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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For The Fiscal Year Ended June 30, 2004
|_| Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934 for the transition period from ______ to _______.
Commission File No. 0-22818
THE HAIN CELESTIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3240619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
58 South Service Road 11747
Melville, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 730-2200
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to Form
10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant based upon the closing price of the
registrant's stock, as quoted on the Nasdaq National Market on December 31,
2003, the last business day of the registrant's most recently completed second
fiscal quarter, was $668,741,931.
As of September 1, 2004, there were 36,395,242 shares outstanding of the
registrant's Common Stock, par value $.01 per share.
Documents Incorporated by Reference
Part of the Form 10-K
Document into which Incorporated
The Hain Celestial Group, Inc. Definitive Proxy Part III
Statement for the Annual Meeting of Stockholders
to be Held December 2, 2004
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Table of Contents
Page
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PART I
Item 1. Business......................................................1
General.......................................................1
Products......................................................2
New Product Initiatives Through Research and Development......4
Sales and Distribution........................................4
Marketing.....................................................4
Manufacturing Facilities......................................5
Suppliers of Ingredients and Packaging........................5
Co-Packed Product Base........................................5
Trademarks....................................................6
Competition...................................................6
Government Regulation.........................................7
Independent Certification.....................................7
Available Information.........................................8
Item 2. Properties....................................................8
Item 3. Legal Proceedings.............................................9
Item 4. Submission of Matters to a Vote of Security Holders...........9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.........................................9
Item 6. Selected Financial Data......................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...25
Item 8. Financial Statements and Supplementary Data..................25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................50
Item 9A. Controls And Procedures......................................50
PART III
Item 10. Directors and Executive Officers of the Registrant...........50
Item 11. Executive Compensation.......................................50
Item 12. Security Ownership and Certain Beneficial Owners and
Management.................................................50
Item 13. Certain Relationships and Related Transactions...............50
Item 14. Principal Accountant Fees and Services.......................50
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K...................................................50
Signatures..................................................................54
PART I
THE HAIN CELESTIAL GROUP, INC.
Item 1. Business.
Unless otherwise indicated, references in this Annual Report to 2004, 2003, 2002
or "fiscal" 2004, 2003, 2002 or other years refer to our fiscal year ended June
30 of that year and references to 2005 or "fiscal" 2005 refer to our fiscal year
ending June 30, 2005.
General
The Hain Celestial Group, Inc., a Delaware corporation, and its subsidiaries
(collectively, the "Company", and herein referred to as "we", "us", and "our")
manufacture, market, distribute and sell natural, organic, specialty and snack
food products and natural health and body care products under brand names which
are sold as "better-for-you" products. We are a leader in many of the top
natural food categories, with such well-known food brands as Celestial
Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R), Rice Dream(R),
Soy Dream(R), Imagine(R), Walnut Acres Certified Organic(R), Ethnic Gourmet(R),
Rosetto(R), Little Bear Organic Foods(R), Bearitos(R), Arrowhead Mills(R),
Health Valley(R), Breadshop's(R), Casbah(R), Garden of Eatin'(R), Terra
Chips(R), Harry's Premium Snacks(R), Boston's(R), Lima(R), Biomarche(R), Grains
Noirs(R), Natumi(R), Milkfree, Yves Veggie Cuisine(R), DeBoles(R), Earth's
Best(R), and Nile Spice(R). The Company's principal specialty product lines
include Hollywood(R) cooking oils, Estee(R) sugar-free products, Kineret(R)
kosher foods, Boston Better Snacks(R), and Alba Foods(R). Our natural health and
body care product line is marketed under the JASON(R), Orjene(R), Shaman Earthly
Organics(TM), and Heather's(R) brands.
Our products are sold primarily to specialty and natural food distributors and
are marketed nationally to supermarkets, natural food stores, and other retail
classes of trade including mass-market stores, drug stores, food service
channels and club stores. During 2004, 2003 and 2002, approximately 39%, 42% and
54%, respectively, of our revenues were derived from products manufactured
within our own facilities. The remaining 61%, 58% and 46% for 2004, 2003 and
2002, respectively, of our revenues were derived from products which are
produced by independent food manufacturers ("co-packers") using proprietary
specifications controlled by us.
