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, 2002
Commission File No. 0-22818
THE HAIN CELESTIAL GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3240619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
58 South Service Road
Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 730-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to Form
10-K. |X|
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*
-------------------------------- -----------------
26,965,891 shares of Common Stock $ 395,859,280
* Based on the last reported sale price for the Common Stock on Nasdaq National
Market on September 25, 2002.
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, 33,613,202 shares outstanding as of September 25, 2002.
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 November 12, 2002
Table of Contents
Part I
Item 1. Business
Note Regarding Forward Looking Information 1
General 1
Product Overview 3
Products 4
New Product Initiatives Through Research and Development 5
Sales and Distribution 5
Marketing 6
Manufacturing Facilities 6
Suppliers of Ingredients and Packaging 7
Co-packed Product Base 8
Trademarks 8
Competition 9
Government Regulation 10
Independent Certification 10
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial 14-22
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 22
Item 8. Financial Statements and Supplementary Data 23-51
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 52
Part III
Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 52
Item 12. Security Ownership and Certain Beneficial Owners and
Management 52
Item 13. Certain Relationships and Related Transactions 52
Item 14. Controls and Procedures 52
Part IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K 52-55
Signatures 56
PART I
THE HAIN CELESTIAL GROUP, INC.
Item 1. Business.
Unless otherwise indicated, references in this Annual Report to 2002,
2001, 2000 or "fiscal" 2002, 2001, 2000 or other years refer to our fiscal year
ended June 30 of that year and references to 2003 or "fiscal" 2003 refer to our
fiscal year ending June 30, 2003.
Note Regarding Forward Looking Information
Certain statements contained in this Annual Report constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1934 (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934 (the "Exchange Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, levels of activity, performance or achievements of the Company (as
defined below), or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; the ability of the Company
to implement its business and acquisition strategy; the ability to effectively
integrate its acquisitions; the ability of the Company to obtain financing for
general corporate purposes; competition; availability of key personnel; and
changes in, or the failure to comply with government regulations. As a result of
the foregoing and other factors, no assurance can be given as to the future
results, levels of activity and achievements and neither the Company nor any
person assumes responsibility for the accuracy and completeness of these
statements.
General
The Hain Celestial Group, Inc., a Delaware corporation, and its
subsidiaries (collectively, the "Company", and herein referred to as "we", "us",
and "our") manufacture, market, distribute and sell natural, specialty, organic
and snack food products under brand names which are sold as "better-for-you"
products. We are a leader in many of the top natural food categories, with such
well-known natural food brands as Celestial Seasonings(R) teas, Hain Pure
Foods(R), Westbrae(R), Westsoy(R), Little Bear Organic Foods(R), Bearitos(R),
Arrowhead Mills(R), Health Valley(R), Breadshop's(R), Casbah(R), Garden of
Eatin'(R), Terra Chips(R), Harry's Premium Snacks(R), Boston's(R), Gaston's(R),
Lima(R) and BioMarche(R), Yves Veggie Cuisine(R), DeBoles(R), Earth's Best(R),
and Nile Spice(R). The Company's principal specialty product lines include
Hollywood(R) cooking oils, Estee(R) sugar-free products, Kineret(R) kosher
foods, Boston Better Snacks(R), and Alba Foods(R). Our website can be found at
www.hain-celestial.com.
Our products are sold primarily to specialty and natural food distributors
and are marketed nationally to supermarkets, natural food stores, and other
retail classes of trade including mass-market stores, food service channels and
club stores. During 2002, 2001 and 2000, approximately 54%, 51% and 55%,
respectively, of our revenues were derived from products manufactured within our
own facilities. The remaining 46%, 49% and 45% for 2002, 2001 and 2000,
respectively, of our revenues were derived from products which are produced by
independent food manufacturers ("co-packers") using proprietary specifications
controlled by us.
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Since our formation, we have completed a number of acquisitions of
companies and brands. In the last three years, we have acquired the following
companies and brands:
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.
On July 1, 1998, we 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 May 18, 1999, we 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.
In September 1999, we purchased the trademarks of Earth's Best natural
baby food products from H.J. Heinz Company ("Heinz"). Prior thereto, Earth's
Best products were sold by us 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. In
connection with an investment by Heinz in our business and our acquisition of
the Earth's Best trademarks, we issued to a subsidiary of Heinz approximately
3.5 million shares of our common stock. The Company and the Heinz subsidiary
also entered into an Investors Agreement under which the Heinz subsidiary agreed
to limit its holdings to 19.5% of our common stock for an 18 month period that
ended March 27, 2001. See Note 13 of the Notes to the Consolidated Financial
Statements for further information regarding this transaction.
On January 18, 2001, we acquired Fruit Chips B.V., a Netherlands based
company, which manufactures, distributes and markets low fat fruit, vegetable
and potato chips.
On June 8, 2001, we acquired Yves Veggie Cuisine, Inc. and its
subsidiaries ("Yves"), a Vancouver, British Columbia based company. Yves is a
manufacturer, distributor and marketer of premium soy protein meat alternative
products.
On December 10, 2001, we acquired Lima N.V., the leading Belgian natural
and organic foods manufacturer and marketer, and its affiliated company
BioMarche, a processor and marketer of fresh organic produce.
-2-
Our brand names are well recognized in the various market categories they
serve. We have acquired numerous brands since our formation (in addition to
those mentioned above) and we will seek future growth through internal expansion
as well as the acquisition of complementary brands.
Our overall mission is to be a leading marketer and seller of natural,
organic, beverage and speciality food products by integrating all of our brands
under one management team and employing a uniform marketing, sales and
distribution program. Our business strategy is to capitalize on the brand equity
and the distribution previously achieved by each of our acquired product lines
and to enhance revenues by strategic introductions of new product lines that
complement existing products. This strategy has been established through the
acquisitions referred to above and the introduction of a number of new products
that complement existing product lines. We believe that by integrating our
various brand groups, we will achieve economies of scale and enhanced market
penetration. We consider the acquisition of natural, organic and speciality food
companies and product lines as an integral part of our business strategy. To
that end, we do, from time to time, review and conduct preliminary discussions
with acquisition candidates.
As of June 30, 2002, we employed a total of 1,337 full-time employees. Of
these employees, 101 were in sales, 764 in production and the remaining 472 were
management and administrative.
Product Overview
Natural and Organic Food Products
Our Hain, Westbrae, Westsoy, Little Bear, Bearitos, Arrowhead Mills, Terra
Chips, DeBoles, Garden of Eatin', Health Valley, Casbah, Breadshop's, Nile
Spice, Earth's Best, Harry's Premium Snacks, Lima and BioMarche businesses
market and distribute a full line of natural food products. We are a leader in
many of the top natural food categories. Natural foods are defined as foods
which are minimally processed, largely or completely free of artificial
ingredients, preservatives, and other non-naturally occurring chemicals, and are
as near to their whole natural state as possible. Many of our products are also
made with "organic" ingredients which are grown without dependence upon
artificial pesticides, chemicals or fertilizers.
Tea and Beverage Products
Our tea products 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. We develop
high-quality, flavorful, natural products with attractive, colorful and thought-
provoking packaging. Our 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
We manufacture, market and sell a variety of potato and vegetable chips,
organic tortilla style chips, pretzels, popcorn and potato chips under the Terra
Chips, Gaston's, Garden of Eatin', Little Bear, Boston's Popcorn and Harry's
Original names.
-3-
Meat Alternative Products
We manufacture, distribute and market a full line of soy protein meat
alternative products under the Yves brand name including such well known
products as The Good Dog(R), The Good Lunch(R) and The Good Slice(R), among
others. Meat alternative products provide consumers with a meat alternative
product containing health benefits of soy but without the health concerns
associated with traditional meat products.
Medically-Directed and Weight Management Products
Our 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.
Specialty Cooking Oil Products
Our Hollywood business markets a line of specialty cooking oils that are
enhanced with Vitamin E to maintain freshness and quality. The Hollywood product
line also includes carrot juice, mayonnaise and margarine. Hollywood products
are primarily sold directly to supermarkets and other mass market merchandisers.
Kosher Food Products
Our Kineret business markets and distributes a line of frozen and dry
kosher food products. Kosher foods are products that are prepared in a manner
consistent with Kosher dietary laws.
Products
Our natural and organic food product lines consist of approximately 1,200
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. Non-dairy drinks accounted for approximately 12% of
total net sales in 2002 and 14% each in 2001 and 2000.
Our beverage and tea products include herb teas which are made from all
natural ingredients and are offered in a wide variety of flavors. Our
top-selling herb tea products include Sleepytime, Chamomile, Lemon Zinger,
Peppermint, Raspberry Zinger, Tension Tamer, Wild Berry Zinger, Country Peach
Passion, Mandarin Orange Spice and Red Zinger; Green teas which includes
Authentic Green Tea, Decaffeinated Green Tea, Emerald Gardens(R) Green Tea,
Green Lemon Zinger, Honey Lemon Ginseng Green Tea and Misty Jasmine(TM) Green
Tea; Wellness teas, which 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 Victorian Earl Grey(R), Devonshire English Breakfast(R),
Tuscany Orange Spice(R), Golden Honey Darjeeling(R), and Bali Black
Raspberry(R). Tea beverages accounted for approximately 21% of total net sales
in 2002 and 24% in each of 2001 and 2000.
Yves meat alternative products consist of approximately 40 items including
meat alternative choices among veggie burgers, veggie wieners, veggie slices,
veggie entrees and veggie ground round.
-4-
Terra Chips natural food products consist of approximately 60 items
comprised of varieties of potato chips, potato sticks (known as Frites(R)),
sweet potato chips and other vegetable chips.
Garden of Eatin' natural food products substantially consist of a variety
of organic tortilla chip products.
Boston Popcorn and Harry's products consist of approximately 20 varieties
of popcorn, potato chips, tortilla chips and other snack food items.
Hollywood products consist of safflower, canola, and peanut oils, and
carrot juice. Hollywood cooking oils are enhanced with Vitamin E.
Estee products consist of sugar-free and fructose sweetened food products.
Kineret 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, dry grocery products for Passover and
assorted other food products.
We continuously evaluate our existing products for taste, nutritional
value and cost and makes improvements where possible. We will discontinue
products or stock keeping units when sales of those items do not warrant further
production.
New Product Initiatives Through Research and Development
We consider research and development of new products to be a significant
part of our overall philosophy and we are committed to developing high-quality
products. A team of professional product developers works with a sensory
technologist to test product prototypes with consumers. The research and
development department incorporates product ideas from all areas of our business
in order to formulate new products. In addition to developing new products, the
research and development department routinely reformulates and revises existing
products. We incurred approximately $1 million in Company-sponsored research and
development activities in 2002 and $1.5 million in each of 2001 and 2000.
Sales and Distribution
Our products are sold in all 50 states and in approximately 50 countries.
Certain of our product lines have seasonal fluctuations (e.g. hot tea products,
baking and cereal products and soup sales are stronger in cold months while
sales of snack food products are stronger in the warmer months). Quarterly
fluctuations in our sales volume and operating results are due to a number of
factors relating to our business, including the timing of trade promotions,
advertising and consumer promotions and other factors, such as seasonality,
inclement weather and unanticipated increases in labor, commodity, energy,
insurance or other operating costs. The impact on sales volume and operating
results due to the timing and extent of these factors can significantly impact
our business.
A majority of the products marketed by us are sold through independent
food distributors. Over half of these sales orders are received from third-party
food brokers. We utilize a direct sales force for sales into natural food stores
that has allowed us to reduce our reliance on food brokers. Food brokers act as
agents for us within designated territories, usually on a non-exclusive basis,
and receive commissions. Food distributors purchase products from us for resale
to retailers. Because food distributors take title to the products upon
purchase, product pricing decisions on sales of our products by the distributors
-5-
are generally made in their sole discretion, although we may participate in
product pricing during promotional periods.
Our customer base consists principally of mass-market merchandisers,
natural food distributors, supermarkets, drug store chains, club stores and
grocery wholesalers. Recently, growth of natural and organic foods has shifted
from the natural food channel to the grocery channels as mainstream grocery
distributors and retailers provide these products to meet consumer demand and
awareness. Two of the distributors we sell to, United Natural Foods and Tree of
Life, accounted for approximately 17% and 15%, respectively, of net sales for
2002 and approximately 18% to each of these distributors in each of 2001 and
2000. Net sales to export customers account for less than 5% of total net sales
for each of the three years ended June 30, 2002.
Our international subsidiaries in Canada and Europe sell to all channels
of distribution in the countries they serve. International sales represented
approximately 14.3% of total net sales in 2002 and less than 5% for each of 2001
and 2000.
Marketing
We use a mix of trade and consumer promotions, as well as advertising, to
market our products. We use trade advertising and promotion, including placement
fees, cooperative advertising and feature advertising in distribution catalogs.
We also utilize advertising and sales promotion expenditures via national and
regional consumer promotion through television and magazine advertising,
couponing and other trial use programs. During 2002 we increased our investment
in consumer spending to enhance brand equity while closely monitoring our trade
spending. We expect to continue these investments in 2003. These consumer
spending categories include, but are not limited to, consumer advertising using
television, radio and print, coupons, direct mailing programs, and other forms
of promotions. There is no guarantee that these promotional investments in
consumer spending will be successful, and as we attempt to monitor our trade
spending and increase consumer awareness, there may be a period of higher costs.
