:
Income (loss) before extraordinary
item and cumulative change in
accounting principle $ (.41) $ .51 $ .50
Extraordinary item (.07) - (.06)
Cumulative change in accounting
principle (.13) - -
--------- --------- --------
Net income (loss) $ (.61) $ .51 $ .44
========= ========= ========
(a) As of result of the net loss, the dilutive effect of options and
warrants are not shown as the results would be antidilutive.
-36-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the fourth quarter of fiscal 2000, the Company approved a plan
to streamline and restructure certain non-core businesses and consolidate
warehouses and information systems within the Company's distribution and
operating network which resulted in a pre-tax charge of $3.7 million. In
addition, in the first quarter of fiscal 2000, the Company entered into a
settlement agreement related to a shareholder lawsuit (see Note 15) resulting in
a one time pre-tax charge of $1.2 million.
The components of the $3.7 million restructuring charge are as follows:
Write-downs of PP&E and other assets $ 1,994
Lease exit costs 1,153
Severance and related benefits 248
Other non-core business costs 338
-------
$ 3,733
At June 30, 2000, no amounts have been charged against the accruals.
The write down of property, plant and equipment and other assets of
approximately $2 million, net of salvage value, primarily related to machinery
and equipment and computer equipment within certain of the Company's
distribution facilities, corporate information systems relating to an
enterprise-wide program to upgrade its business information systems and computer
hardware and software and other equipment and assets related to the
restructuring of certain non-core business.
Lease exit costs of approximately $1.2 million relate to incremental
costs and contractual obligations for items such as leasehold termination
payments (net of estimated expected sub rentals) and other facility exit costs
expected to be incurred as a direct result of this plan.
In addition, during the first quarter of fiscal 2000, Celestial decided
to cease production of its 30-count supplements product line and focus it
efforts on its 60-count product line. In conjunction with the discontinuance of
the 30-count products, Celestial decided to offer a return program to its
customers. Accordingly, Celestial reversed sales ($5.1 million) and recorded
additional cost of sales ($4.0 million) for the estimated 30-count products
still with customers and an estimated write-down of inventory on hand and
expected to be returned.
In the fourth quarter of fiscal 2000, the Company was required to
provide additional amounts for sales returns and inventory write-offs (totaling
$.9 million) related to the previously announced decision to cease production of
the 30-count products. Moreover, the Company provided certain reserves related
to expected returns of the Company's 60-count supplement products, totaling $1.6
million, primarily related to the receipt of return notification from certain
customers and prevailing market conditions affecting the supplements industry.
-37-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE:
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 was adopted by the Company effective July 1, 1999, and
requires start-up costs capitalized prior to such date be written-off as a
cumulative effect of an accounting change as of July 1, 1999, and any future
start-up costs to be expensed as incurred. Start-up activities are defined
broadly as those one-time activities related to introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer or commencing some new operations. In accordance with SOP
98-5, the Company recorded a one-time non-cash charge in the first quarter of
fiscal 2000 reflecting the cumulative effect of a change in accounting
principle, in the amount of $3.8 million, net of tax benefit, representing
start-up costs capitalized as of the beginning of fiscal year 2000.
6. ACQUISITIONS:
On May 18, 1999, the Company acquired Natural Nutrition Group, Inc.
("NNG"). NNG is a manufacturer and marketer of premium natural and organic food
products primarily under its Health Valley, Breadshop's and Sahara brands. The
aggregate purchase price, including acquisition costs, amounted to approximately
$82 million. The purchase price was paid by approximately $72 million in cash
and the issuance of $10 million in convertible promissory notes. To finance the
cash portion of the acquisition, the Company entered into a $160 million senior
secured loan which provided for a $30 million revolving credit facility and $130
million in term loans. The aggregate purchase price paid in excess of net assets
acquired amounted to $62.5 million. From the date of acquisition through June
30, 1999, NNG had net sales of approximately $7.5 million.
On December 8, 1998, the Company acquired the Nile Spice soup and meal
cup ("Nile Spice") business from The Quaker Oats Company. The Nile Spice product
line includes premium soups and meals packaged in cups that are sold under the
Nile Spice and Near East brands. The Near East brand is sold under a licensing
agreement through December 2000. In addition, the Company assumed certain
liabilities directly related to the acquired business. The Company used its
revolving credit facility to fund the purchase price.
On July 1, 1998, the Company acquired the following businesses and
brands from The Shansby Group and other investors: Arrowhead Mills (natural
foods), DeBoles Nutritional Foods (natural pasta products), Terra Chips (natural
vegetable chips) and Garden of Eatin', Inc. (natural snack products). The
aggregate purchase price, including acquisition costs, for these businesses
amounted to approximately $61.5 million. The purchase price was paid by the
issuance of 1,716,111 shares of the Company's common stock with a market value
of $39.75 million and approximately $21.7 million in cash. In addition, the
Company repaid approximately $20.8 million of outstanding debt of the acquired
businesses. The aggregate purchase price paid in excess of net assets acquired
amounted to $74.5 million.
On October 14, 1997, the Company completed a tender offer for all of
the shares of Westbrae Natural, Inc. ("Westbrae"), a publicly-owned company, for
$3.625 per share of common stock. The aggregate cash purchase price, including
-38-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
acquisition costs, amounted to approximately $24 million. In addition, the
Company repaid approximately $2.1 million of outstanding Westbrae debt. To
finance the acquisition, the Company entered into a $40 million credit facility
with its bank providing for a $30 million senior term loan and a $10 million
revolving credit line. The aggregate purchase price paid in excess of net assets
acquired amounted to $24.8 million. Westbrae (formerly known as Vestro Natural
Foods, Inc.) is a leading formulator and marketer of high quality natural and
organic foods sold under the brand names Westbrae Natural, Westsoy, Little Bear
and Bearitos, marketing food items such as non-dairy beverages, chips, snacks,
beans and soups.