Since our formation, we have completed a number of acquisitions of companies and
brands. In the last three fiscal years, we have acquired the following companies
and brands:
o On June 3, 2004, we acquired Jason Natural Products, Inc., a
California-based manufacturer and marketer of natural health and body care
products.
o On May 27, 2004, we acquired the Rosetto and Ethnic Gourmet businesses of
H.J. Heinz Company, L.P. ("Heinz"), which produce and market frozen pasta
and natural ethnic frozen meals, respectively. Heinz owned approximately
16.7% of our common stock at the time of the transaction.
o On February 25, 2004, we acquired Natumi AG, a German producer and marketer
of soy milk and other soy based products.
o On June 17, 2003, we acquired Acirca, Inc., a New York based manufacturer,
distributor and marketer of natural and organic juices, pasta sauces, soups
and salsas under the Walnut Acres Certified Organic(R) brand.
o On May 14, 2003, we acquired Grains Noirs, N.V., a Belgian producer and
marketer of fresh prepared organic appetizers, salads, sandwiches and other
full-plated dishes.
o On December 2, 2002, we acquired the assets and business of Imagine Foods,
Inc. ("Imagine") in the United States and the United Kingdom. Imagine is a
non-dairy beverage business specializing in aseptic and refrigerated rice
and soy milks, organic aseptic soups and broths, and organic non-dairy
frozen desserts under the Rice Dream(R), Soy Dream(R) and Imagine(R)
brands.
o 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.
Our brand names are well recognized in the various market categories they serve.
We have acquired numerous brands since our formation (in addition to those
mentioned above) and we will seek future growth through internal expansion as
well as the acquisition of complementary brands.
Our overall mission is to be a leading marketer and seller of natural, organic,
beverage, snack and speciality food products and natural health and body care
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 specialty 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, 2004, we employed a total of 1,463 full-time employees. Of these
employees, 173 were in sales and 768 in production, with the remaining 522
employees filling management, accounting, marketing, operations and clerical
positions.
Products
We continuously evaluate our existing products for taste, nutritional value and
cost and make improvements where possible. We will discontinue products or stock
keeping units when sales of those items do not warrant further production.
Natural and Organic Food Products
Our natural and organic food product lines consist of approximately 1,500
branded items and include non-dairy drinks (soy and rice milk), popcorn cakes,
cookies, crackers, flour and baking mixes, hot and cold cereals, pasta, baby
food, condiments, cooking oils, granolas, granola bars, cereal bars, canned and
instant soups, chilis, packaged grain, nut butters and nutritional oils, juices,
frozen desserts and ethnic meals, as well as other food products. Our Hain(R),
Westbrae(R), Westsoy(R), Imagine(R), Rice Dream(R), Soy Dream(R), Walnut Acres
Certified Organic(R), Ethnic Gourmet(R), Little Bear(R), Bearitos(R), Arrowhead
Mills(R), Terra Chips(R), DeBoles(R), Garden of Eatin'(R), Health Valley(R),
Casbah(R), Breadshop's(R), Nile Spice(R), Earth's Best(R), Harry's Premium
Snacks(R), Lima(R), Biomarche(R) and Grains Noirs(R) businesses market and
distribute this 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. Non-dairy drinks accounted for
approximately 15% of total net sales in 2004, 16% in 2003 and 12% in 2002.
Tea and Beverage Products
Our tea products are 100% natural and are made from high-quality, natural
flavors and ingredients and are generally offered in 20 and 40 count packages.
We are the leading specialty tea in North America and are sold in grocery,
natural foods and other retail stores. We develop flavorful, unique blends with
attractive, colorful and thought-provoking packaging. Our products include herb
teas such as Sleepytime(R), Lemon Zinger(R), Peppermint, Chamomile, Mandarin
Orange Spice(R), Cinnamon Apple Spice, Red Zinger(R), Raspberry Zinger(R),
Tension Tamer(R), Country Peach Passion(R) and Wild Berry Zinger(R), a line of
green teas, a line of wellness teas, a line of organic teas,
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and a line of specialty black teas and chais. We also offer Cool Brew iced teas,
natural ciders, a line of Teahouse Lattes and Chais and a new line of
Zingerades(R) which include herb tea, lemonade and juice.
Our beverage and tea products include over 80 flavors of tea made from 100%
natural ingredients. The types of teas offered include herb, red (rooibos),
honeybush, white, green, black, mate and chai. Our teas are offered both with
and without caffeine. We also offer organic and iced teas. Recent beverage
introductions include Natural Ciders and Teahouse Lattes and Chais, available in
several flavors. Tea beverages accounted for approximately 17% of total net
sales in 2004 and 20% in 2003 and 21% in 2002.