Manufacturing Facilities
We currently manage and operate the following manufacturing facilities
located throughout the United States: Celestial Seasonings, in Boulder,
Colorado, which produces specialty teas; Terra Chips, in Moonachie, New Jersey,
which produces Terra Chips vegetable chips; Arrowhead Mills, in Hereford, Texas,
which produces hot and cold cereals, baked goods and meal cups; and DeBoles
pasta, in Shreveport, Louisiana, which produces organic pasta. We also operate a
manufacturing facility in Irwindale, California, which produces hot and cold
cereals, baked goods, granola, granola bars, dry soups and other products under
the Health Valley, Breadshop and Casbah labels. We have entered into an
agreement (subject to customary consents and conditions) related to our
Irwindale facility and expect that the lease on that facility will be assigned
in connection with the sale of the related manufacturing assets to a co-pack
manufacturer who will continue to manufacture products for us at that facility.
Outside the United States, we have the following manufacturing facilities:
Terra Chips, B.V. in The Netherlands (that we acquired in January 2001 as part
of the Fruit Chips B.V. acquisition) which produces snack foods; Yves Veggie
Cuisine in Vancouver, British Columbia (that we acquired in connection with our
acquisition of Yves Veggie Cuisine, Inc.) which produces soy-based meat
-6-
alternative products; Lima, N.V. with two facilities, one in Maldegem, Belgium,
which manufactures natural and organic food products, and the other in
Sombreffe, Belgium, where its BioMarche business processes fresh organic
produce.
The facility in Irwindale, California, which we expect to sublease to a
co- packer as described above, is leased by us under an operating lease through
2004. We own the manufacturing facilities in Moonachie, New Jersey, Boulder,
Colorado, Hereford, Texas, Shreveport, Louisiana, The Netherlands and Vancouver,
British Columbia and Belgium. During 2002, 2001 and 2000, approximately 54%, 51%
and 55%, respectively, of our revenue was derived from products manufactured at
our currently owned manufacturing facilities.
We believe we have sufficient capacity in all of our facilities; however,
an interruption in or the loss of operations at one or more of these facilities
or failure to maintain our labor force at one or more of these facilities could
delay or postpone production of our products, which could have a material
adverse effect on our business, results of operations and financial condition
until we could secure an alternate source of supply.
Furthermore, there can be no assurance that the recent power situation in
California, or similar situations which may arise in other locations, would not
adversely affect our business. Also, any work stoppage or disruption at any of
our facilities could materially harm our business.
Suppliers of Ingredients and Packaging
Our natural and organic ingredients and our packaging materials and
supplies are obtained from various sources and suppliers located principally in
the United States. However, certain of our packaging and products are sourced
from the Far East.
Our tea ingredients are purchased from numerous foreign and domestic
manufacturers, importers and growers, with the majority of those purchases
occurring outside of the United States.
We maintain long-term relationships with most of our suppliers. Purchase
arrangements with ingredient suppliers are generally made annually and in U.S.
currency. Purchases are made through purchase orders or contracts, and price,
delivery terms and product specifications vary.
Our organic and botanical purchasers visit major suppliers around the
world annually to procure ingredients and to assure quality by observing
production methods and providing product specifications. We perform laboratory
analyses on incoming ingredient shipments for the purpose of assuring that they
meet both our own quality standards and those of the U.S. Food and Drug
Administration ("FDA") and the California Organic Foods Act of 1990.
Our ability to ensure a continuing supply of ingredients at competitive
prices depends on many factors beyond our control, such as foreign political
situations, embargoes, changes in national and world economic conditions,
currency fluctuations, forecasting adequate need of seasonal raw material
ingredients and unfavorable climatic conditions. We take steps intended to
lessen the risk of an interruption of botanical supplies, including
identification of alternative sources and maintenance of appropriate inventory
levels. We have, in the past, maintained sufficient supplies for our ongoing
operations.
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Co-Packed Product Base
During 2002, 2001 and 2000, approximately 46%, 49% and 45%, respectively,
of our revenue was derived from products manufactured at independent co-packers.
Currently, independent food manufacturers, who are referred to in our industry
as co-packers, manufacture many of our product lines, including our Alba, Estee,
Garden of Eatin', Hain Pure Foods, Kineret, Little Bear Organic Foods, Terra
Chips, Westbrae, Westsoy and Lima product lines.
We presently obtain:
- all of our requirements for non-dairy beverages from two co-packers,
all of which are under contract;
- all of our requirements for rice cakes from one co-packer;
- all of our cooking oils from one co-packer, which is under contract;
- principally all of our tortilla chips from three suppliers, one of
which is under contract;
- all of our requirements for Terra's Yukon Gold line from one
supplier, which is under contract;
- the requirements for our canned soups from one supplier, which is
under contract; and
- all of our Earth's Best baby food products from one supplier, Heinz,
under contract.
The loss of one or more co-packers, or our failure to retain co-packers
for newly acquired products or brands, could delay or postpone production of our
products, which could have a material adverse effect on our business, results of
operations and financial condition until such time as an alternate source could
be secured, which may be on less favorable terms.
Trademarks
Our trademarks and brand names for the product lines referred to herein
are registered in the United States and a number of foreign countries and we
intend to keep these filings current and seek protection for new trademarks to
the extent consistent with business needs. We also copyright certain of our
artwork and package designs. We own the trademarks for our principal products,
including Arrowhead Mills, 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, Westsoy, Lima
and Yves. 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.
We believe that brand awareness is a significant component in a consumer's
decision to purchase one product over another in the highly competitive food and
beverage industry. Our failure to continue to sell our products under our
established brand names or negative publicity relating to one of our significant
brand names, could have a material adverse effect on our business, results of
operations and financial condition. We believe that our trademarks and trade
-8-
names are significant to the marketing and sale of our products and that the
inability to utilize certain of these names could have a material adverse effect
on our business, results of operations and financial condition.
Competition
We operate in highly competitive geographic and product markets, and some
of these markets are dominated by competitors with greater resources. We cannot
be certain that we could successfully compete for sales to distributors or
stores that purchase from larger, more established companies that have greater
financial, managerial, sales and technical resources. In addition, we compete
for limited retailer shelf space for our products. Larger competitors, such as
mainstream food companies including General Mills, Nestle S.A., Kraft Foods,
Groupe Danone, Kellogg Company and Sara Lee Corporation, also may be able to
benefit from economies of scale, pricing advantages or the introduction of new
products that compete with our products. Retailers also market competitive
products under their own private labels.
The beverage market for both tea and soy beverages are large and highly
competitive. Competitive factors in the tea industry include product quality and
taste, brand awareness among consumers, variety of specialty tea flavors,
interesting or unique product names, product packaging and package design,
supermarket and grocery store shelf space, alternative distribution channels,
reputation, price, advertising and promotion. Celestial 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.
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
we have. Private label competition in the specialty tea category is currently
minimal.
The soy beverage market, including both aseptic and refrigerated products,
has shown sustained growth over the past several years. A statement by the FDA
endorsing the heart healthy benefits of soy in October 1999 spurred the growth
in both the aseptic and refrigerated segments. Aseptic soy milk is the more
mature product category of the two and in the past eighteen months, additional
larger competitors entered the category but have since exited the category after
unsuccessful regional launches. Westsoy has taken advantage of the shelf space
which became available and continues to be the number one and largest growing
brand of aseptic soymilk in the grocery and natural channels.
The refrigerated market is primarily driven by one brand, Silk, which is
owned by Dean Foods and holds a significant share of refrigerated soymilk space
through its strong national distribution system. Our refrigerated Westsoy
product is specifically being targeted to accounts that agree to partner with us
in strong soy milk markets that distribute both aseptic and refrigerated
products.
In the future, our competitors may introduce other products that compete
with our products and these competitive products may have an adverse effect on
our business, results of operations and financial condition.
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Government Regulation
Along with our manufacturers, brokers, distributors and co-packers, we are
subject to extensive regulation by federal, state and local authorities. The
federal agencies governing our business include the Federal Trade Commission
(FTC), The Food and Drug Administration (FDA), the United States Department of
Agriculture (USDA), and the Occupational Safety and Health Administration
(OSHA). These agencies regulate, among other things, the production, sale,
safety, advertising, labeling of and ingredients used in our products. Under
various statutes these agencies prescribe the requirements and establish the
standards for quality, purity and labeling. Among other requirements, the USDA,
in certain circumstances must approve our products, including a review of the
manufacturing processes and facilities used to produce these products before
these products can be marketed in the United States. In addition, advertising of
our business is subject to regulation by the FTC. Our activities are also
regulated by state agencies as well as county and municipal authorities. We are
also subject to the laws of the foreign jurisdictions in which we manufacture
and sell our products.
The USDA has adopted regulations with respect to organic labeling and
certification which became effective February 20, 2001 with full implementation
scheduled for October 21, 2002. We are in the final stages of preparation to
comply with these regulations, and we anticipate that we will be in compliance
by the required date. We currently manufacture approximately 650 organic
products which are covered by these new regulations. Substantial labeling
changes, as well as additional requirements for third party organic
certification are required for compliance. In addition, on January 18, 2001, the
FDA proposed new policy guidelines regarding the labeling of genetically
modified foods. While we are revising our current labels to align them with this
policy statement, future developments in the regulation of labeling of
genetically modified foods could require us to further modify the labeling of
our products, which could affect the sales of our products and thus harm our
business.
Furthermore, new government laws and regulations may be introduced in the
future that could result in additional compliance costs, seizures, confiscation,
recall or monetary fines, any of which could prevent or inhibit the development,
distribution and sale of our products. If we fail to comply with applicable laws
and regulations, we may be subject to civil remedies, including fines,
injunctions, recalls or seizures, as well as potential criminal sanctions, which
could have a material adverse effect on our business, results of operations and
financial condition.
In addition, through our fiscal 2002 year, we manufactured and sold
dietary supplements through our Celestial subsidiary which are 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.
Independent Certification
We rely on independent certification agencies to certify our products as
"organic" or "kosher," to differentiate our products in natural and specialty
food categories. The loss of any independent certifications could adversely
affect our market position as a natural and specialty food company, which could
-10-
have a material adverse effect on our business, results of operations and
financial condition.
We comply with the requirements of independent organizations or
certification authorities in order to label our product as certified. For
example, we can lose our "organic" certification if a plant becomes contaminated
with non-organic materials, or if not properly cleaned after a production run.
In addition, all raw materials must be certified organic. 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.
Our corporate headquarters are located in approximately 35,000 square feet
of leased office space located at 58 South Service Road, Melville, New York, to
which we relocated in January 2002. The lease on this facility runs through
December 2012 with a current annual rental of approximately $1.2 million.
We own a manufacturing and office facility in Boulder, Colorado, built in
1990 on 42 acres of Company-owned land. The facility has approximately 167,000
square feet, of which 50,000 square feet is office space and 117,000 square feet
is manufacturing space.
In January 2001, we purchased a 75,000 square foot manufacturing facility
in Moonachie, New Jersey to manufacture our Terra vegetable chip products. This
facility became operational in the fall of 2001.
We own and operate manufacturing and distribution centers in Hereford,
Texas and Shreveport, Louisiana for certain of our natural food product lines.
We lease 60,000 square feet of warehouse space in Boulder, Colorado which
is used for the storage and shipment of our tea and beverage products. The lease
expires in 2004, and provides for a current annual rental of approximately
$500,000.
We lease 375,000 square feet of warehouse space in a building located in
Ontario, California. The lease expires June 30, 2007 with renewal options and
provides for a minimum annual rental of approximately $1.3 million. This
facility serves as one of our West Coast distribution centers for principally
all of our product lines.
We operate a 7,000 square foot warehouse and distribution center located
in East Hills, New York which it utilizes to distribute its frozen kosher food
products. This lease, which provides for annual rental of approximately $55,000,
expires in fiscal 2005.
We lease approximately 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. We have entered
into an agreement (subject to customary consents and conditions) related to this
facility and expect to assign the lease covering approximately 155,000 square
feet of this manufacturing space to a co-packer in connection with our planned
sale of our manufacturing assets of this facility.
-11-
Outside the United States, we own and operate a 90,000 square foot
manufacturing facility in The Netherlands that produces snack food, including
certain Terra Chips products; a 53,000 square foot manufacturing facility in
Vancouver, British Columbia that produces soy-based meat substitute products; a
manufacturing and distribution facility in Maldegem, Belgium, which produces
natural and organic food products; and a processing and distribution center in
Sombreffe, Belgium, which processes fresh organic produce.
In addition to the foregoing distribution facilities operated by us, we
also utilize bonded public warehouses from which deliveries are made to
customers.
Item 3. Legal Proceedings.
From time to time, we are involved in litigation incidental to the conduct
of our business. Disposition of pending litigation is not expected by management
to have a material adverse effect on our business, results of operations or
financial condition.
Item 4 Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Outstanding shares of our Common Stock, par value $.01 per share, are
traded on Nasdaq's National Market System (under the ticker symbol HAIN). The
following table sets forth the reported high and low closing prices for our
Common Stock for each fiscal quarter from July 1, 2000 through September 10,
2002.
Common Stock
----------------------------------------------
Fiscal 2002 Fiscal 2001
---------------------- --------------------
High Low High Low
---------- ----------- ---------- ---------
First Quarter $ 26.00 $ 18.22 $ 37.50 $ 26.63
Second Quarter 28.06 18.06 39.69 27.00
Third Quarter 26.90 20.01 36.00 27.81
Fourth Quarter 22.37 15.42 27.69 22.00
July 1 - September 10, 2002 17.88 12.13
As of September 10, 2002, there were 381 holders of record of our Common
Stock.
We have not paid any dividends on our Common Stock to date. We intend to
retain all future earnings for use in the development of our business and do not
anticipate declaring or paying any dividends in the foreseeable future. The
payment of all dividends will be at the discretion of our Board of Directors and
will depend on, among other things, future earnings, operations, capital
requirements, contractual restrictions, including restrictions within our Credit
Facility (as defined below), our general financial condition and general
business conditions.