Unaudited pro forma results of operations (in thousands, except per
share amounts) for the year ended June 30, 1999, assuming the above
acquisitions, excluding Nile Spice which is not material, had occurred as of
July 1, 1998, are as follows:
1999
-------
Net sales $ 379,000
Net income $ 8,190
Net income per share:
Basic $ .34
Diluted $ .31
The pro forma operating results shown above are not
necessarily indicative of operations in the period following acquisition.
The above acquisitions have been accounted for as purchases and,
therefore, operating results of the acquired businesses have been included in
the accompanying financial statements from the date of acquisition. Goodwill
arising from the acquisitions is being amortized on a straight line basis over
40 years.
7. INVENTORIES:
Inventories consist of the following:
June 30
-------------
2000 1999
--------- ------
Finished goods $ 28,730 $ 20,443
Raw materials, work-in-process
and packaging 19,409 19,486
--------- ---------
$ 48,139 $ 39,929
========= ========
-39-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
June 30
-----------------
2000 1999
---------- ----------
Land $ 6,049 $ 5,931
Building 10,579 9,276
Machinery & equipment 33,565 29,130
Assets held for sale 197 5,008
Furniture and fixtures 2,464 2,448
Leasehold improvements 4,971 4,797
Construction in progress 502 -
-------- --------
58,327 56,590
Less:
Accumulated depreciation and
amortization 18,987 15,103
-------- --------
$ 39,340 $ 41,487
======== ========
Assets held for sale were acquired from prior business acquisitions and
have been recorded at their respective fair values on the dates of acquisition.
During fiscal 2000, the Company transferred approximately $4 million from assets
held for sale to their respective categories as management determined that those
assets were to be utilized by the Company. Management intends to dispose of the
remaining assets held for sale in fiscal 2001.
9. LONG-TERM DEBT:
Long-term debt at June 30, 2000 and 1999, consists of the following:
2000 1999
---------- ---------
Senior Term Loans (A) $ - $ 130,000
Revolving credit facilities payable to
banks(A) - 5,080
Convertible Promissory Notes (B) 23 10,000
Notes payable to sellers in connection with
acquisitions of businesses, and other long-
term debt (C) 847 1,125
Economic Development Revenue Bonds due in
monthly installments through November 1, 2009,
interest payable monthly at variable rates (D) 5,433 5,750
-------- ---------
6,303 151,955
Current portion 681 10,817
-------- ---------
$ 5,622 $ 141,138
======== =========
(A) Senior Term Loans and Revolving Credit Facilities
On May 18, 1999, in connection with the acquisition of NNG, the Company
arranged for a $160 million senior secured loan facility ("Facility"), that
provided for a $30 million credit facility and $130 million of term loans. The
Facility was used to complete the acquisition of NNG, refinance then existing
debt and provide for ongoing working capital needs. Required
-40-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
quarterly principal payments were made starting September 30, 1999. Interest
rates on the Facility, which were computed using either the bank's base rate, as
defined, or LIBOR, at the Company's option, ranged from 8.5% to 9.5% and
averaged 8.3% during fiscal 2000.
In June 2000, using the proceeds received from the sale of common stock
to Heinz (see Note 11), all amounts then outstanding under the Facility were
prepaid and the Facility was terminated. As a result, the Company incurred an
extraordinary charge in connection with this early extinguishment of debt of
approximately $1.9 million (net of tax benefit of approximately $1.2 million)
for the write-off of related unamortized deferred financing costs.
The above-described Facility replaced a previous facility under which
the Company had available a $60 million term loan, the full amount of which was
borrowed in connection with the July 1, 1998 acquisition of businesses from the
Shansby Group and other investors (see Note 6), and to pay down then existing
debt, and a $15 million revolving credit line. Interest on these borrowings was
computed in the same manner as under the Facility. Interest during fiscal 1999
under the Facility and the previous facility averaged 7.95%.
In July 2000, the Company entered into a short-term revolving credit
facility with a bank providing a $50 million revolving credit facility to fund
operations. No borrowings exist on this facility as at September 19, 2000.
On November 2, 1998, Celestial entered into a three year credit
facility which includes a revolving credit loan of up to $15,000,000, and a
standby letter of credit commitment in the amount of $6,100,000 (the "Letter of
Credit Facility") to support outstanding Economic Development Revenue Bonds
issued to finance Celestial's manufacturing facility. Borrowings under the
credit facility carried interest at rates ranging from LIBOR plus 0.50% to the
Federal Funds Rate plus .75%, subject to increases if the Company failed to
achieve certain future operating results. The Letter of Credit Facility included
annual financing fees of 0.50%, and loans resulting from a draw under the Letter
of Credit Facility carried interest at a rate equal to the interest rate then
applicable to the Revolving Loan. The Revolving Loan was due on November 2, 2001
and the Letter of Credit Facility expires on November 2, 2002. The credit
facility imposed certain financial and other restrictive covenants including
limitations on indebtedness, liens, sales of assets, mergers and investments. At
the end of December 1999 the revolving loan was paid in full. Subsequent to May
30, 2000, the revolving credit loan was terminated.