Snack Food Products
We manufacture, market and sell a variety of potato and vegetable chips, organic
tortilla style chips, pretzels, popcorn and potato chips under the Terra
Chips(R), Garden of Eatin'(R), Little Bear(R), Boston's Popcorn(R) and Harry's
Premium Snacks(R) names. Terra Chips(R) natural food products consist of
approximately 40 items comprised of varieties of potato chips, potato sticks
(known as Frites(R)), sweet potato chips and other vegetable chips. Garden of
Eatin'(R) natural food products substantially consist of approximately 30
organic tortilla chip products. Boston Popcorn(R) and Harry's(R) products
consist of approximately 25 varieties of popcorn, potato chips, tortilla chips
and other snack food items.
Meat Alternative Products
We manufacture, distribute and market a full line of soy protein meat
alternative products under the Yves brand name including such well known
products as The Good Dog(R), The Good Lunch(R) and The Good Slice(R), among
others. Meat alternative products provide consumers with an alternative product
containing the health benefits of soy without the health concerns associated
with traditional meat products. Yves meat alternative products consist of
approximately 60 items including meat alternative choices among veggie burgers,
veggie wieners, veggie slices, veggie entrees and veggie ground round.
Frozen Food Products
Our Rosetto(R), Ethnic Gourmet(R), Kineret(R), and Imagine(R) Frozen businesses
manufacture, market and distribute all-natural, organic, and specialty frozen
food products. Rosetto(R) is the country's #1 brand of frozen pasta, with 8 of
the top 10 SKU's in the category. Ethnic Gourmet(R) is an all-natural line of
restaurant quality frozen entrees, bowls, and wraps made from authentic ethnic
recipes. Kineret(R) is an all-Kosher line of frozen meals, side dishes and other
items. Our Imagine(R) frozen businesses, the Soy Dream(R) and Rice Dream(R)
lines of frozen non-dairy confections and novelties, offer more than 40
different products for consumers that want all-natural and organic soy and rice
based alternatives to ice cream.
Natural Health and Body Care Products
We manufacture and market a full line of personal care products including skin
care, hair care, body care, oral care, and deodorants under the JASON(R),
Orjene(R) and Shaman Earthly Organics(TM) brands. The majority of our products
are under the JASON(R) brand, which consists of approximately 250 items across
all five of the product categories that we participate in. We also manufacture
and market a brand of natural cleaning products called Heather's(R), which
consists of 7 items.
Medically-Directed and Weight Management Products
Our Estee(R) and Featherweight(R) businesses market and distribute a full line
of sugar-free, fructose sweetened and low sodium products targeted towards
diabetic and health conscious consumers and persons on medically-restricted
diets.
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Specialty Cooking Oil Products
Our Hollywood(R) business markets a line of specialty cooking oils, including
safflower, canola, and peanut oils, that are enhanced with Vitamin E to maintain
freshness and quality. The Hollywood(R) product line also includes carrot juice,
mayonnaise and margarine. Hollywood(R) products are primarily sold directly to
supermarkets and other mass market merchandisers.
Kosher Food Products
Our Kineret(R) business markets and distributes a line of frozen and dry kosher
food products. Kosher foods are products that are prepared in a manner
consistent with Kosher dietary laws. Kineret(R) offers a line of kosher frozen
food products under the Kineret(R) and Kosherific(R) labels. The Kineret(R)
products include fish products, potato pancakes, blintzes, challah bread, pastry
dough, dry grocery products for Passover and assorted other food products.
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 $2.0 million in Company-sponsored research and
development activities in 2004, $1.7 million in 2003 and $1.0 million in 2002.
Sales and Distribution
Our products are sold in all 50 states and in approximately 50 countries.
Certain of our product lines have seasonal fluctuations (e.g., hot tea products,
baking and cereal products and soup sales are stronger in cold months while
sales of snack food products are stronger in the warmer months).
A majority of the products marketed by us are sold through independent food
distributors. Over half of these sales orders are received from third-party food
brokers. We utilize a direct sales force for sales into natural food stores that
has allowed us to reduce our reliance on food brokers. Food brokers act as
agents for us within designated territories, usually on a non-exclusive basis,
and receive commissions. Food distributors purchase products from us for resale
to retailers. Because food distributors take title to the products upon
purchase, product pricing decisions on sales of our products by the distributors
are generally made in their sole discretion, although we may participate in
product pricing during promotional periods.