-12-
Item 6. Selected Financial Data.
The following information has been summarized from our financial
statements and should be read in conjunction with such financial statements and
related notes thereto (in thousands, except per share amounts):
Year Ended June 30
----------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------- ------------ ----------- ------------
Operating results:
Net sales $395,954 $345,661 $ 332,436 $269,760 $174,264
Income (loss) before
extraordinary item and
cumulative change in
accounting principle 2,971 23,589 (11,403) 13,517 11,390
Extraordinary item - - (1,940) - (1,342)
Cumulative change in
accounting principle - - (3,754) - -
------------ ------------- ------------ ----------- ------------
Net income (loss) $ 2,971 $ 23,589 $(17,097) $ 13,517 $ 10,048
============ ============= ============ =========== ============
Basic earnings per common share:
Income (loss) before
extraordinary item and
cumulative change in
accounting principle $ .09 $ .71 $ (.41) $ .56 $ .55
Extraordinary item - - (.07) - (.06)
Cumulative change in
accounting principle - - (.13) - -
------------ ------------- ------------ ----------- ------------
Net income (loss) $ .09 $ .71 $ (.61) $ .56 $ .49
============ ============= ============ =========== ============
Diluted earnings per common share (a):
Income (loss) before
extraordinary item and
cumulative change in
accounting principle $ .09 $ .68 $ (.41) $ .51 $ .50
Extraordinary item - - (.07) - (.06)
Cumulative change in
accounting principle - - (.13) - -
------------ ------------- ------------ ----------- ------------
Net income (loss) $ .09 $ .68 $ (.61) $ .51 $ .44
============ ============= ============ =========== ============
Financial Position:
Working Capital $ 70,942 $ 92,312 $ 89,750 $ 37,983 $37,669
Total Assets 479,248 461,693 416,017 362,669 170,938
Long-term Debt 10,293 10,718 5,622 141,138 27,311
Stockholders' Equity 403,848 396,653 351,724 164,489 104,567
(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
stock options and warrants are not included as the results would be
antidilutive.
-13-
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
We made the following acquisitions during the three years ended June 30,
2002:
On January 18, 2001, we acquired Fruit Chips B.V., a Netherlands based
company, who manufactures, distributes and markets low fat fruit, vegetable and
potato chips.
On June 8, 2001, we acquired Yves Veggie Cuisine, Inc. and its subsidiaries
("Yves"). Yves is a manufacturer, distributor and marketer of premium soy
protein meat alternative food products.
On December 10, 2001, we acquired Lima N.V., the leading Belgian natural
and organic food manufacturer and marketer.
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. The Celestial merger, completed in May 2000,
was accounted for using the pooling-of-interests method and accordingly, all
prior periods were restated to include Celestial's results of operations.
Results of Operations
Adoption of EITF Consensus Regarding Sales Incentives
Our statements of operations reflect the adoption of Emerging Issues Task
Force ("EITF") consensuses related to the classification of certain vendor
promotional allowances and other sales incentives as reductions of sales rather
than as selling expenses as had been the predominant industry and company
practice in the past. The sales amounts for the fiscal 2002, 2001 and 2000
periods are in conformity with those EITF consensuses, which were adopted
effective January 1, 2002. To provide comparability, prior year periods have
been restated by reclassifying promotional allowances and other sales incentives
of $67.2 and $71.1 million for the fiscal years ended June 30, 2001 and 2000,
respectively, from selling expense to net sales. The adoption of these EITF
consensuses had no impact on income or cash flows.
Restructuring and Non-recurring Charges
During the fourth quarter of fiscal 2002, we recorded charges aggregating
$21.3 million, before taxes, related to the expected sale of the manufacturing
assets of our Health Valley facility in Irwindale, California ($11.3 million)
and the discontinuance of our supplements business ($7.9 million) and Weight
Watchers licenses ($2.1 million). Approximately $17.9 million of these charges
are noncash in nature.
During the second half of 2002, we decided to pursue and execute a plan to
sell the Health Valley Irwindale plant. During the fourth quarter of 2002, we
entered into an agreement (subject to customary consents and conditions) to sell
the manufacturing assets of the facility to a co-packer who will also assume the
related lease. Our decision to dispose of this facility was largely the result
of our inability to reach practical capacity at the facility. Accordingly, we
-14-
identified a co-packer who can produce our products and bring more production
into the plant by offering other branded and private label companies the
opportunity to have their products manufactured by the co-packer.
Upon the execution of a signed contract, our products will be purchased
from this co-packer on a cost plus basis. This pricing structure will not
provide us with any immediate increase in margins, but it will allow us to share
in the potential operating efficiencies of the plant through reduced product
pricing in our cost plus arrangement when and if the co-packer brings more
production into the plant.
Accordingly, with the expected sale of all plant assets and certain
inventories to this co-packer, we recorded this restructuring and non-recurring
charge. The charge includes $7.6 million of restructuring and non-recurring
charges associated with reduced values of inventories of raw ingredients and
packaging, certain lease obligations and other items, none of which includes
employee severance costs. Of this $7.6 million of charges, our gross profit was
reduced by $5.5 million charged to cost of sales as required by accounting
rules. At June 2002, approximately $2.1 million of future costs have been
accrued, principally related to lease exit costs. In addition, we recorded $3.7
million of impairment charges to reduce the Health Valley plant's manufacturing
assets to their net realizable values. We anticipate that there will be future
charges in fiscal 2003 for potential severance liabilities and related employee
costs, which are expected to approximate $2 million.
In June 2002, we announced that we had discontinued our supplements
business at Celestial, and that we would not renew our license to sell certain
Weight Watchers products. These product lines did not represent our core product
category of natural and organic foods, and further, the supplements business had
faced increasing competition over the last few years along with reduced consumer
interest. We believe our operating results and financial position will be only
minimally enhanced in fiscal 2003 and beyond without these non-core product
lines. In addition, we can now better utilize our management resources away from
these non-core product lines. In connection with these discontinuances, we
recorded charges of $7.9 million related to supplements, principally for
inventories, packaging and trade items. Of this $7.9 million charge, $6.2
million had the effect of reducing our gross profit. The charge for the
non-renewal of the Weight Watchers license amounted to $2.1 million, principally
for inventories, packaging and trade items, of which $.7 million reduced our
gross profit. Approximately $4.3 million has been accrued at June 30, 2002
associated with these future costs.
Fiscal 2002 Compared to Fiscal 2001
Net sales in fiscal 2002 were $396 million, an increase of 14.5% over net
sales of $345.7 million in 2001. Adjusted for sales derived from acquired
businesses and a continuation of the redirection of management focus from
certain non-core product lines (principally supplements and non-core food
product categories), our net sales increased 4%. Our net sales were impacted
during fiscal 2002 by the tragic events of September 11, 2001, the unusually
warm winter which slowed sales of teas and other cold weather products, and
product availability issues affecting our Terra Chips products caused first by
capacity limitations at our original Brooklyn, New York plant and further by the
delays in the start-up of production at our Moonachie, New Jersey plant. Our
internal growth was derived principally from our Terra and Garden of Eatin'
snack brands and from our refrigerated Westsoy brand.
-15-
Gross profit for 2002 decreased by $7 million to $104 million (26.3% of
net sales) as compared to $111 million (32.1% of net sales) in 2001. Gross
profits in 2002 adjusted for the restructuring and non-recurring charges
discussed above were $116.4 million, or 29.4% of reported net sales. The decline
in adjusted gross profit percentage of 2.7% was caused by: changes in the mix of
sales driven principally by unusually warm winter weather ($6.0 million or
1.5%); higher than anticipated start-up production costs at our new Terra Chips
manufacturing facility in Moonachie ($1.5 million or .4%); higher freight and
warehousing costs associated with certain strategic initiatives to increase
inventory levels in order to reduce stock outs with the objective of increasing
customer satisfaction ($3.5 million or .9%); and lower gross profits associated
with certain of our recent business acquisitions ($.8 million or .2%).
Selling, general and administrative expenses (excluding amortization
expense) increased by approximately $22.5 million to $87.7 million (22.1% of net
sales) in 2002 as compared to $65.2 (18.9% of net sales) in 2001. The increase
is a result of: $10.7 million of costs brought on by the aforementioned
acquisitions during the second half of fiscal 2001 and first half of fiscal
2002; $2 million of increased consumer marketing; $1.4 million of higher
depreciation associated with continuing improvements to our information systems
and the capital expenditures related to our headquarters office relocation; and
increases across all levels of general and administrative costs to support the
growing infrastructure required for our business. Amortization of goodwill and
other intangible assets was $6.4 million for 2001 compared to approximately $.3
million for 2002. The results for 2002 include the effect of adopting Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets", which resulted in a $6.1
million reduction in overall expenses ($4.0 million net of tax) and a $.12
increase in basic and diluted earnings per share. The $6 million pre-tax
reduction of amortization expense in 2002 represents the amount of amortization
of goodwill and indefinite-life intangible assets that arose from acquisitions
prior to July 1, 2001 and is no longer being amortized.
As discussed above, during 2002 we recorded $5 million of restructuring
and other non-recurring charges, and a $3.9 million impairment of long-lived
assets charge. There were no such charges in 2001. These charges are related to
certain asset write-offs, trade costs and employee severance costs associated
with the discontinuance of the Celestial supplements business and Weight
Watchers brand license and the expected Health Valley facility sale.
Merger related charges amounted to $1 million for 2001, resulting from
certain employee costs associated with the Celestial Merger in May 2000.
Operating income decreased to $7.3 million during 2002 compared to $38.4
million in 2001. The decrease of $31.1 million is due to the aforementioned
restructuring and non-recurring charges of $21.3 million, decreased gross
profits and higher selling, general and administrative expenses, all discussed
above.
Interest expense (income) - net and other expenses amounted to $2.5
million in 2002 compared with income of $2.3 million in 2001. The decrease of
$4.8 million is primarily the result of the interest expense we incurred in 2002
while using our Credit Facility as compared to the interest we earned in 2001 on
the investible cash we had during that year. Since June 2001, we have used that
cash to fund the Yves and Lima acquisitions, and to fund the construction of our
new Terra Chips manufacturing facility in Moonachie, New Jersey. In addition, in
2002 we incurred a full year of carrying costs for our Credit Facility, which we
entered into on March 28, 2001. In 2002, we also incurred other costs and
expenses totaling $1.5 million resulting from the closure of our Terra Chips
-16-
Brooklyn, NY manufacturing facility in December 2001, and the return of the
leased premises to the owner. We disposed of machinery and equipment and
leasehold improvements deemed unusable which totaled $1 million, and we were
required to retrofit the leased Brooklyn facility to its original condition at a
cost of approximately $.5 million.
Income before income taxes decreased $35.9 million to $4.8 million in 2002
as compared to $40.7 million in 2001. The decrease is a result of the
aforementioned decrease in operating income and higher interest and other costs.
Income taxes decreased to $1.8 million for 2002 compared to $17.1 million
in 2001. The effective tax rate was 38% in 2002 compared to 42.0% in 2001. The
reason for our lower tax rate was the elimination of nondeductible goodwill
amortization discussed above.
Net income for 2002 amounted to $3 million compared to $23.6 million in
2001. This $20.6 million decrease in earnings was primarily attributable to the
aforementioned decrease in income before income taxes offset by the reduction in
income tax expense.
Fiscal 2001 Compared to Fiscal 2000:
Net sales for 2001 were $345.7 million, an increase of 4% over net sales
of $332.4 million in 2000. On a year-to-year basis, our net sales were affected
by a slowing U.S. economy and redirection of management focus away from certain
non- core product lines (supplements, certain private label categories and other
non- core food product categories). On a comparable basis, net sales increased
by $23.9 million or 7.2% with the growth primarily coming from our Westsoy,
Health Valley, Terra Chips and Garden of Eatin' brands.
Gross profit for 2001 increased by $6 million to $111 million (32.1% of
net sales) as compared to $105 million (31.6% of net sales) in 2000. Our gross
profits were helped by lower trade incentives ($3.9 million) in 2001 as compared
to 2000. This increased our net sales and gross profits, respectively, in 2001.
On a net sales basis without sales incentives, the increase in gross profit
dollars was a direct result of increased sales levels in 2001. The decline in
gross profit percentage was predominantly due to: inventory write-offs of
approximately $1.9 million associated with our decision to write-off certain
nonperforming inventory SKU's as a result of our decision to move and
consolidate warehouses and upgrade our management information system within our
distribution infrastructure; approximately $.5 million associated with our
consolidation and move of one of our distribution facilities into our new
Ontario, California distribution facility that opened in September 2000;
approximately $1.2 million of higher fuel costs associated with freight cost;
all offset by $4 million of additional writeoffs and reserves in 2000 associated
with the supplements line.
Selling, general and administrative expenses (including goodwill
amortization of approximately $6.4 million each year) decreased by approximately
$11.8 million to $71.6 million (20.7% of net sales) in 2001 as compared to $83.4
(25.1% of net sales) in 2000. The dollar decrease is a combination of
approximately $8 million of synergies realized resulting from the Celestial
merger; a $1.2 million non-recurring charge incurred in the September 1999
period by Celestial, and $2.6 million of lower other selling, general and
administrative expense components.
Merger related charges amounted to $1 million for 2001, as compared to
$15.6 million during 2000. Merger related charges incurred in 2001 relate to
certain employee costs associated with the Celestial Merger in May 2000.