(B) Convertible Promissory Notes
In connection with the acquisition of NNG, the Company issued $10
million of convertible promissory notes (the "Notes") bearing interest at 7%,
payable quarterly commencing September 30, 1999. The Notes are convertible into
shares of the Company's Common Stock. The number of shares of Common Stock to be
issued upon conversion of each Note is based upon the conversion price equal to
the average of the closing prices of the Company's Common Stock for the ten
trading days prior to any conversion of the Note. During the year ended June 30,
2000, holders of approximately $9.98 million in Notes have converted such Notes
into 442,538 shares of the Company's common stock.
-41-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(C) Other Long-Term Debt
In connection with an acquisition NNG consummated on January 12, 1999,
prior to the acquisition of NNG by the Company, an $800,000 nonconvertible
promissory note bearing interest at prime (9.5% at June 30, 2000), was issued to
the seller. This promissory note requires principal installments starting June
30, 1999 through December 31, 2002.
(D) Economic Development Bonds
Borrowings related to Economic Development Revenue Bonds (the "Bonds")
bear interest at a variable rate (4.60% at June 30, 2000) and are secured by a
cash collateral account of the Company. The Bonds mature December 1, 2009. The
Bonds can be tendered monthly to the Bond trustee at face value plus accrued
interest, with payment for tendered Bonds made from drawdowns under the letter
of credit. Drawdowns under the letter of credit bear interest at prime plus
1.00%, and are repaid through resale of the Bonds. Any outstanding drawdowns
must be repaid on November 2, 2002.
Maturities of all debt instruments at June 30, 2000, are as follows:
2001 $ 681
2002 856
2003 635
2004 558
2005 600
Thereafter 2,973
------
$6,303
Interest paid during the years ended June 30, 2000, 1999 and 1998
amounted to $7,224, $5,091 and $2,796, respectively.
10. INCOME TAXES:
The provision for income taxes for the years ended June 30, 2000, 1999
and 1998 is presented below. The table excludes the tax benefits applicable to
the extraordinary charges in 1998 and 2000, and the cumulative change in
accounting principle in 2000.
2000 1999 1998
------ ------ -------
Current:
Federal $ 2,615 $ 7,548 $ 5,675
State 389 1,303 852
--------- --------- ---------
3,004 8,851 6,527
Deferred Federal and State 896 80 777
--------- --------- ---------
Total $ 3,900 $ 8,931 $ 7,304
========= ========= =========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
-42-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of the Company's deferred tax asset/(liability) as of June
30, 2000 and 1999 are as follows:
June 30,
-------------
2000 1999
-------- --------
Current deferred tax assets/(liabilities):
Basis difference on inventory $ 1,244 $ 633
Deferred charges and capitalized costs - (3,149)
Allowance for doubtful accounts 981 165
Charitable contribution carryforward - 935
Net operating loss carryovers 2,034 1,552
Reserves not currently deductible 4,465 3,539
-------- -------
Current deferred tax assets/(liabilities), net $ 8,724 $ 3,675
-------- -------
Noncurrent deferred tax assets/(liabilities):
Difference in amortization $ (3,168) $ 449
Basis difference on property and equipment (3,342) (1,170)
Charitable contribution carryforward 935 -
Net operating loss carryovers 2,365 4,009
Valuation allowance (2,327) (2,327)
-------- --------
Noncurrent deferred tax assets/(liabilities), net $ (5,537) $ 961
-------- --------
$ 3,187 $ 4,636
======== =======
Reconciliations of expected income taxes at the U.S. federal statutory
rate to the Company's provision for income taxes for the years ended June 30,
2000, 1999 and 1998 are as follows:
2000 % 1999 % 1998 %
------ ------ ------
Expected U.S. federal
income tax at
statutory rate $ (2,626) 35.0 % $ 7,826 35.0% $ 6,356 34.0%
State income taxes,
net of federal benefit 569 (7.6) 617 2.7 601 3.2
Goodwill amortization 1,576 (21.0) 1,016 4.5 334 1.8
Merger related expenses 4,654 (62.0) - - - -
Contributions (610) 8.1 (582) (2.6) - -
Other 337 (4.5) 54 .2 13 .1
-------- ----- ------- ---- ------- ----
Provision for income
taxes $ 3,900 (52.0)% $ 8,931 39.8% $ 7,304 39.1%
======== ======== ==== ======= ====
Income taxes paid during the years ended June 30, 2000, 1999 and 1998
amounted to $4,909, $5,442, and $5,439, respectively.
At June 30, 2000, the Company had net operating loss carryforwards
("NOLS") of approximately $11,437 which were acquired in previous years. These
NOL's begin expiring in fiscal 2010. Under U.S. Income tax regulations, the
utilization of the NOL's is subject to annual limitations as a result of the
changes in control of the acquired entities, as well as limitations regarding
the use of the NOL's against income other than that earned by the acquired
business (referred to as "SRLY" limitations). Despite these restrictions, as a
result of new regulations issued by the Internal Revenue
-43-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Service effective June 25, 1999, which had the effect of relaxing the SRLY
limitations, the Company expects to fully utilize all of the acquired NOL's
prior to expiration and, therefore, has not provided a valuation allowance on
the related tax assets. The impact of the change in the tax regulations has been
included in the application of purchase accounting for the business acquired.