Our customer base consists principally of mass-market merchandisers, natural
food distributors, supermarkets, drug store chains, club stores and grocery
wholesalers. Recently, growth of natural and organic foods has shifted from the
natural food channel to the grocery channels as mainstream grocery distributors
and retailers provide these products to meet consumer demand and awareness. Two
of the distributors we sell to, United Natural Foods and Tree of Life, accounted
for approximately 20% and 12%, respectively, of net sales for 2004,
approximately 18% and 15%, respectively, in 2003 and approximately 17% and 15%,
respectively, in 2002. Net sales to export customers account for less than 5% of
total net sales for each of the three years ended June 30, 2004.
Our international subsidiaries in Canada and Europe sell to all channels of
distribution in the countries they serve. International sales represented
approximately 20.3% of total net sales in 2004, 17.3% in 2003 and 14.3% in 2002.
Marketing
We use a mix of trade and consumer promotions as well as media advertising to
market our products. We use trade advertising and promotion, including placement
fees, cooperative advertising and feature advertising in distribution catalogs.
We also utilize advertising and sales promotion expenditures via national and
regional consumer promo-
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tion through television and magazine advertising, couponing and other trial use
programs. In each of 2002, 2003 and 2004, we have increased our investment in
consumer spending to enhance brand equity while closely monitoring our trade
spending. These consumer spending categories include, but are not limited to,
consumer advertising using television, radio and print, coupons, direct mailing
programs and other forms of promotions. There is no guarantee that these
promotional investments in consumer spending will be successful.
Manufacturing Facilities
We currently manage and operate the following manufacturing facilities located
throughout the United States: Celestial Seasonings(R), in Boulder, Colorado,
which produces specialty teas; Terra Chips(R), in Moonachie, New Jersey, which
produces vegetable chips; Arrowhead Mills(R), in Hereford, Texas, which produces
hot and cold cereals, baked goods and meal cups; DeBoles(R), in Shreveport,
Louisiana, which produces organic pasta; Ethnic Gourmet(R), in Framingham,
Massachusetts, which produces frozen meals; Rosetto(R), in West Chester,
Pennsylvania, which produces frozen pasta; and JASON(R), in Culver City,
California, which produces health and body care products. We formerly operated a
manufacturing facility in Irwindale, California, producing hot and cold cereals,
baked goods, granola, granola bars, dry soups and other products under the
Health Valley(R), Breadshop(R) and Casbah(R) labels. During fiscal 2003, we sold
the manufacturing assets of our Irwindale facility to a co-pack manufacturer who
continues to manufacture products for us at that facility. The co-pack
manufacturer has entered into a lease directly with the landlord of the
facility.
Outside the United States, we have the following manufacturing facilities: Yves
Veggie Cuisine(R) in Vancouver, British Columbia, which produces soy-based meat
alternative products; Hain Celestial Belgium, with its Lima, N.V. facility in
Maldegem, Belgium, which manufactures natural and organic food products, its
Biomarche(R) facility in Sombreffe, Belgium, which processes fresh organic
produce and prepared salads, its Grains Noirs(R) facility in Brussels, Belgium,
which prepares fresh organic appetizers, salads, sandwiches and other
full-plated dishes, and its Natumi facility in Eitorf, Germany, which produces
soy milk and other soy based products.
We own the manufacturing facilities in Moonachie, New Jersey; Boulder, Colorado;
Hereford, Texas; Shreveport, Louisiana; West Chester, Pennsylvania and
Vancouver, British Columbia. We also own the Lima and Biomarche(R) facilities in
Belgium. During 2004, 2003 and 2002, approximately 39%, 42% and 54%,
respectively, of our revenue was derived from products manufactured at our
currently owned manufacturing facilities.
Suppliers of Ingredients and Packaging
Our natural and organic ingredients and our packaging materials and supplies are
obtained from various sources and suppliers located principally in the United
States and locally in Canada and Europe for our businesses in these areas.
Certain of our packaging and products are sourced from the Far East.
Our tea ingredients are purchased from numerous foreign and domestic
manufacturers, importers and growers, with the majority of those purchases
occurring outside of the United States.
We maintain long-term relationships with most of our suppliers. Purchase
arrangements with ingredient suppliers are generally made annually and in the
local currency of the country in which our businesses operate. Purchases are
made through purchase orders or contracts, and price, delivery terms and product
specifications vary.
Our organic and botanical purchasers visit major suppliers around the world
annually to procure ingredients and to assure quality by observing production
methods and providing product specifications. We perform laboratory analyses on
incoming ingredient shipments for the purpose of assuring that they meet both
our own quality standards and those of the U.S. Food and Drug Administration
(FDA) and the California Organic Foods Act of 1990.