-17-
During 2000, we recorded $4.9 million and $3.5 million of restructuring
and other non-recurring charges and an impairment of long-lived assets charge,
respectively. There were no such charges during 2001.
Operating income increased to $38.4 million during 2001 compared to a
operating loss of $2.4 million in 2000. The increase of $40.8 million was due to
increased gross profits, lower selling, general and administrative expenses and
merger charges as well as no restructuring or impairment of asset charges as had
occurred in 2000.
Interest expense (income) - net of other expenses amounted to $2.3 million
of income in 2001 compared with an expense of $5.1 million in 2000. The swing of
$7.4 million was the result of interest earned on investible cash on hand in
2001 with minimal debt levels as opposed to our position in 2000, our average
debt level was approximately $58 million under our then existing term loan
facility, with interest incurred at an average rate of 8.22%.
Income before income taxes, extraordinary item and cumulative change in
accounting principle increased $48.2 million to $40.7 million in 2001 as
compared to a pretax loss of $7.5 million in 2001. The increase is a result of
the aforementioned increase in operating income, higher interest and other
income and lower interest and finance costs.
During 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 $17.1 million
(42%) on a pre-tax income of $40.7 million during 2001. The 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. The tax rate of 42% in 2001
is higher than the statutory federal and state rates in effect primarily due to
nondeductible goodwill amortization.
Liquidity and Capital Resources
We finance our operations and growth primarily with the cash flows we
generate from our operations and from borrowings under our Credit Facility.
We have available to us a $240 million revolving Credit Facility (the
"Credit Facility") which provides us with a $145 million revolving credit
facility through March 29, 2005, and a $95 million 364-day facility through
March 27, 2003. The Credit Facility is unsecured, but is guaranteed by all of
our direct and indirect domestic subsidiaries. We are required to comply with
customary affirmative and negative covenants for facilities of this nature.
This access to capital provides us with flexible working capital needs in
the normal course of business and the opportunity to grow our business through
acquisitions or develop our existing infrastructure through capital investment.
Net cash provided by operations was $22.6 million and $22.8 million for
2002 and 2001, respectively. Our working capital and current ratio were $70.9
million and 2.31 to 1, respectively, at June 30, 2002 compared with $92.3
million and 2.99 to 1 respectively, at June 30, 2001. The decrease in working
capital and current ratio is due to the use of approximately $21.3 million for
capital expenditures and $13.6 million of cash to fund our 2002 acquisitions.
Net cash used in financing activities was $6.5 million for 2002. During
2002, we repaid certain debt obligations of acquired businesses totaling $3.7
million and we used $3.6 million of cash for a stock buyback program. Net cash
provided by financing activities of $16.1 million in 2001 was derived
principally
-18-
from proceeds received from exercises of warrants and stock options. During the
period July 1, 2002 to September 19, 2002, we acquired .2 million shares of our
common stock in open market purchases at a cost of approximately $1.9 million.
Obligations for all debt instruments, capital and operating leases and
other contractual obligations are as follows:
Payments Due by Period
-------------------------------------------------
Less than 1 - 3
Total 1 year years Thereafter
----------- ------------ ----------- ------------
Debt instruments $ 9,896 $ 868 $ 6,628 $ 2,400
Capital lease obligations 1,828 563 1,262 3
Operating leases 22,843 3,419 8,336 11,088
----------- ------------ ----------- ------------
Total contractual cash
obligations $ 34,567 $ 4,850 $16,226 $13,491
=========== ============ =========== ============
We believe that cash on hand of $7.5 million at June 30, 2002, as well as
projected fiscal 2003 cash flows from operations, and availability under our
Credit Facility are sufficient to fund our working capital needs, anticipated
capital expenditures of approximately $10 million, and the $4.85 million of debt
and lease obligations described in the table above. We currently invest our cash
on hand in highly liquid short-term investments yielding approximately 1.5%
interest.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The accounting principles we use
require us to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and amounts of
income and expenses during the reporting periods presented. We believe in the
quality and reasonableness of our critical accounting policies; however, it is
likely that materially different amounts would be reported under different
conditions or using assumptions different from those that we have consistently
applied. We believe our critical accounting policies are as follows, including
our methodology for estimates made and assumptions used:
Valuation of Accounts and Chargeback Receivables
We perform ongoing credit evaluations on existing and new customers daily.
We apply reserves for delinquent or uncollectible trade receivables based on a
specific identification methodology and also apply a general reserve based on
the experience we have with our trade receivables aging categories. Credit
losses have been within our expectations over the last few years. While two of
our customers represent approximately 30% of our trade receivable balance on an
ongoing basis, we believe there is no credit exposure at this time.
Based on cash collection history and other statistical analysis, we
estimate the amount of unauthorized deductions that our customers have taken to
be repaid and collectible in the near future in the form of a chargeback
receivable. While our estimate of this receivable balance could be different had
we used different assumptions and judgments, historically our cash collections
of this type of receivable has been within our expectations and no significant
write-offs and/or
-19-
impairment has occurred. Our chargeback receivable balance at June 2002 was $5
million as compared to $1.4 million at June 2001 (included in other current
assets).
There can be no assurance that we would have the same experience with our
receivables during different economic conditions, or with changes in business
conditions, such as consolidation within the food industry and/or a change the
way we market and sell our products.
Inventory
Our inventory is valued at the lower of cost or market. Cost has been derived
principally using standard costs utilizing the first-in, first-out method. We
provide write-downs for finished goods expected to become non-saleable due to
age and specifically identify and reserve for slow moving or obsolete raw
ingredients and packaging.
Property, Plant and Equipment
Our property, plant and equipment is carried at cost and depreciated and or
amortized on a straight-line basis over the lesser of the estimated useful lives
or lease life, whichever is shorter. We believe the asset lives assigned to our
property, plant and equipment are within ranges/guidelines generally used in
food manufacturing and distribution businesses. Our manufacturing plants and
distribution centers, and their related assets, are periodically reviewed to
determine if any impairment exists by analyzing underlying cash flow
projections. At this time, we believe no impairment exists on the carrying value
of such assets.
Revenue Recognition
Sales are recognized upon the shipment of finished goods to customers.
Allowances for cash discounts and returns are recorded in the period in which
the related sale is recognized.
-20-
Supplementary Quarterly Financial Data:
Unaudited quarterly financial data (in thousands, except per share
amounts) for fiscal 2002 and 2001 is summarized as follows:
Three Months Ended
---------------------------------------------------
September 30, December 31, March 31, June 30,
2001 2001 2002 2002
------------ ----------- ------------ -----------
Net sales $ 89,735 $ 105,169 $ 105,614 $ 95,436
Gross profit 26,662 32,296 32,442 12,639
Restructuring and
non-recurring charges - - - 4,977
Impairment of property,
plant & equipment - - - 3,878
Operating income (loss) 9,135 9,960 8,531 (20,362)
Income (loss) before
income taxes 8,778 8,396 8,231 (20,602)
Net income (loss) $ 5,443 $ 5,205 $ 5,137 $(12,814)
Basic earnings per
common share $ .16 $ .15 $ .15 $ (.38)
Diluted earnings per
common share $ .16 $ .15 $ .15 $ (.38)
Gross profit for the three months ended June 30, 2002 was negatively
impacted by approximately $12.4 million of charges to cost of sales resulting
from the restructuring and non-recurring charges related to the expected sale of
the Health Valley manufacturing facility, and the discontinuance of the
supplements business and Weight Watchers license.
Three Months Ended
--------------------------------------------------
September 30, December 31, March 31, June 30,
2000 2000 2001 2001
------------- ----------- ---------- -----------
Net sales $ 81,708 $ 97,721 $ 87,092 $ 79,140
Gross profit 28,463 35,424 25,963 21,168
Merger costs 1,032 - - -
Operating income 10,517 17,028 6,561 4,273
Income before income taxes 11,043 17,699 7,313 4,616
Net income $ 6,405 $ 10,266 $ 4,241 $ 2,677
Basic earnings per
common share $ .20 $ .31 $ .13 $ .08
Diluted earnings per
common share $ .19 $ .30 $ .12 $ .08
-21-
Seasonality
Our tea business consists primarily of manufacturing and marketing hot tea
products and, as a result, its quarterly results of operations reflect seasonal
trends resulting from increased demand for its hot tea products in the cooler
months of the year. This is also true for our soups and hot cereals businesses,
but to a lesser extent. Quarterly fluctuations in our sales volume and operating
results are due to a number of factors relating to our business, including the
timing of trade promotions, advertising and consumer promotions and other
factors, such as seasonality, abnormal and inclement weather patterns and
unanticipated increases in labor, commodity, energy, insurance or other
operating costs. The impact on sales volume and operating results, due to the
timing and extent of these factors, can significantly impact our business. For
these reasons, you should not rely on our quarterly operating results as
indications of future performance. In some future periods, our operating results
may fall below the expectations of securities analysts and investors, which
could harm our business.
Inflation
Management does not believe that inflation had a significant impact on our
results of operations for the periods presented.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
The principal market risks (i.e. the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed are:
o interest rates on debt and cash equivalents, and
o foreign exchange rates, generating translation and transaction gains
and losses.
Interest Rates
We centrally manage our debt and cash equivalents considering investment
opportunities and risks, tax consequences and overall financing strategies. Our
cash equivalents consist primarily of commercial paper and obligations of U.S.
Government agencies. Assuming year-end 2002 variable debt and cash equivalents
levels, a one-point change in interest rates would not have a material impact on
net interest (expense) income.
Foreign Operations
Operating in international markets involves exposure to movements in
currency exchange rates, which are volatile at times. The economic impact of
currency exchange rate movements is complex because such changes are often
linked to variability in real growth, inflation, interest rates, governmental
actions and other factors. These changes, if material, could cause adjustments
to our financing and operating strategies. Consequently, isolating the effect of
changes in currency does not incorporate these other important economic factors.
During fiscal 2002, approximately 14.2% of our net sales were generated from
sales outside the United States and in 2001 less than 5% of our net sales were
generated from sales outside the United States. We expect sales from non-core
U.S. markets
-22-
to possibly represent an increasing portion of our total net sales in the
future. Our non U.S. sales and operations are subject to risks inherent in
conducting business abroad, many of which are outside our control, including:
o periodic economic downturns and unstable political environments;
o price and currency exchange controls;
o fluctuations in the relative values of currencies;
o unexpected changes in trading policies, regulatory requirements,
tariffs and other barriers, and
o difficulties in managing a global enterprise, including staffing,
collecting accounts receivable and managing distributors.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of The Hain Celestial
Group, Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets - June 30, 2002 and 2001
Consolidated Statements of Operations - Years ended June 30, 2002, 2001 and
2000
Consolidated Statements of Cash Flows - Years ended June 30, 2002, 2001 and
2000
Consolidated Statements of Stockholders' Equity - Years ended June 30, 2002,
2001 and 2000
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of The Hain Celestial
Group, Inc. and subsidiaries is included in Item 15 (a):
Schedule II Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
-23-
Report of Independent Auditors
The Stockholders and Board of Directors
The Hain Celestial Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Hain
Celestial Group, Inc. and Subsidiaries as of June 30, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 2002. Our audits
also included the financial statement schedule listed in the index at Item
15(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Hain Celestial
Group, Inc. and Subsidiaries at June 30, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 4 to the consolidated financial statements, in fiscal year
2002 the Company changed its method of accounting for goodwill and other
intangible assets. As discussed in Note 7 to the consolidated financial
statements, in fiscal year 2000 the Company changed its method of accounting for
start-up costs.
/s/ Ernst & Young LLP
Melville, New York
August 28, 2002
-24-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
June 30,
---------------------
2002 2001
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 7,538 $ 26,643
Accounts receivable, less allowance for doubtful 44,018 46,404
accounts of $1,002 and $815
Inventories 53,624 49,593
Recoverable income taxes, net 1,742 8,232
Deferred income taxes 7,223 3,740
Other current assets 10,804 4,168
----------- ----------
Total current assets 124,949 138,780
Property, plant and equipment, net of accumulated 69,774 55,780
depreciation and amortization of $29,059 and $25,551
Goodwill 239,644 219,826
Trademarks and other intangible assets, net of 38,083 38,230
accumulated amortization of $6,603 and $6,794
Other assets 6,798 9,077
----------- ----------
Total assets $ 479,248 $ 461,693
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 46,166 $ 43,587
Current portion of long-term debt 1,431 2,881
Accrued restructuring and non-recurring charges 6,410 -
----------- ----------
Total current liabilities 54,007 46,468
Long-term debt, less current portion 10,293 10,718
Deferred income taxes 11,100 7,854
----------- ----------
Total liabilities 75,400 65,040
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value, authorized 5,000,000 - -
shares, no shares issued
Common stock - $.01 par value, authorized 100,000,000 341 338
shares, issued 34,075,639 and 33,771,124 shares
Additional paid-in capital 354,822 348,942
Retained earnings 51,597 48,626
Foreign currency translation adjustment 963 (978)
----------- -----------
407,723 396,928
Less: 306,917 and 100,000 shares of treasury stock, at cost (3,875) (275)
----------- -----------
Total stockholders' equity 403,848 396,653
----------- -----------
Total liabilities and stockholders' equity $ 479,248 $ 461,693
=========== ===========
See notes to consoldiated financial statements.