At June 30, 2000, the potential benefits from noncurrent deferred tax
assets relating to certain intangible assets, which are not amortizable for tax
purposes are fully reserved by means of a valuation allowance, due to the
uncertainty of their future realization. There was no change in the valuation
allowance in 2000. The valuation allowance increased $154 and $153, in 1999 and
1998, respectively.
11. STOCKHOLDERS' EQUITY:
Common Stock:
On December 8, 1997, the Company completed a public offering of
2,500,000 shares of its common stock at $9 per share. Proceeds to the Company,
net of expenses of the offering, amounted to approximately $20.9 million, which
was utilized to pay down the Company's credit facility with its bank. In
connection therewith, certain officers of the Company exercised options for an
aggregate of 105,000 shares of common stock which were sold in the public
offering. The Company received aggregate net proceeds of approximately $340 from
the exercise of such options.
In connection with the acquisition of businesses from The Shansby Group
and other investors, a portion of the purchase price was paid by the issuance of
1,716,111 shares of the Company's common stock with a market value of $39.8
million.
In September 1999, the Company entered into a global strategic alliance
with Heinz related to the production and distribution of natural products
domestically and internationally, and purchased from Heinz the trademarks of its
Earth's Best baby food line of products. In connection with the alliance, the
Company issued 2,837,343 shares (the "Investment Shares") of its common stock,
par value $.01 per share (the "Common Stock") to a wholly owned subsidiary of
Heinz (the "Heinz Subsidiary"), for an aggregate purchase price of $82.4 million
under a Securities Purchase Agreement dated September 24, 1999 between the
Company the Heinz Subsidiary. The Company used $75 million of the proceeds from
this to reduce its borrowings under its credit facility. The remainder of the
proceeds were used to pay transaction costs and for general working capital
purposes. In consideration for the trademarks, the Company paid a combination of
$4.6 million in cash and 670,234 shares of Common Stock, valued at $17.4
million(the "Acquisition Shares" and together with the Investment Shares, the
"Shares"). This purchase agreement terminates a license agreement dated April 1,
1999 between the Company and Heinz whereby the Company was granted exclusive
sale and distribution rights of Earth's Best baby food products into the United
States retail grocery and natural food channel. With the acquisition of these
trademarks, the Company will be able to sell, market and distribute Earth's Best
products both domestically and internationally and have a more efficient means
to develop new products. In connection with the issuance of the Shares, the
Company and the Heinz
-44-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsidiary have entered into an Investor's Agreement dated September 24, 1999
that sets forth certain restrictions and obligations of the Company and the
Heinz Subsidiary and its affiliates relating to the Shares, including
restrictions and obligations relating to (1) the appointment by the Company of
one member to its board of directors nominated by the Heinz Subsidiary and one
member jointly nominated by the Heinz Subsidiary and the Company, (2) an
18-month standstill period during which the Heinz Subsidiary and its affiliates
may not purchase or sell shares of Common Stock, subject to certain exceptions,
(3) a right of first offer granted to the Company by Heinz and its affiliates to
the Company upon the sale of Shares by the Heinz Subsidiary and its affiliates
following the standstill period, (4) preemptive rights granted to the Heinz
Subsidiary and its affiliates relating to the future issuance by the Company of
shares of capital stock and (5) confidentiality.
Included as part of the alliance was a provision that the Heinz
Subsidiary would have the preemptive right to purchase additional equity in the
Company to maintain it's investment level at 19.5% of the outstanding stock of
the Company. The Heinz Subsidiary investment level was diluted following the
acquisition by the Company of Celestial Seasonings on May 30, 2000. Under the
terms of the agreement, on June 20, 2000 the Company issued 2,582,774 shares of
its common stock, par value $.01 per share to the Heinz Subsidiary for an
aggregate purchase price of approximately $79.7 million. The Company used
approximately $44 million to prepay the remainder of its borrowings under its
credit facility. The remainder of the funds are being used for working capital.
In addition, the Company and the Heinz Subsidiary have entered into a
Registration Rights Agreement dated September 24, 1999 that provides the Heinz
Subsidiary and its affiliates customary registration rights relating to the
Shares, including two demand registration rights and "piggy-back" registration
rights.
On May 30, 2000, the Company's shareholders approved an increase to the
number of authorized shares of the Company's common stock from 40 million to 100
million.
Preferred Stock:
The Company is authorized to issue "blank check" preferred stock (up to
5 million shares) with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered to issue, without stockholder approval, preferred
stock with dividends, liquidation, conversion, voting, or other rights which
could decrease the amount of earnings and assets available for distribution to
holders of the Company's Common Stock. As at June 30, 2000 and 1999, no
preferred stock was issued or outstanding.
Warrants:
In connection with the acquisition of Estee in November 1995, the
Company issued a warrant to the seller to purchase 200,000 shares of the
Company's Common Stock at an exercise price of $6.50 per share. In August and
September 1997, the seller exercised all of the warrants and the Company
-45-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issued 200,000 shares of Common Stock out of treasury for aggregate proceeds of
$1.3 million. The proceeds were used to pay down bank debt.
In connection with the Weight Watchers agreement, the Company issued
warrants to Heinz on March 31, 1997, to acquire 250,000 shares of the Company's
Common Stock at prices ranging from $7.00 to $9.00 per share. The value ascribed
to these warrants of approximately $.3 million is being amortized over ten
years. In April 1999, Heinz exercised these warrants and the Company issued
250,000 shares of Common Stock resulting in proceeds of $1.9 million. In
accordance with the terms of the then existing term loan facility, 50% of the
proceeds was used to pay down the term loan with the remainder used for working
capital purposes.
Since fiscal 1997, the Company issued a total of 300,000 warrants in
connection with services rendered by third party consultants at prices ranging
from $4.13 to $10.00 per share. 250,000 of these warrants were exercised during
fiscal 2000, resulting in proceeds of $1.6 million. In accordance with the then
existing term loan facility, 50% of the proceeds were used to pay down the term
loan with the remainder used for working capital purposes.
In connection with the acquisition of Westbrae on October 14, 1997 and
the related bank refinancing, the Company issued a warrant to its bank to
acquire 114,294 shares of the Company's common stock at an exercise price of
$11.418. The value ascribed to this warrant of approximately $.4 million is
being amortized over six years. In July 1998, the bank exercised these warrants
via a cashless exercise resulting in the issuance to the bank of 63,647 common
shares. In addition, the Company issued a warrant to Argosy Investment Corp.
("Argosy") to acquire 100,000 shares of the Company's common stock at an
exercise price of $12.688. The value ascribed to this warrant of approximately
$.4 million has been included in the costs of the acquisition of Westbrae.
In June 2000, Argosy exercised warrants, previously granted in 1994, to
acquire 95,853 shares of the Company's common stock at an exercise price of
$3.25. The proceeds were utilized for working capital purposes as the Company
had already paid down its term and revolver loans. At June 30, 2000, 426,864 of
these warrants remain available for exercise.
12. STOCK OPTION PLANS:
Hain:
In December 1994, the Company adopted the 1994 Long-Term Incentive and
Stock Award Plan ("Plan"), which amended and restated the Company's 1993 stock
option plan. On December 9, 1997, the stockholders of the Company approved an
amendment to increase the number of shares issuable under the 1994 Long Term
Incentive and Stock Award Plan by 345,000 to 1,200,000 shares. In December 1998,
the Plan was further amended to increase the number of shares issuable by
1,200,000 bringing the total shares issuable under this plan to 2,400,000. In
December 1999, the Plan was further amended to increase the number of shares
issuable by 1,000,000 bringing the total shares issuable under this plan to
3,400,000. In May 2000, the Plan was further amended to increase the number of
shares issuable by 3,000,000 bringing the total shares issuable under this plan
to 6,400,000. The Plan provides for the granting of
-46-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
incentive stock options to employees, directors and consultants to purchase
shares of the Company's common stock. All of the options granted to date under
the Plan have been incentive and non-qualified stock options providing for
exercise prices equivalent to the fair market price at date of grant, and expire
10 years after date of grant. Vesting terms are determined at the discretion of
the Company. During 1998, options to purchase 298,600 shares were granted at
prices from $4.50 to $14.13 per share. During 1999, options to purchase
1,175,600 shares were granted at prices from $12.125 to $21.50 per share. During
2000, options to purchase 372,550 shares were granted at prices ranging from
$21.188 to $33.50 per share. At June 30, 2000, 3,658,950 options were available
for grant under this plan.
The Company's Chief Executive Officer ("CEO") was granted 125,000 of
the options granted in 1998, that had been conditionally granted to him at
$4.8125 per share on the date of grant (June 30, 1997) pending approval of an
increase in the number of shares available for grant (approved by shareholders
on December 9,1997). The Company will incur a straight line non-cash
compensation charge ($46, $46, and $27, respectively for fiscal years 2000, 1999
and 1998) over the 10-year vesting period based on the excess ($.5 million) of
the market value of the stock options ($8.50 per share) on December 9, 1997
compared to $4.8125 per share market value on the date of grant.
In December 1995, the Company adopted a Directors Stock Option Plan.
The Plan provides for the granting of stock options to non-employee directors to
purchase up to an aggregate of 300,000 shares of the Company's common stock. In
December 1998, the Director Stock Option Plan was amended to increase the number
of shares issuable from 300,000 to 500,000. In December 1999, the Director Stock
Option Plan was amended to increase the number of shares issuable by 250,000,
bringing the total shares issuable under this plan to 750,000. During 1998,
options for an aggregate of 67,500 shares were granted at prices of $8.50 and
$19.68 per share. During 1999, options for an aggregate of 95,000 shares were
granted at a price of $17.625 per share. During 2000, options for an aggregate
of 103,500 shares were granted at prices of $23.25 and $26.063 per shares. At
June 30, 2000, 326,500 options are available for grant under this plan.
In May 2000, the Company adopted a new Directors Stock Option Plan. The
Plan provides for the granting of stock options to non-employee directors to
purchase up to an aggregate of 750,000 shares of the Company's stock. At June
30, 2000, no options were granted under this plan.
The Company also has a 1993 Executive Stock Option Plan pursuant to
which it granted its CEO options to acquire 600,000 shares of the Company's
common stock. As a result of the Company achieving certain sales thresholds, all
of such shares are currently exercisable. The exercise price of options designed
to qualify as incentive options is $3.58 per share and the exercise price of
non-qualified options is $3.25 per share. None of these options have been
exercised. The options expire in 2003.
-47-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Celestial:
In conjunction with the Merger as previously discussed, all outstanding
Celestial options became fully vested as of May 30, 2000. All amounts have been
restated to reflect the conversion of the Celestial stock to Hain stock at a
ratio of 1.265:1.
During 1991, Celestial adopted an incentive and non-qualified stock
option plan that provided for the granting of options to purchase up to 116,663
shares of Celestial's common stock to employees. The options generally vested
over a four year period and expired ten years from the grant date. No grants
were made under the plan.