-25-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended June 30
-----------------------------------------
2002 2001 2000
------------- ------------ -----------
Net Sales $ 395,954 $ 345,661 $ 332,436
Cost of sales 291,915 234,643 227,417
------------- ------------ -----------
Gross profit 104,039 111,018 105,019
Selling, general and administrative expenses 87,920 71,607 83,372
Merger costs - 1,032 15,633
Restructuring and other non-recurring charges 4,977 - 4,933
Impairment of long-lived assets 3,878 - 3,468
------------- ------------ ------------
Operating income (loss) 7,264 38,379 (2,387)
Interest expense (income), net and other expenses 2,461 (2,292) 5,116
------------- ------------ ------------
Income (loss) before income taxes, extraordinary item 4,803 40,671 (7,503)
and cumulative change in accounting principle
Provision for income taxes 1,832 17,082 3,900
------------- ------------ ------------
Income (loss) before extraordinary item and 2,971 23,589 (11,403)
cumulative change in accounting principle
Extraordinary item - costs in connection with early - - (1,940)
extinguishment of debt, net of income tax benefit
of $1,182
Cumulative change in accounting principle, net of - - (3,754)
income tax benefit of $2,547
------------- ------------ ------------
Net income (loss) $ 2,971 $ 23,589 $ (17,097)
============= ============ ============
Basic earnings per common share:
Income (loss) before extraordinary item and $ .09 $ .71 $ (.41)
cumulative change in accounting principle
Extraordinary item - - (.07)
Cumulative change in accounting principle - - (.13)
------------- ------------ ------------
Net income (loss) $ .09 $ .71 $ (.61)
============= ============ ============
Diluted earnings per common share:
Income (loss) before extraordinary item and $ .09 $ .68 $ (.41)
cumulative change in accounting principle
Extraordinary item - - (.07)
Cumulative change in accounting principle - - (.13)
------------- ------------ ------------
Net income (loss) $ .09 $ .68 $ (.61)
============= ============ ============
Weigted average common shares outstanding:
Basic 33,760 33,014 27,952
============= ============ ============
Diluted 34,744 34,544 27,952
============= ============ ============
See notes to consoldidated financial statements.
-26-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
------------------------------------
2002 2001 2000
------------ ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,971 $ 23,589 $ (17,097)
Adjustment for change in year-end of Celestial - - 3,933
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Non-cash restructuring and non-recurring charges, 10,929 - 1,994
including related inventory charges
Non-cash impairment of long-lived assets 3,878 - 3,468
Non-cash merger related charge - - 175
Extraordinary item - - 1,940
Cumulative change in accounting principle - - 3,754
Depreciation and amortization of property and equipment 7,687 6,287 4,986
Amortization of goodwill and other intangible assets 249 6,441 6,053
Amorization of deferred financing costs 423 107 718
Provision for doubtful accounts 551 393 432
Deferred income taxes (237) 7,301 4,373
Gain on disposal of assets - - (922)
Other 47 46 46
Increase (decrease) in cash attributable to changes in
assets and liabilities, net of amounts applicable to
acquired businesses:
Accounts receivable 1,824 (6,514) 4,211
Inventories (9,179) 848 (8,607)
Other current assets (4,274) 604 2,090
Other assets 1,836 (746) (2,771)
Accounts payable and accrued expenses (7,494) (19,119) 3,882
Accrued restructuring and non-recurring charges 6,410 - -
Recoverable income taxes 7,305 6,631 1,225
Tax benefit of nonqualified stock options (334) (3,027) (3,319)
------------- ----------- -----------
Net cash provided by operating activities 22,592 22,841 10,564
------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired (13,568) (37,184) (4,673)
Purchases of property and equipment and other (21,341) (13,474) (4,298)
intangible assets
Proceeds from sale of assets - - 1,583
------------- ----------- -----------
Net cash used in investing activities (34,909) (50,658) (7,388)
------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) from bank revolving credit facility, net - 4,400 (5,080)
Repayment of term loan facilities - - (130,000)
Payments on economic development revenue bonds (459) (366) (317)
Costs in connection with bank financing (249) (1,369) (26)
Proceeds from private equity offering, net of expenses - - 160,332
Purchase of treasury stock (3,600) - -
Proceeds from exercise of options and stock purchase plan, 1,071 13,685 9,354
net of related expenses
Payment of other long-term debt and other liabilities (3,275) (217) (278)
------------- ----------- -----------
Net cash (used in) provided by financing activities (6,512) 16,133 33,985
------------- ----------- -----------
Effect of exchange rate changes on cash (276) 19 -
------------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (19,105) (11,665) 37,161
Cash and cash equivalents at beginning of year 26,643 38,308 1,147
------------- ----------- -----------
Cash and cash equivalents at end of year $ 7,538 $ 26,643 $ 38,308
============= =========== ===========
See notes to consolidated financial statements.
-27-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 2001 AND 2002
(In thousands, except per share and share data)
Common Stock
-------------------- Foreign
Additional Treasury Stock Currency
Amount Paid-in Retained ----------------- Translation Comprehensive
Shares at $.01 Capital Earnings Shares Amount Adjustment Total Income (Loss)
----------------------------------------------------------------------------------------------
Balance at June 30, 1999 24,684,079 $ 247 $ 126,316 $38,201 100,000 $ (275) $ 164,489
Issuance of shares to Heinz, 6,090,351 61 177,642 177,703
net of related expenses
Conversion of promissory notes 442,538 4 9,973 9,977
Exercise of common stock warrants, 345,853 3 1,922 1,925
net of related expenses
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) $(17,097)
-------------------------------------------------------------------------------------=========
Balance at June 30, 2000 32,147,261 321 326,641 25,037 100,000 (275) 351,724
Exercise of common stock warrants,
net of related expenses 166,419 2 657 659
Exercise of stock options 1,265,465 13 12,857 12,870
Issuance of common stock 191,979 2 5,714 5,716
Non-cash compensation charge 46 46
Tax benefit from stock options 3,027 3,027
Net income for the period 23,589 23,589
Comprehensive income:
Net income $ 23,589
Translation adjustments $ (978) (978) (978)
---------
Total comprehensive income $ 22,611
--------------------------------------------------------------------------------------========
Balance at June 30, 2001 33,771,124 338 348,942 48,626 100,000 (275) (978) 396,653
Exercise of stock options 94,341 1 992 993
Purchase of treasury shares 206,917 (3,600) (3,600)
Issuance of common stock 210,174 2 4,507 4,509
Non-cash compensation charge 47 47
Tax benefit from stock options 334 334
Net income for the period 2,971 2,971
Comprehensive income:
Net income $ 2,971
Translation adjustments 1,941 1,941 1,941
----------
Total comprehensive income $ 4,912
------------------------------------------------------------------------------------=========
Balance at June 30, 2002 34,075,639 $ 341 $ 354,822 $ 51,597 306,917 $(3,875) $ 963 $ 403,848
====================================================================================
See notes to consolidated financial statements.
-28-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
1. BUSINESS
The Hain Celestial Group (herein referred to as "the Company",
"we","us" and "our") is a natural, specialty and snack food company. We are a
leader in many of the top natural food categories, with such well-known natural
food brands as Celestial Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R),
Westsoy(R), Arrowhead Mills(R), Health Valley(R), Breadshop's(R), Casbah(R),
Garden of Eatin'(R), Terra Chips(R), Yves Veggie Cuisine(R), Gaston's(R),
Lima(R) and Biomarche(R) in Europe, DeBoles(R), Earth's Best(R), and Nile
Spice(R). Our principal specialty product lines include Hollywood(R) cooking
oils, Estee(R) sugar-free products, Kineret(R) kosher foods, Boston Better
Snacks(R), and Alba Foods(R).
We operate in one business segment: the sale of natural, organic and
other food and beverage products. During the three years ended 2002,
approximately 54%, 51% and 55% of our revenues were derived from products that
are manufactured within our own facilities with 46%, 49% and 45% produced by
various co-packers. In fiscal 2002, 2001 and 2000, there were no co-packers who
manufactured 10% or more of our co-packed products.
2. BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of The Hain
Celestial Group, Inc. (formerly known as The Hain Food Group, Inc. ("Hain")) and
all wholly- owned subsidiaries. In the Notes to Consolidated Financial
Statements, all dollar amounts, except per share data, are in thousands unless
otherwise indicated.
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 consolidated
financial statements for the year ended June 30, 2000 include the results of
operations and cash flows of Hain and Celestial for the year then ended and,
because Celestial had a fiscal year ending in September, 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 (1999 is not presented in these
consolidated financial statements). Celestial incurred a net loss of $3.9
million for the three-month period duplicated and therefore, we have eliminated
this duplication by adjusting retained earnings to add 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 - $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.
-29-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
The reconciliations of operating results of Hain and Celestial for the
period previously reported prior to the combination are as follows:
Nine months
ended
March 31, 2000
-------------
Net sales:
Hain $ 186,300
Celestial 74,500
-------------
Combined $ 260,800
=============
Income before extraordinary item
and cumulative change in
accounting principle:
Hain $ 22,700
Celestial 4,200
-------------
Combined $ 26,900
=============
Net income:
Hain $ 8,700
Celestial 3,400
-------------
Combined $ 12,100
=============
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 AND CRITICAL ACCOUNTING POLICIES
Consolidation Policy
Our accompanying consolidated financial statements include the accounts of
the Company and all of its wholly-owned subsidiaries. Material intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The accounting principles we
use require us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting periods presented. We
believe in the quality and reasonableness of our critical accounting policies;
however, it is likely that materially different amounts would be reported under
different conditions or using assumptions different from those that we have
consistently applied.
Valuation of Accounts and Chargeback Receivables and Concentration of
Credit Risk
We perform ongoing credit evaluations on existing and new customers daily.
We apply reserves for delinquent or uncollectible trade receivables based on a
specific
-30-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
identification methodology and also apply an additional reserve based on the
experience we have with our trade receivables aging categories. Credit losses
have been within our expectations in recent years. While two of our customers
represent approximately 30% of our trade receivables balance on an ongoing
basis, we believe there is no credit exposure at this time.
Based on cash collection history and other statistical analysis, we
estimate the amount of unauthorized deductions that our customers have taken to
be repaid and collectible in the near future in the form of a chargeback
receivable. While our estimate of this receivable balance ($5 million at June
30, 2002 and $1.4 million at June 30, 2001, included in other current assets)
could be different had we used different assumptions and judgments, historically
our cash collections of this type of receivable has been within our expectations
and no significant write-offs and/or impairment has occurred.
During the year ended June 30, 2002, sales to two customers and their
affiliates approximated 17% and 15%. These two customers each accounted for
approximately 18% of sales in 2001 and 2000.
Inventory
Our inventory is valued at the lower of cost or market. Cost has been
determined principally using standard costs utilized under the first-in,
first-out method. We provide write-downs for finished goods expected to become
non-saleable due to age and specifically identify and provide for slow moving or
obsolete raw ingredients and packaging.
Property, Plant and Equipment
Our property, plant and equipment is carried at cost and depreciated and
or amortized on a straight-line basis over the estimated useful lives or lease
life, whichever is shorter. We believe the asset lives assigned to our property,
plant and equipment are within ranges generally used in food manufacturing and
distribution businesses. Our manufacturing plants and distribution centers, and
their related assets, are periodically reviewed to determine if any impairment
exists by analyzing underlying cash flow projections. At this time, we believe
no impairment exists on the carrying value of such assets, except at our Health
Valley manufacturing facility in Irwindale, California (see Note 6). We utilize
the following ranges of asset lives:
Buildings and improvements 10-31 years
Machinery and equipment 5-10 years
Furniture and fixtures 3-7 years
Leasehold improvements 3-10 years
Revenue Recognition
Sales are recognized upon the shipment of finished goods to customers.
Allowances for cash discounts and returns are recorded in the period in which
the related sale is recognized.
-31-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Reclassifications
We have made certain reclassifications to the prior years consolidated
financial statements and notes thereto to conform to the current year
presentation.
Foreign Currency Translation
Financial statements of foreign subsidiaries are translated into U.S.
dollars at current rates, except that revenues, costs and expenses are
translated at average rates during each reporting period. Net exchange gains or
losses resulting from the translation of foreign financial statements and the
effect of exchange rate changes on intercompany transactions of a long-term
investment nature are accumulated and credited or charged directly to a separate
component of stockholders' equity and other comprehensive income.
Advertising Costs
Media advertising costs, which are included in selling, general and
administrative expenses, amounted to $4.8, $1.6 and $2.0 million for fiscal
2002, 2001 and 2000, respectively. Such costs are expensed as incurred.
Income Taxes
We follow the liability method of accounting for income taxes. Under the
liability method, deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities at enacted rates
in effect in the years in which the differences are expected to reverse.
Shipping and Handling Costs
We include the costs associated with shipping and handling of our
inventory as a component of cost of sales in the Consolidated Statements of
Operations.
Fair Values of Financial Instruments
At June 30, 2002 and 2001, we had $3.6 and $22.8 million invested in
corporate money market securities, including commercial paper, repurchase
agreements, variable rate instruments and bank instruments. These securities are
classified as cash equivalents as their maturities when purchased are less than
three months. At June 30, 2002 and 2001, the carrying value of these money
market securities approximates their fair values.
We believe that the interest rates charged on our debt instruments
approximate current borrowing rates and, accordingly, the carrying amounts of
such debt at June 30, 2002 and 2001 approximate fair value.
Accounting for the Impairment of Long-Lived Assets
We account for impairment of long-lived assets, other than goodwill and
other indefinite life intangibles, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (see Note 4).
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.
-32-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
We perform such a review at each balance sheet date whenever events and
circumstances have occurred that indicate possible impairment. We consider
continued operating losses and significant and long-term changes in prevailing
market conditions to be the primary indicators of potential impairment. In
accordance with SFAS No. 121, we use an estimate of the future undiscounted net
cash flows of the related asset or asset grouping over the remaining life to
measure whether the assets are recoverable. During fiscal 2002, as part of the
expected Health Valley Irwindale manufacturing facility sale (see Note 6), we
recorded a $3.7 million impairment charge to reduce the Health Valley plant's
manufacturing assets to their net realizable value. 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 had experienced losses. We
determined that the product line had become impaired and does not expect to
recover recorded values in the foreseeable future.