In 1991, Celestial granted options to an executive officer to purchase
241,944 shares of the Company's common stock in connection with capital
contributions made by the officer and certain other agreements. Such options
were immediately vested at the grant date, are exercisable at a weighted average
price per share of $4.93 and expire in 2031.
During 1993, Celestial adopted an incentive and non-qualified stock
option plan that provided for the granting of awards for up to 331,430 shares of
Celestial's common stock. Options granted at the time of Celestial's initial
public offering in 1993 vested over one year and five year periods. Options
granted subsequent to Celestial's initial public offering generally vested over
a five-year period. Options expire ten years from the grant date. During 1995,
Celestial approved an increase in the number of awards that may be granted to
569,250 shares and in 1998 Celestial approved a further increase of up to
1,581,250 shares which may be granted under the plan. Effective May 30, 2000, no
further grants are available under this plan.
In 1993, Celestial granted options to purchase 25,300 shares of
Celestial common stock to a director of Celestial. The options vested over a
three-year period and expire ten years from the grant date.
In 1995, Celestial adopted a non-qualified stock option plan for non-
employee directors. The plan provides for up to 189,750 shares of Celestial's
common stock for issuance upon exercise of options granted to non-employee
directors and in lieu of meeting fees paid to non-employee directors. The
options vest over a one-year period and expire ten years from the grant date.
During 1998, Celestial amended this plan to provide each non-employee director
an initial grant of an option to purchase 12,650 shares and an annual grant,
commencing in 1999, of an option to purchase 5,060 shares. In addition, non-
employee directors may elect to receive their annual retainer in shares of
common stock rather than cash. Effective May 30, 2000, no further grants are
available under this plan.
In 1997, Celestial granted options to an executive officer to purchase
417,450 shares of Celestial's common stock. The options were granted in
connection with the officer's employment agreement, initially vested over a
five-year period, are exercisable at $10.75 per share and expire ten years from
the grant date.
-48-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee stock purchase plan:
Under Celestial's Employee Stock Purchase Plan (the "Plan") Celestial
is authorized to issue up to 66,286 shares of common stock to its full-time
employees, nearly all of whom are eligible to participate. Under the terms of
the Plan, employees can choose each year to have up to 10% of their annual base
earnings withheld to purchase Celestial's common stock. The purchase price of
the stock is 85 percent of the lower of the market price at the beginning or end
of each six month participation period. Approximately 30 percent of eligible
employees have participated in the Plan in the last three years. Under the Plan,
Celestial has sold approximately 10,000 shares for each of the three years ended
June 30, 2000.
Accounting For Stock Issued to Employees:
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations, in accounting
for stock options because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options at least equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro-forma information regarding net income(loss) and net income(loss)
per share is required by SFAS No. 123, and has been determined as if the Company
has accounted for its stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Sholes option pricing model with the following weighted-average
assumptions: risk free interest rates ranging from 4.78% to 6.77%; no dividend
yield; volatility factors of the expected market price of the Company's Common
Stock of approximately 90% for fiscal 2000, 57% for fiscal 1999 and 40% for
fiscal 1998; and a weighted-average expected life of the options of five years
at June 30, 2000, 1999 and 1998.
The Black-Sholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
-49-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
2000 1999 1998
------ ------ -------
Pro forma net income(loss) $ (23,033) $ 2,897 $ 7,780
Pro forma diluted net
income (loss) per share $ (.82) $ .11 $ .34
The SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995. As a result, the pro forma compensation cost
may not be representative of that to be expected in future years.
A summary of the transactions pursuant to the Company's stock option
plans for the three years ended June 30, 1999 follows:
2000 1999 1998
--------------- --------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ------- ------- ------- ------- ------
Outstanding at
beginning of year 4,076,088 $ 11.83 3,042,210 $ 7.80 2,811,369 $ 6.00
Granted 632,710 23.05 1,630,493 18.02 730,863 13.21
Exercised (572,442) 15.03 (459,592) 5.56 (399,299) 5.00
Terminated (139,250) 18.63 (137,023) 16.78 (100,723) 7.83
--------- ------- --------- ------- --------- -------
Outstanding at
end of 3,997,106 $ 12.91 4,076,088 $ 11.83 3,042,210 $ 7.80
========= ======= ========= ======= ========= ======
Exercisable at
end of year 3,553,964 2,831,522 1,992,870
========= ========= =========
Weighted average
fair value of
options granted
during year $ 15.23 $ 7.92 $ 4.01
========= ========= =========
The following table summarizes information for stock options outstanding at
June 30, 2000:
Weighted Average
Remaining Contractual
Exercise Options Options Life In Years of
Price Outstanding Exercisable Options Exercisable
$2.94 - 4.83 1,027,400 1,027,400 4.75
4.93 241,944 241,944 31.00
7.59 - 13.00 806,819 787,569 6.47
15.50 - 17.63 829,112 788,862 8.62
18.00 - 19.69 528,295 509,320 8.46
20.00 - 23.63 387,112 95,495 9.34
24.25 - 33.50 176,424 103,374 9.08
---------- ----------
3,997,106 3,553,964
========== ==========
-50-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares of Common Stock reserved for future issuance as of June 30, 2000 are as
follows:
Stock options 9,623,347
Warrants 576,864
Employee stock purchase plan 23,726
Convertible promissory notes 4,656
-----------
10,228,593
13. LEASES:
The Company's corporate headquarters are located in leased office space
in Uniondale, New York, under a lease which expires in October 2003. In
addition, the Company leases manufacturing and warehouse space under leases
which expire through fiscal 2007. These leases provide for additional payments
of real estate taxes and other operating expenses over a base period amount.