Deferred Financing Costs
Eligible costs associated with obtaining debt financing are capitalized
and amortized over the related term of the applicable debt instruments, which
approximates the effective interest method.
Earnings Per Share
We report basic and diluted earnings per share in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per share excludes
the dilutive effects of options, warrants and convertible debt. Diluted earnings
per share includes only the dilutive effects of common stock equivalents such as
stock options and warrants.
-33-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128.
2002 2001 2000
--------- --------- -----------
Numerator:
Income (loss) before extraordinary item and
cumulative change in accounting principle -
numerator for basic and
diluted earnings per share $ 2,971 $ 23,589 $ (11,403)
Extraordinary item - - (1,940)
Cumulative change in accounting principle - - (3,754)
--------- --------- -----------
Net income (loss) $ 2,971 $ 23,589 $ (17,097)
========= ========= ===========
Denominator (in thousands):
Denominator for basic earnings (loss) per
share - weighted average shares outstanding
during the period 33,760 33,014 27,952
Effect of dilutive securities (a):
Stock options 802 1,304 -
Warrants 182 226 -
--------- --------- ----------
984 1,530 -
--------- --------- ----------
Denominator for diluted earnings (loss) per
share - adjusted weighted average shares
and assumed conversions 34,744 34,544 27,952
========= ========= ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary item and
cumulative change in accounting principle $ .09 $ .71 $ (.41)
Extraordinary item - - (.07)
Cumulative change in accounting principle - - (.13)
--------- --------- -----------
Net income (loss) $ .09 $ .71 $ (.61)
========= ========= ===========
Diluted earnings (loss) per share (a):
Income (loss) before extraordinary item and
cumulative change in accounting principle $ .09 $ .68 $ (.41)
Extraordinary item - - (.07)
Cumulative change in accounting principle - - (.13)
--------- --------- -----------
Net income (loss) $ .09 $ .68 $ (.61)
========= ========= ===========
(a) As of result of the net loss in 2000, the dilutive effect of options and
warrants (aggregating 2.3 million shares) are not shown as the results
would be antidilutive.
-34-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Our results for the year ended June 30, 2002, include the effect of
adopting SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets", which resulted in a $6.1 million reduction ($4.0
million, net of tax) in amortization expense and $.13 and $.12 increases in
basic and diluted earnings per share, respectively. SFAS No. 141 provides that
all business combinations initiated after June 30, 2001 shall be accounted for
using the purchase method. In addition, it provides that the cost of an acquired
entity must be allocated to the assets acquired, including identifiable
intangible assets and liabilities assumed, based on their estimated fair values
at the date of acquisition. The excess of cost over the fair value of the net
assets acquired must be recognized as goodwill. SFAS No. 142 provides that
goodwill is no longer amortized and the value of an identifiable intangible
asset must be amortized over its useful life unless the asset is determined to
have an indefinite useful life. At June 30, 2002, included in trademarks and
other intangible assets on the balance sheet, is approximately $.6 million of
intangible assets deemed to have a finite life which are being amortized over
their estimated useful lives. Goodwill must be tested for impairment at the
beginning of the fiscal year in which SFAS No. 142 is adopted and at least
annually thereafter. In accordance with SFAS No. 142, we have evaluated the fair
value of our reporting units and compared those values to the carrying values of
their related goodwill and indefinite-life intangible assets, and based on such
evaluations, no impairment existed at July 1, 2001 or through June 2002. The
$6.1 million pre-tax reduction of intangible amortization expense recognized
during the year ended June 30, 2002 represents the amount of amortization of
goodwill and indefinite-life intangible assets that arose from acquisitions
prior to July 1, 2001 and are no longer amortized. Amounts assigned to
indefinite-life intangible assets primarily represent the values of trademarks.
The following table reflects consolidated results of operations (net of
tax effect) adjusted as though the adoption of SFAS No. 141 and 142 occurred as
of the beginning of the year ended June 30, 2000.
Year Ended
-------------------------------
June 30, 2001 June 30, 2000
--------------- ---------------
Net Income (loss):
As reported $ 23,589 $ (17,097)
Goodwill and indefinite-life
intangibles amortization, net of tax 4,000 3,800
--------------- ---------------
As adjusted $ 27,589 $ (13,297)
=============== ===============
Basic earnings (loss) per common share:
As reported $ 0.71 $ (0.61)
=============== ===============
As adjusted $ 0.84 $ (0.48)
=============== ===============
Diluted earnings (loss) per common share:
As reported $ 0.68 $ (0.61)
=============== ===============
As adjusted $ 0.80 $ (0.48)
=============== ===============
-35-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
The following table reflects the components of trademarks and other
intangible assets as of June 30, 2002:
Gross Carrying Accumulated
Amount Amortization
------------------ ---------------
Amortized intangible assets:
Licensing costs and other intangibles $ 630 $ 118
Non-amortized intangible assets:
Trademarks 44,056 6,485
5. ADOPTION OF EITF CONSENSUS REGARDING SALES INCENTIVES
In May 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 00-14, "Accounting for Certain Sales Incentives". Under the consensus,
certain sales incentives must be recognized as a reduction of sales rather than
as an expense (we included such sales incentives within selling, general and
administrative expenses). In April 2001, the EITF reached a consensus on Issue
00-25, "Vendor Statement Characterization of Consideration from a Vendor to a
Retailer", which expanded upon the types of consideration paid by vendors to
retailers which are to be considered sales incentives and, accordingly, should
be classified as a reduction of sales rather than as a component of selling,
general and administrative expenses. In November 2001, the EITF reached a
consensus on Issue 01-9, "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of A Vendor's Product", which provides interpretative
guidance to Issues 00-14 and 00-25. Our statements of operations reflect the
adoption of these EITF consensuses by the classification of certain vendor
promotional allowances and other sales incentives as reductions of sales rather
than as selling expenses as had been the predominant industry and company
practice in the past. The sales amounts for the 2002 period is in conformity
with those EITF consensuses, which were adopted effective January 1, 2002. To
provide comparability, prior year periods have been restated by reclassifying
promotional allowances and other sales incentives of $67.2 million and $71.1
million for the fiscal years ended June 30, 2001 and 2000, respectively. The
adoption of these EITF consensuses had no impact on income or cash flows.
6. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
Fiscal 2002
During the fourth quarter of fiscal 2002, we recorded charges aggregating
$21.3 million, before taxes, related to the expected sale of our Health Valley
facility in Irwindale, California ($11.3 million) and the discontinuance of our
supplements business ($7.9 million) and Weight Watchers licenses (2.1 million).
Approximately $17.9 million of these charges are noncash in nature.
Our Health Valley facility charge includes $7.6 million of restructuring
and non-recurring charges associated with reduced values of inventories of raw
ingredients and packaging, certain lease obligations and other items. Of this
$7.6 million of charges, our gross profit was reduced by $5.5 million charged to
cost of sales as required by accounting rules. In addition, we recorded $3.7
million of impairment charges to reduce the Health Valley plant's manufacturing
assets to their net realizable value. At June 30, 2002, we accrued $2.1 million
of future costs associated with this charge primarily relating to lease exit
costs relating to
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The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
incremental costs and contractual obligations and other facility exit costs
expected to be incurred as part of this sale. We anticipate that there may be
additional charges of approximately $2 million in fiscal 2003 for potential
severance liabilities and related employee costs.
We also discontinued our supplements business at Celestial, and did not
renew our license to sell certain Weight Watchers products. In connection with
these discontinuances, we recorded charges of $7.9 million related to
supplements principally for inventories, packaging and trade items. Of this $7.9
million charge, $6.2 million had the effect of reducing our gross profit. The
charge for the non- renewal of the Weight Watchers license amounted to $2.1
million, principally for inventories, packaging and trade items, of which $.7
million reduced our gross profit. At June 30, 2002, we accrued $3.1 and $1.2
million for future costs associated with the Celestial supplements and Weight
Watchers license discontinuance, respectively. These future costs primarily
relate to sales returns resulting from the discontinuance notification, other
trade incentives, employee severance costs and other items.
At June 30, 2002, our balance sheet includes the above-described aggregate
of $6.4 million of accrued restructuring and non-recurring charges,
substantially all of which are expected to be paid during 2003.
Fiscal 2000
During the fourth quarter of fiscal 2000, we approved a plan to streamline
and restructure certain non-core businesses and consolidate warehouses and
information systems within our distribution and operating network which resulted
in a pre-tax charge of $3.7 million. In addition, in the first quarter of fiscal
2000, we entered into a settlement agreement related to a shareholder lawsuit
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 property, plant and
equipment 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, there was approximately $1.7 million of future costs
accrued which were associated with this restructuring charge; no such accrual
remains at June 30, 2002.
The write-down of property, plant and equipment and other assets related
principally to machinery, equipment and computer hardware and software within
certain of our distribution facilities and corporate offices, as well as other
equipment and assets related to the restructuring of a 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.
-37-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
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, we were 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, we provided certain reserves related to expected
returns of our 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.
7. 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 us effective July 1, 1999, and required
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, 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, we 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.
8. ACQUISITIONS
In December 2001, we acquired 100% of the stock of privately-held Lima,
N.V. ("Lima"), a leading Belgian manufacturer and marketer of natural and
organic foods. We consummated this strategic European acquisition to provide us
with a diversified natural and organic food products manufacturer and
distributor that is similar to our manufacturing and distribution (types of food
products) here in the United States. The aggregate purchase price, including
acquisition costs, amounted to approximately $20 million. The purchase price
paid was based on a multiple of future operating income Lima will generate with
the integration of certain business processes and introduction of existing Hain
products into Europe, utilizing Lima's distribution network. The purchase price
was paid by $15.6 million is cash and the issuance of 205,128 shares of our
common stock valued at $4.4 million. The value assigned to the common stock was
determined based on the average market price of our common stock over the period
including three days before and after the terms of the acquisition were agreed
to and announced. The aggregate purchase price paid over the net assets acquired
amounted to approximately $15.6 million (included in goodwill, and currently not
tax deductible). We are in the process of finalizing our purchase price
allocation, and have estimated that based on an independent valuation analysis,
most of the excess cost over net assets acquired will be goodwill and
trademarks, which will not amortize under SFAS No. 142. The remaining valuation
analysis requiring completion is appraisal of property, plant and equipment. We
expect this analysis to be completed by the second quarter of fiscal 2003.
-38-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the estimated fair values of assets
acquired and liabilities assumed at the date of acquisition.
December 10,
2001
--------------
Current assets $ 6,770
Property, plant & equipment and other
long-term assets 3,990
--------------
Total assets 10,760
Liabilities and debt instruments assumed 6,360
--------------
Net assets acquired $ 4,400
==============
The above purchase price excludes the amount of contingency payments we
are obligated to pay the former owner of Lima. The contingency payments are
based on the achievement by Lima of certain financial targets over the 2.5 years
following the date of acquisition. Such payments will be charged to goodwill if
and when paid.
On June 8, 2001, we acquired privately-held Yves Veggie Cuisine, Inc.
("Yves") a Vancouver, British Columbia based company. Yves is a leading North
American manufacturer, distributor and marketer of soy protein meat alternative
products. The aggregate purchase price, including acquisition costs, amounted to
approximately $34 million excluding the assumption of debt and capital leases of
approximately $3 million. The purchase price was paid by approximately $32.5
million in cash and $1.5 million worth of common stock (61,500 shares). The
aggregate purchase price paid over the net assets acquired amounted to
approximately $31.5 million.
On January 18, 2001, we acquired privately held Fruit Chips B.V., ("Fruit
Chips") a Netherlands based company, which we subsequently renamed as Terra
Chips B.V. Terra Chips B.V. is a manufacturer and distributor of low fat fruit,
vegetable and potato chips selling to European markets. The aggregate purchase
price paid, including transaction costs was approximately $9.8 million
consisting of both cash and stock. The aggregate purchase price paid over the
net assets acquired was approximately $6.2 million.
Unaudited pro forma results of operations for the years ended June 30,
2002 and 2001 reflecting the above acquisitions as if they occurred at the
beginning of each year would not be materially different than the actual results
for those years.
The above acquisitions have been accounted for as purchases and,
therefore, operating results of the acquired businesses have been included in
the accompanying financial statements from the dates of acquisition.
-39-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
9. INVENTORIES
Inventories consist of the following at June 30:
2002 2001
----------- -----------
Finished goods $ 35,158 $ 29,933
Raw materials, work-in-process and packaging 18,466 19,660
----------- -----------
$ 53,624 $ 49,593
=========== ===========
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30:
2002 2001
------------ -----------
Land $ 6,852 $ 6,673
Buildings and improvements 25,537 13,611
Machinery & equipment 46,360 42,861
Furniture and fixtures 2,848 2,505
Leasehold improvements 6,209 6,818
Construction in progress 6,258 8,863
Health Valley plant assets held for sale 4,769 -
------------ -----------
98,833 81,331
Less:
Accumulated depreciation and amortization 29,059 25,551
------------ -----------
$ 69,774 $ 55,780
============ ===========
Included within machinery and equipment are assets held under capital
leases with net book values at June 30, 2002 and 2001 of $2 million and $3
million, respectively.