The aggregate minimum future lease payments for these operating leases
at June 30, 2000 are as follows:
Year Ending
June 30
2001 $ 4,107
2002 3,586
2003 3,202
2004 2,527
2005 1,275
Thereafter 2,847
---------
$ 17,544
Rent expense charged to operations for the years ended June 30, 2000,
1999 and 1998 was approximately $3,217, $1,823 and $875, respectively.
14. DEFINED CONTRIBUTION PLANS
The Company has a 401(k) Employee Retirement Plan ("Plan") to provide
retirement benefits for eligible employees. All full-time employees of the
Company and its subsidiaries who have attained the age of 21 are eligible to
participate upon completion of 30 days of service. The subsidiaries of NNG and
Arrowhead Mills each have their own separate 401 (k)employee retirement plan.
The Arrowhead Mills plan rolled into the Company's Plan during the year ended
June 2000. Employees within those subsidiaries, who meet their respective
eligibility requirements, may participate in those plans. The Company's
Celestial Seasonings subsidiary has a contributory thrift plan. Each year, based
on the achievement of certain targeted operating results, the Company can
contribute to the plan an amount equal to 1% to 2.5% of thriftable wages. In
addition, the Company matches a portion (currently 50%) of participant
contributions up to the limits provided under the plan. Participants may elect
to make voluntary contributions to the Plan in amounts not exceeding federal
guidelines. On an annual basis, the Company may, in its sole discretion, make
certain matching contributions. For the years ended June 30, 2000, 1999 and
1998, the Company made contributions to the Plans of $464, $603 and $371,
respectively.
-51-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. LITIGATION:
On May 5, 1995, a purported stockholder of Celestial filed a lawsuit,
Schwartz v. Celestial Seasonings, Inc. et al., in the United States District
Court for the District of Colorado (Civil Action Number: 95-K-1045), in
connection with disclosures by the Company concerning the Company's license
agreement with Perrier Group of America, Inc. which was terminated on January
1, 1995. In addition to Celestial, the complaint named as defendants certain
of Celestial's then present and former directors and officers, PaineWebber,
Inc., Shearson/Lehman Brothers, Inc., and Vestar/Celestial Investment Limited
Partnership. The complaint, which was pled as a class action on behalf of
persons who acquired Celestial's common stock from July 12, 1993 through May
18, 1994, sought money damages from Celestial and the other defendants for the
class in the amount of their loss on their investment in Celestial's common
stock, punitive damages, costs and expenses of the action, and such other
relief as the court may order.
On November 6, 1995, the federal district court granted a motion by Celestial
and the other defendants to dismiss the case. On September 5, 1997, however, the
court of appeals reversed the decision of the district court and returned the
case to the district court for further proceedings. The case was certified as a
class action.
On November 4, 1999, Celestial reached a settlement with the plaintiff,
which resulted in a pre-tax charge of $1.2 million during Celestial's fourth
quarter of its fiscal year ending 1999. The settlement was subject to a
completion of a definitive settlement stipulation to be filed in the district
court and court approval of the settlement. On April 25, 2000, the settlement
was approved by the courts. The settlement has become final. The Company does
not expect any additional shareholder lawsuits related to this matter.
In April 1999, an arbitrator ruled in favor of a former financial
advisor of Westbrae who claimed fees and expenses due in connection with the
sale of Westbrae to the Company in October 1997. The Company paid approximately
$1.3 million, including legal fees, as a result of the arbitrator's decision,
which amount had been provided for in connection with the 1997 acquisition of
Westbrae.
From time to time, the Company is involved in litigation, incidental to
the conduct of its business. In the opinion of management, disposition of
pending litigation will not have a material adverse effect on the Company's
business, results of operations or financial condition.
16. RELATED PARTY TRANSACTIONS
During 1998, the Company, pursuant to an employment agreement, provided
a key employee with an interest free loan of $280,000 associated with the
employee's relocation. The loan was payable upon the earlier of the sale of, the
employee's former home, or five months. The loan was paid in full in 1999.
During 1999, a former executive officer of Celestial borrowed
approximately $3.0 million in connection with the purchase and construction of
certain real estate. Celestial guaranteed the repayment of up to $1.0
-52-
million of the loan, plus all interest, lender's costs, expenses and attorney's
fees incurred in connection with any future collection of the loan. The guaranty
terminated on September 22, 2000.
During 1999, the Company, pursuant to an employment agreement, provided
a key employee with a loan of approximately $126,000 associated with the
employee's relocation. The loan was payable upon the sale of the employee's
former home. The loan was paid in full in 2000.
-53-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
PART III
Item 10, "Directors and Executive Officers of the Registrant", Item 11,
"Executive Compensation", Item 12, "Security Ownership of Certain Beneficial
Owners and Management", and Item 13, "Certain Relationships and Related
Transactions", have been omitted from this report inasmuch as the Company will
file with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report a
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held on December 5, 2000, at which meeting the stockholders will vote upon
election of the directors. This information under the caption "Election of
Directors" in such Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K.