11. LONG-TERM DEBT
Long-term debt at June 30 consists of the following:
2002 2001
----------- ----------
Senior revolving Credit Facilities payable to
banks $ 4,400 $ 4,400
Capital leases on machinery and equipment and 2,716 2,671
other debt instruments
Economic Development Revenue Bonds due in
monthly installments through November 1,
2009; interest payable monthly at variable rates 4,608 5,067
Mortgage loan - 1,461
---------- -----------
11,724 13,599
Current Portion 1,431 2,881
---------- -----------
$ 10,293 $ 10,718
========== ===========
Credit Facilities
On May 18, 1999, in connection with the acquisition of Natural Nutrition
Group ("NNG"), we 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.
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 13), all amounts then outstanding under the Facility were
prepaid and the Facility was terminated. As a result, we 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.
In March 2001, we entered into a new $240 million Credit Facility (the
"Credit Facility"), which provides us with a $145 million revolving credit
facility through March 29, 2005 and a $95 million 364-day facility through March
29, 2003. The Credit Facility is unsecured, but guaranteed by all of our current
and future direct and indirect domestic subsidiaries. We are required to comply
with customary affirmative and negative covenants for facilities of this nature.
Revolving credit loans under this facility bear interest at a base rate (greater
of the applicable prime rate or Federal Funds Rate plus applicable margin) or,
at our option, the reserve adjusted LIBOR rate plus an applicable margin. As of
June 30, 2002 and 2001, $4.4 million was borrowed under the Credit Facility at
3.0625% and 5.94%, respectively.
Capital Leases and Other Debt Instruments
Capital leases on machinery and equipment of $1.8 million bear interest
ranging from 7.25% to 10% and are due in monthly installments through July 2006.
Other debt instruments include $.8 million assumed with business acquired.
The aggregate minimum future lease payments for all capital leases at June
30, 2002 are as follows:
2003 $ 563
2004 761
2005 334
2006 167
2007 3
-----------
$ 1,828
===========
Economic Development Bonds
Borrowings related to Economic Development Revenue Bonds (the "Bonds")
bear interest at a variable rate (1.75% at June 30, 2002) and are secured by a
letter of credit. The Bonds mature November 1, 2009. The Bonds can be tendered
monthly to the Bond trustee at face value plus accrued interest, with payment
for tendered Bonds made from drawdowns under a letter of credit facility which
expires November 2002.
-40-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Mortgage Loan
As part of the Yves acquisition on June 8, 2001, the Company assumed a
mortgage loan on the land and building occupied by Yves. The mortgage loan of
$1,461 was repayable in monthly installments, including principal with interest
at 7.65% (floating at Government of Canada five-year bond rates plus 1.5%) with
a final payment of $1.4 million which was due and paid by us on April 1, 2002.
Maturities of all debt instruments at June 30, 2002, are as follows:
2003 $ 1,431
2004 1,526
2005 1,040
2006 5,324
2007 763
Thereafter 1,640
----------
$ 11,724
==========
Interest paid (which approximates the related expense) during the years
ended June 30, 2002, 2001 and 2000 amounted to $893, $412 and $7,224
respectively.
12. INCOME TAXES
The provision for income taxes for the years ended June 30, 2002, 2001 and
2000 is presented below. The table excludes the tax benefits applicable to the
extraordinary charges and the cumulative change in accounting principle in 2000.
2002 2001 2000
------------- ------------ ------------
Current:
Federal $ (130) $ 8,145 $ 2,615
State (15) 1,480 389
Foreign 2,214 156 -
------------- ------------ ------------
2,069 9,781 3,004
Deferred Federal and State (237) 7,301 896
------------- ------------ ------------
Total $ 1,832 $ 17,082 $ 3,900
============= ============ ============
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.
-41-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Components of our deferred tax asset/(liability) as of June 30 are as
follows:
2002 2001
------------ ------------
Current deferred tax assets:
Basis difference on inventory $ 1,663 $ 1,110
Allowance for doubtful accounts 284 315
Net operating loss carryovers 1,331 1,552
Reserves not currently deductible 3,945 763
------------ ------------
Current deferred tax assets 7,223 3,740
------------ ------------
Noncurrent deferred tax asset/(liabilities):
Difference in amortization (7,596) (6,759)
Basis difference on property and equipment (3,504) (2,407)
Net operating loss carryovers - 1,312
------------ ------------
Noncurrent deferred tax asset/(liabilities), net (11,100) (7,854)
------------ ------------
$ (3,877) $ (4,114)
============ ============
Reconciliations of expected income taxes at the U.S. federal statutory
rate to the Company's provision for income taxes for the years ended June 30 are
as follows:
2002 % 2001 % 2000 %
---------- ------- ---------- --------- ----------- ---------
Expected U.S. federal
income tax at
statutory rate $ 1,681 35.0% $14,235 35.0% $ (2,626) 35.0 %
State income taxes,
net of federal benefit (46) (.9) 1,949 4.8 569 (7.6)
Goodwill amortization - - 1,535 3.8 1,576 (21.0)
Merger related expenses - - - - 4,654 (62.0)
Contributions - - - - (610) 8.1
Foreign income at
different rates 277 5.7 - - - -
Other (80) (1.7) (637) (1.6) 337 (4.5)
---------- ------- ---------- --------- ----------- ---------
Provision for income taxes $ 1,832 38.1% $17,082 42.0% $ 3,900 (52.0)%
========== ======= ========== ========= =========== =========
Income taxes (refunded) paid during the years ended June 30, 2002, 2001
and 2000 amounted to $(5.1) million, $6.1 million and $4.9 million,
respectively.
At June 30, 2002, we had net operating loss carryforwards ("NOLS") of
approximately $3.4 million 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 Service effective June
25, 1999, which had the effect of relaxing the SRLY limitations, we expect to
fully utilize all of the acquired NOL's prior to
-42-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
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.
13. STOCKHOLDERS' EQUITY
Common Stock
In September 1999, we 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, we issued 2,837,343
shares (the "Investment Shares") of our 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 Hain and the
Heinz Subsidiary. We used $75 million of the proceeds to reduce borrowings under
our then credit facility. The remainder of the proceeds were used to pay
transaction costs and for general working capital purposes. In consideration for
the trademarks, we 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 terminated a
license agreement dated April 1, 1999 between Hain and Heinz under which we were
granted exclusive sale and distribution rights of Earth's Best baby food
products into the United States retail grocery and natural food channel. In
connection with the issuance of the Shares, Hain and the Heinz Subsidiary
entered into an Investor's Agreement dated September 24, 1999 that set forth
certain restrictions and obligations of Hain and the Heinz Subsidiary and its
affiliates relating to the Shares, including restrictions and obligations
relating to (1) the appointment by Hain of one member to its Board of Directors
nominated by the Hain and the Heinz Subsidiary and one member nominated by the
Heinz Subsidiary, (2) an 18-month standstill period (which expired in March
2001) during which the Heinz Subsidiary and its affiliates could not purchase or
sell shares of Hain Common Stock, subject to certain exceptions, (3) a right of
first offer granted to us by Heinz and its affiliates 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 Hain 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 Hain to
maintain its investment level at 19.5% of the outstanding stock of Hain. The
Heinz Subsidiary investment level was diluted following the acquisition by Hain
of Celestial on May 30, 2000. Under the terms of the agreement, on June 20,
2000, we 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. We used approximately $44 million of these proceeds to prepay all
outstanding borrowings under our then credit facility. The remainder of the
funds were used for working capital.
In addition, Hain and the Heinz Subsidiary 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, Hain's stockholders approved an increase to the number of
authorized shares of the Company's common stock from 40 million to 100 million.
-43-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
As part of the Yves and Fruit Chips acquisitions consummated during fiscal
2001, 185,330 common shares were issued to the sellers, valued at approximately
$5.6 million in the aggregate.
As part of the Lima acquisition consummated during fiscal 2002, 205,128
common shares were issued to the sellers, valued at approximately $4.4 million.
Preferred Stock
We are authorized to issue "blank check" preferred stock (up to 5 million
shares) with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered to issue, without stockholder approval, preferred stock with
dividends, liquidation, conversion, voting, or other rights which could decrease
the amount of earnings and assets available for distribution to holders of our
Common Stock. As at June 30, 2002 and 2001, no preferred stock was issued or
outstanding.
Warrants
Since fiscal 1997, we issued a total of 300,000 warrants in connection
with services rendered by third party consultants at prices ranging from $4.13
to $10.00 per share. 250,000 of these warrants were exercised during fiscal
2000, resulting in proceeds of $1.6 million. In accordance with the then
existing term loan facility, 50% of the proceeds were used to pay down the term
loan with the remainder used for working capital purposes. In fiscal 2001, the
remaining 50,000 warrants were exercised via a cashless exercise resulting in
the issuance of 35,653 shares.
In connection with an acquisition in 1997, we issued warrants to Argosy
Investment Corp. ("Argosy") to acquire 100,000 shares of our common stock at an
exercise price of $12.688. In fiscal 2002, Argosy exercised no warrants. In
fiscal 2001, Argosy exercised 26,666 of these warrants, resulting in proceeds of
$.3 million.
In fiscal years 2001 and 2000, Argosy exercised warrants previously
granted in 1994 to acquire 104,100 and 95,853, respectively, of our common stock
at an exercise price of $3.25. At June 30, 2002, 322,764 warrants remain
available for exercise.
14. STOCK OPTION PLANS
Hain
In December 1994, we adopted the 1994 Long-Term Incentive and Stock Award
Plan, which amended and restated our 1993 stock option plan. On December 9,
1997, the stockholders of Hain approved an amendment to increase the number of
shares issuable under the 1994 Long Term Incentive and Stock Award Plan by
345,000 to 1,200,000 shares. In December 1998, the plan was further amended to
increase the number of shares issuable by 1,200,000 bringing the total shares
issuable under this plan to 2,400,000. In December 1999, the plan was further
amended to increase the number of shares issuable by 1,000,000 bringing the
total shares issuable under this plan to 3,400,000. In May 2000, the plan was
further amended to increase the number of shares issuable by 3,000,000 bringing
the total shares issuable under this plan to 6,400,000. The plan provides for
the granting of incentive stock options to employees, directors and consultants
to purchase shares of our common stock. All of the options granted to date under
the plan have been incentive and non-qualified stock options providing
-44-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
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 2000, options to purchase 372,550 shares were
granted at prices from $21.188 to $33.50 per share. During 2001, options to
purchase 1,352,850 shares were granted at prices ranging from $27.125 to
$36.6875 per share. During 2002, options to purchase 1,688,900 shares were
granted at prices ranging from $15.42 to $22.72 per share. At June 30, 2002,
638,025 options were available for grant under this plan.
Our Chief Executive Officer ("CEO") was granted options to purchase
125,000 shares of common stock at $4.8125 per share on the date of grant (June
30, 1997) pending approval of an increase in the number of shares available for
grant (approved by shareholders on December 9, 1997). We incur a straight line
non-cash compensation charge ($46 annually) over the 10-year vesting period
based on the excess ($.5 million) of the market value of the stock options
($8.50 per share) on December 9, 1997 over the $4.8125 per share market value on
the date of grant.
In December 1995, we adopted a Directors Stock Option Plan. The plan
provides for the granting of stock options to non-employee directors to purchase
up to an aggregate of 300,000 shares of our common stock. In December 1998, the
plan was amended to increase the number of shares issuable from 300,000 to
500,000. In December 1999, the plan was amended to increase the number of shares
issuable by 250,000, bringing the total shares issuable under this plan to
750,000. During 2000, options for an aggregate of 103,500 shares were granted at
prices of $23.25 and $26.063 per share. In December 2000, options for an
aggregate of 185,000 shares were granted at prices ranging from $27.75 to
$32.125 per shares. The remaining available shares in this plan have been
canceled and no future grants are available on this plan effective January 2001.
In May 2000, we adopted a new Directors Stock Option Plan. The plan
provides for the granting of stock options to non-employee directors to purchase
up to an aggregate of 750,000 shares of our common stock. At June 30, 2001, no
options were granted under this plan. During 2002, options for an aggregate of
255,000 shares were granted at prices ranging from $20.01 to $26.44 per share.
We also have a 1993 Executive Stock Option Plan pursuant to which we
granted our CEO options to acquire 600,000 shares of our common stock. These
options are fully vested and exercisable. The exercise price of options designed
to qualify as incentive options is $3.58 per share and the exercise price of
non-qualified options is $3.25 per share. During fiscal 2001, options to
purchase 65,000 shares were exercised. No exercises were made during fiscal
2002. These options expire in 2003.
Celestial
In connection with the Merger with Celestial, 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.
In 1991, Celestial granted options to an executive officer of Celestial to
purchase 241,944 shares of common stock in connection with capital contributions
made by the officer and certain other agreements. Such options were immediately
vested at the grant date, are exercisable at a weighted average price per share
of $3.90 and expire in 2031.
-45-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
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.
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. During fiscal 2001, all of
these options were exercised.
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.
Effective May 30, 2000, no further grants are available under this plan.
In 1997, Celestial granted options to an executive officer of Celestial 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 $8.70 per share and expire ten years from
the grant date. During 2001, all of these options were exercised.
Employee Stock Purchase Plan
Under Celestial's Employee Stock Purchase Plan, Celestial was authorized
to issue up to 66,286 shares of common stock to its full-time employees, nearly
all of whom were eligible to participate. Under the terms of the plan, employees
could choose each year to have up to 10% of their annual base earnings withheld
to purchase Celestial's common stock. The purchase price of the stock was equal
to 85 percent of the lower of the market price at the beginning or end of each
six month participation period. Approximately 30 percent of eligible Celestial
employees participated in the plan. Under the plan, Celestial sold approximately
5,000 shares for the year ended June 30, 2002, 5,300 shares for the year ended
June 30, 2001 and 10,000 shares for the year ended June 30, 2000. As of December
31, 2001, this plan was terminated.
Accounting For Stock Issued to Employees
We have elected to follow APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related Interpretations, in accounting for stock
options because, as discussed below, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of our employee stock
options at least equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro-forma information regarding net (loss) income and net (loss) income
per share is required by SFAS No. 123, and has been determined as if we have
accounted for our stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Sholes option pricing
-46-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
model with the following weighted-average assumptions: risk free interest rates
ranging from 4% to 6.77%; no dividend yield; volatility factors of the expected
market price of our common stock of approximately 93% for fiscal 2002 and 2001
and 90% for fiscal 2000; and a weighted-average expected life of the options of
five years in each year.
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 our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Our pro forma
information is as follows:
2002 2001 2000
------------- ------------ ------------
Pro forma net (loss) income $ (12,194) $ 8,515 $ (23,033)
Pro forma diluted net $ (.36) $ .25 $ (.82)
A summary our stock option plans' activity for the three years ended June
30, 2002 follows:
2002 2001 2000
------------------------- --------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------- ---------- --------------- ----------- ------------ -----------
Outstanding at
beginning of year 4,240,741 $ 18.01 3,997,106 $ 12.91 4,076,088 $ 11.83
Granted 1,943,900 19.70 1,537,850 27.55 632,710 23.05
Exercised (94,341) 9.12 (1,265,465) 10.16 (584,440) 15.03
Terminated (66,917) 23.27 (28,750) 20.12 (127,252) 18.63
------------- ---------- ------------- ----------- ------------ -----------
Outstanding at end
of year 6,023,383 $ 18.72 4,240,741 $ 18.01 3,997,106 $ 12.91
============= ========== ============= =========== ============ ===========
Exercisable at end
of year 4,482,182 $ 18.14 3,444,219 $ 16.17 3,553,964 $ 11.75
============= ========== ============= =========== ============ ===========
Weighted average
fair value of
options granted
during year $ 14.23 $ 20.24 $ 15.23
============ ========== ============= =========== ============ ===========
-47-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
The following table summarizes information for stock options outstanding at
June 30, 2002:
Options Outstanding Options Exercisable
- ------------------------------------------------------ ------------------------
Weighted
Options Average Weighted Options Weighted
Outstanding Remaining Average Exercisable Average
Range of as of Contractual Exercise as of Exercise
Exercise Prices 06/30/2002 Life Price 06/30/2002 Price
- ---------------- -------------- ----------- ----------- ------------- ----------
(In Years)
$2.94 - $4.83 998,144 8.6 $ 3.85 998,144 $ 3.85
4.84 - 15.43 250,553 5.0 12.38 157,953 10.54
15.44 - 18.34 1,739,767 8.0 17.66 846,867 17.22
18.35 - 22.01 895,180 8.1 20.49 800,847 20.42
22.01 - 25.68 520,780 7.3 22.66 340,597 22.83
25.69 - 29.35 1,356,659 8.1 26.81 1,086,474 26.73
29.36 - 33.01 221,800 8.3 31.50 211,050 31.54
33.02 - 38.38 40,500 8.0 35.53 40,250 35.51
------------ ----------- --------- ------------ -----------
6,023,383 8.0 $18.72 4,482,182 $18.14
============ =========== ========= ============ ===========
Shares of Common Stock reserved for future issuance as of June 30, 2002
are as follows:
Stock options 7,161,808
Warrants 396,098
Convertible promissory notes 4,656
------------
7,562,562
============
15. LEASES
Our corporate headquarters are located in approximately 35,000 square feet
of leased office space in Melville, New York, under a lease which expires in
December 2012. In addition, the Company leases manufacturing and warehouse space
under leases which expire through 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, 2002, excluding the Health Valley Irwindale Plant (lease commitments of
$753 in 2003 and $754 in 2004) are as follows:
2003 $ 3,419
2004 2,977
2005 2,617
2006 2,742
2007 2,788
Thereafter 8,300
----------
$22,843
==========
Rent expense charged to operations for the years ended June 30, 2002, 2001
and 2000 was approximately $3,804, $3,442 and $3,217, respectively.
-48-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
16. SEGMENT INFORMATION
Our company is engaged in one business segment: the manufacturing,
distribution and marketing of natural and organic food and beverage products. We
define business segments as components of an enterprise about which separate
financial information is available that is evaluated on a regular basis by a
chief operating decision maker or group.
Outside the United States, we primarily conduct business in Canada and
Europe. We have grouped Canada and Europe together as "other" because they are
individually not significant enough to warrant separate geographic disclosure.
During fiscal years 2001 and 2000, sales to unaffiliated customers outside the
United States made up less than 5% of total net sales.
Selected information related to our operations by geographic area are as
follows for 2002:
United States Other
--------------- ------------
Net sales $ 339,343 $ 56,611
(Loss) Earnings before income taxes (737) 5,537
Long-lived assets 298,198 56,101
17. DEFINED CONTRIBUTION PLANS
We have a 401(k) Employee Retirement Plan ("Plan") to provide retirement
benefits for eligible employees. All full-time employees of Hain and our
domestic subsidiaries who have attained the age of 21 are eligible to
participate upon completion of 30 days of service. The subsidiary Yves Veggie
Cuisine has its own separate Registered Retirement Employee Savings Plan for
those employees residing in Canada. Employees of Yves who meet eligibility
requirements may participate in that plan. On an annual basis, we may, in our
sole discretion, make certain matching contributions. For the years ended June
30, 2002, 2001 and 2000, we made contributions to the Plan of $372, $614 and
$464, respectively.
18. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting for the Impairment or Disposal of Long-Lived Assets
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of"; however, it retains fundamental provisions
related to the recognition and measurement of the impairment of long-lived
assets to be "held and used." In addition, SFAS No. 144 provides more guidance
on estimating cash flows when performing a recoverability test, requires that a
long-lived assets group to be disposed of other than by sale (e.g., abandoned)
be classified as "held and used" until disposed of, and establishes more
restrictive criteria regarding classification of an asset group as "held for
sale."
-49-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
SFAS No. 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations" ("APB 30"), for the disposal of a segment of a business, and extends
the reporting of a discontinued operation to a "component of an entity."
Further, SFAS No. 144 requires operating losses from a "component of an entity"
to be recognized in the period in which they occur rather than as of the
measurement date as previously required by APB 30.
SFAS No. 144 is effective for years beginning after December 15, 2001 (our
fiscal year 2003). Transition is prospective for committed disposal activities
that are initiated after our initial application of the statement. SFAS No. 144
also provides transition provisions for assets "held for sale" that were
initially recorded under previous models and do not meet the new "held for sale"
criteria within one year of the initial application of the statement.
Accounting for Costs Associated with Exit or Disposal Activity
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between SFAS No. 146 and Issue 94-3 relates to SFAS No. 146's
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
Therefore, the SFAS No. 146 eliminates the definition and requirements for
recognition of exit costs in Issue 94-3. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. The provisions
of SFAS No. 146 are effective for exit or disposal activities that we may
initiate after December 31, 2002.
19. LITIGATION
From time to time, the Company is involved in litigation, incidental to
the conduct of its business. In the opinion of management, disposition of
pending litigation will not have a material adverse effect on the Company's
business, results of operations or financial condition.
-50-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
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 "Equity Compensation Plan Information", Item 13,
"Certain Relationships and Related Transactions", and Item 14, "Controls and
Procedures" have been omitted from this report inasmuch as the Company will file
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the end of the fiscal year covered by this report a definitive
Proxy Statement for the Annual Meeting of Stockholders of the Company to be held
on November 12, 2002, at which meeting the stockholders will vote upon election
of the directors. This information in such Proxy Statement is incorporated
herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K.
(a) (1) List of Financial statements
Consolidated Balance Sheets - June 30, 2002 and 2001
Consolidated Statements of Operations - Years ended June 30, 2002, 2001
and 2000
Consolidated Statements of Cash Flows - Years ended June 30, 2002, 2001
and 2000
Consolidated Statements of Stockholders' Equity - Years ended June 30,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedule
Valuation and Qualifying Accounts (Schedule II)
-51-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
(3) List of Exhibits
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 of Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (Commission
File No. 333-33830) filed with the Commission on April 24,
2000).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (Commission File No. 333-33830) filed
with the Commission on April 24, 2000).
4.1 Specimen of common stock certificate (incorporated by reference
to Exhibit 4.1 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (Commission File No.
333-33830) filed with the Commission on April 24, 2000).
4.2 1993 Executive Stock Option Plan (incorporated by reference to
Exhibit 4.2 of Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2 (Commission File No. 33-68026) filed with the
Commission on October 21, 1993).
4.3 Amended and Restated 1994 Long Term Incentive and Stock Award Plan
(included as Annex F to the Joint Proxy Statement/Prospectus
contained in the Registrant's Registration Statement on Form S-4
(Commission File No. 333-33830) filed with the Commission on April
24, 2000).
4.4 1996 Directors Stock Option Plan (incorporated by reference to
Appendix A to the Registrant's Notice of Annual Meeting of
Stockholders and Proxy Statement dated November 4, 1996).
4.5 2000 Directors Stock Option Plan (included as Annex G to the Joint
Proxy Statement/Prospectus contained in the Registrant's Registration
Statement on Form S-4 (Commission File No. 333-33830) filed with the
Commission on April 24, 2000).
10.1 Credit Agreement dated as of March 29, 2001 by and among the
Registrant and Fleet National Bank, as administrative agent, SunTrust
Bank, as syndication agent, HSBC Bank USA, as documentation agent,
and the lenders party thereto, as amended through July 17, 2001 (the
"Credit Agreement") (incorporated by reference to Exhibit 10.1 of the
Registrant's Annual Report Form 10-K for the fiscal year ended June
30, 2001 filed with the Commission on September 28, 2001).
10.2a Amendments to the Credit Agreement dated March 28, 2002 and June 25,
2002.
10.3 Investor's Agreement among the Registrant, Boulder Inc. (formerly
Earth's Best, Inc.) and Irwin D. Simon dated September 24, 1999
(incorporated by reference to Exhibit 10.2 of the Registrant's
Current Report on Form 8-K filed with the Commission on
September 30, 1999).
-52-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
10.4 Registration Rights Agreement between the Registrant and Boulder
Inc. (formerly Earth's Best, Inc.), dated September 24, 1999
(incorporated by reference to Exhibit 10.3 of the Registrant's
Current Report on Form 8-K filed with the Commission on
September 30, 1999).
10.5 Form of Change in Control Agreement for Executive Officers
(incorporated by reference to Exhibit 10.1 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 2000 filed with the Commission on November 14, 2000).
10.6 Employment Agreement for Chief Executive Officer dated July 1, 2000
(incorporated by reference to Exhibit 10.2 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 2000 filed with the Commission on November 14, 2000).
10.7a Employment Agreement for Executive Vice President and Chief Financial
Officer dated October 1, 2001.
21a Subsidiaries of Registrant
23a Consent of Independent Auditors - Ernst & Young LLP
99.1a Certificate of Chief Executive Officer
99.2a Certificate of Chief Financial Officer
a - Filed herewith
(b) Reports on Form 8-K
On May 10, 2002, the Registrant filed a Current Report on Form 8-K
providing revised earnings guidance for the fourth quarter of fiscal 2002 and
revenue growth for fiscal 2003.
-53-
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, 2002
Deducted from asset accounts:
Allowance for doubtful accounts $ 815 $ 551 $ 175 (1) $ 539 (2) $ 1,002
Year Ended June 30, 2001
Deducted from asset accounts:
Allowance for doubtful accounts $ 929 $ 393 $ 41 (1) $ 548 (2) $ 815
Year Ended June 30, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,287 $ 432 $ 100 (1) $ 890 (2) $ 929
(1) Allowance for doubtful accounts at dates of acquisitions of acquired
businesses.
(2) Uncollectible accounts written off, net of recoveries.
-54-
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 30, 2002
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 30, 2002
- ------------------------
Irwin D. Simon Executive Officer
and Chairman of the
Board of Directors
/s/ Ira J. Lamel Executive Vice President
- ------------------------
Ira J. Lamel and Chief Financial Officer September 30, 2002
/s/ Andrew R. Heyer Director September 30, 2002
- ------------------------
Andrew R. Heyer
/s/ Beth L. Bronner Director September 30, 2002
- ------------------------
Beth L. Bronner
/s/ Jack Futterman Director September 30, 2002
- ------------------------
Jack Futterman
/s/ James S. Gold Director September 30, 2002
- ------------------------
James S. Gold
/s/ Michael Bertasso Director September 30, 2002
- ------------------------
Michael Bertasso
/s/ Daniel Glickman Director September 30, 2002
- --------------------------
Daniel Glickman
/s/ Joseph Jimenez Director September 30, 2002
- ------------------------
Joseph Jimenez
/s/ Roger Meltzer Director September 30, 2002
- ------------------------
Roger Meltzer
/s/ Marina Hahn Director September 30, 2002
- ------------------------
Marina Hahn
-55-
CERTIFICATION
I, Irwin D. Simon, President and Chief Executive Officer of The Hain
Celestial Group, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of The Hain
Celestial Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report.
Date: September 30, 2002
/s/ Irwin D. Simon
---------------------------------------
Irwin D. Simon
President and Chief Executive Officer
-57-
CERTIFICATION
I, Ira J. Lamel, Chief Financial Officer of The Hain Celestial Group,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of The Hain
Celestial Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report.
Date: September 30, 2002
/s/ Ira J. Lamel
-----------------------------------
Ira J. Lamel
Executive Vice President and
Chief Financial Officer
-58-