(a) (1) List of Financial statements
Consolidated Balance Sheets - June 30, 2000 and 1999
Consolidated Statements of Operations - Years ended June 30, 2000,
1999 and 1998
Consolidated Statements of Cash Flows - Years ended June 30, 2000, 1999
and 1998
Consolidated Statements of Stockholders' Equity - Years ended June 30,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedule
Valuation and Qualifying Accounts (Schedule II)
(3) List of Exhibits
Exhibit 21 - Subsidiaries of Registrant
Exhibit 23 - Consent of Independent Auditors - Ernst & Young LLP
Exhibit 23.1 - Consent of Independent Auditors -
Deloitte & Touche LLP
Exhibit 23.2 - Independent Auditors Report for Financial
Statement Schedule - Deloitte & Touche
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended June 30, 2000.
-54-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to other Balance at
beginning costs and accounts - Deductions end of
of period expenses describe describe period
- ----------------------------------------------------------------------------------------------------------
Year Ended June 30, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,287 $ 432 $ 100 (1) $ 890 (2) $ 929
Year Ended June 30, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 859 $ 313 $ 316 (1) $ 201 (2) $ 1,287
Year Ended June 30, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 430 $ 468 $ 94 (1) $ 133 (2) $ 859
(1) Allowance for doubtful accounts at dates of acquisitions of acquired
businesses.
(2) Uncollectible accounts written off, net of recoveries.
-55-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE HAIN CELESTIAL GROUP, INC.
By: /s/ Irwin D. Simon
--------------------------------
Irwin D. Simon
Chairman of the Board, President and Chief Executive Officer
Date: September 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Irwin D. Simon President, Chief September 28, 2000
- ----------------------
Irwin D. Simon Executive Officer
and Chairman of the
Board of Directors
/s/ Mo Siegel Vice Chairman of the September 28, 2000
- ----------------------
Mo Siegel Board of Directors
/s/ Gary M. Jacobs Chief Financial Officer September 28, 2000
- ----------------------
Gary M. Jacobs
/s/ Andrew Heyer Director September 28, 2000
- ----------------------
Andrew R. Heyer
/s/ Kenneth Daley Director September 28, 2000
- ----------------------
Kenneth Daley
/s/ Beth L. Bronner Director September 28, 2000
- ----------------------
Beth L. Bronner
/s/ Jack Futterman Director September 28, 2000
- ----------------------
Jack Futterman
/s/ James Gold Director September 28, 2000
- ----------------------
James S. Gold
/s/ Joseph Jimenez Director September 28, 2000
- ----------------------
Joseph Jimenez
/s/ Nigel Clare Director September 28, 2000
- ----------------------
Nigel Clare
/s/ Marina Hahn Director September 28, 2000
- ----------------------
Marina Hahn
/s/ Gregg Ostrander Director September 28, 2000
- ----------------------
Gregg Ostrander
-56-
Exhibit 21
Jurisdiction of
Subsidiary Incorporation
Celestial Seasonings, Inc. Delaware
Natural Nutrition Group, Inc. Delaware
Health Valley Company California
Arrowhead Mills, Inc. Delaware
AMI Operating, Inc. Texas
DeBoles Nutritional Foods, Inc. New York
Hain Pure Food Co., Inc. California
Kineret Foods Corporation New York
Westbrae Natural, Inc. Delaware
Westbrae Natural Foods, Inc. California
Little Bear Organic Foods, Inc. California
Dana Alexander, Inc. New York
-57-
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-33828), Post-Effective Amendment No. 1 to the Registration
Statement (Form S-4 on Form S-8 No. 333-33830) and Post-Effective Amendment
No. 1 to the Registration Statement (Form S-8 No. 333-38915) pertaining to
The Hain Celestial Group, Inc. 1994 Long Term Incentive and Stock Award
Plan, and the Registration Statements (Form S-3 Nos. 333-59761 and 333-
77137) of The Hain Celestial Group, Inc. and in the related Prospectus of
our report dated September 13, 2000, with respect to the consolidated
financial statements and schedule of The Hain Celestial Group, Inc. and
Subsidiaries included in this Annual Report (Form 10-K) for the year ended
June 30, 2000.
/s/ Ernst & Young LLP
Melville, New York
September 27, 2000
-58-
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-33828), Post-Effective Amendment No. 1 to the Registration
Statement (Form S-4 on Form S-8 No. 333-33830) and Post-Effective Amendment
No. 1 to the Registration Statement (Form S-8 No. 333-38915) pertaining to
The Hain Celestial Group, Inc. 1994 Long Term Incentive and Stock Award
Plan, and the Registration Statements (Form S-3 Nos. 333-59761 and 333-
77137) of The Hain Celestial Group, Inc. and in the related Prospectus of
our report dated November 3, 1999, with respect to the consolidated
financial statements of Celestial Seasonings, Inc. (none of which are
included in this Annual Report (Form 10-k)) for the year ended September 30,
1999.
/s/ Deloitte & Touche LLP
Denver, Colorado
September 27, 2000
-59-
Exhibit 23.2
INDEPENDENT AUDITORS REPORT
To the Stockholders and Board of Directors of Celestial Seasonings, Inc.:
We have audited the consolidated financial statements and schedule of
Celestial Seasonings, Inc. and subsidiaries (the "Company") as of September 30,
1999 and for each of the two years in the period ended September 30, 1999 and
have issued our reports thereon dated November 3, 1999. Our audits also included
the consolidated financial statement schedule (which is not presented herein) of
the Company, listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth herein.
/s/ Deloitte & Touche LLP
Denver, Colorado
November 3, 1999
-60-