Co-Packed Product Base
During 2004, 2003 and 2002, approximately 61%, 58% and 46%, respectively, of our
revenue was derived from products manufactured at independent co-packers.
Currently, independent food manufacturers, who are referred to
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in our industry as co-packers, manufacture many of our products, including our
Health Valley(R), Breadshop's(R), Casbah(R), Alba Foods(R), Estee(R), Earth's
Best(R), Garden of Eatin'(R), Hain Pure Foods(R), Hollywood(R), Kineret(R),
Little Bear Organic Foods(R), Westbrae(R), Westsoy(R), Rice Dream(R), Soy
Dream(R), Imagine(R), Walnut Acres Certified Organic(R), Lima(R) and some of our
Terra Chips(R) and Ethnic Gourmet(R) product lines.
In the U.S., we presently obtain:
o all of our requirements for non-dairy beverages from five co-packers, all
of which are under contract or other arrangements;
o all of our U.S. requirements for rice cakes from one co-packer;
o all of our Health Valley(R) baked goods and cereal products from one
co-packer, which is under contract;
o all of our cooking oils from one co-packer;
o principally all of our tortilla chips from three co-packers, one of which
is under contract;
o a portion of our requirements for Terra's Yukon Gold(R) line from one
co-packer, which is under contract;
o the requirements for our canned soups from two co-packers, which are under
contract;
o all of our Earth's Best(R) baby food products from two co-packers, which
are under contract; and
o a portion of our Ethnic Gourmet(R) products from one co-packer, which is
under contract.
Trademarks
We believe that brand awareness is a significant component in a consumer's
decision to purchase one product over another in the highly competitive food and
beverage industry. Our trademarks and brand names for the product lines referred
to herein are registered in the United States and a number of foreign countries
and we intend to keep these filings current and seek protection for new
trademarks to the extent consistent with business needs. We also copyright
certain of our artwork and package designs. We own the trademarks for our
principal products, including Arrowhead Mills(R), Bearitos(R), Breadshop's(R),
Casbah(R), Celestial Seasonings(R), DeBoles(R), Earth's Best(R), Estee(R),
Ethnic Gourmet(R), Garden of Eatin'(R), Hain Pure Foods(R), Health Valley(R),
Imagine(R), JASON(R), Orjene(R), Shaman Earthly Organics(TM), Heather's(R),
Kineret(R), Little Bear Organic Foods(R), Nile Spice(R), Rice Dream(R),
Rosetto(R), Soy Dream(R), Terra(R), Walnut Acres Certified Organic(R),
Westbrae(R), Westsoy(R), Lima(R), Biomarche(R) and Yves Veggie Cuisine(R).
Celestial Seasonings(R) has trademarks for most of its best-selling brands,
including Sleepytime(R), Lemon Zinger(R), Mandarin Orange Spice(R), Red
Zinger(R), Wild Berry Zinger(R), Tension Tamer(R), Country Peach Passion(R) and
Raspberry Zinger(R).
Competition
We operate in highly competitive geographic and product markets, and some of
these markets are dominated by competitors with greater resources. In addition,
we compete for limited retailer shelf space for our products. Larger competitors
include mainstream food companies such as General Mills, Nestle S.A., Kraft
Foods, Groupe Danone, Kellogg Company, Unilever PLC, and Sara Lee Corporation.
Retailers also market competitive products under their own private labels.
The beverage markets for both tea and soy beverages are large and highly
competitive. Competitive factors in the tea industry include product quality and
taste, brand awareness among consumers, variety of specialty tea flavors,
interesting or unique product names, product packaging and package design,
supermarket and grocery store shelf space, alternative distribution channels,
reputation, price, advertising and promotion. Celestial Seasonings currently
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competes in the specialty tea market segment which consists of herb tea, green
tea, wellness tea and black tea. Celestial Seasonings specialty tea products,
like other specialty tea products, are priced higher than most commodity black
tea products.
The principal competitors of Celestial Seasonings(R) on a national basis in the
specialty teas market segment are Thomas J. Lipton Company (a division of
Unilever PLC), Twinings (a division of Associated British Grocers) and R.C.
Bigelow, Inc. In addition, in April 2004, Tazo Tea Company (a subsidiary of
Starbucks Corporation) and Kraft Foods Global, Inc. announced a licensing
agreement whereby Tazo products might gain additional access to grocery channels
through placement by Kraft. Additional competitors include a number of regional
specialty tea companies.
The soy beverage market, including both aseptic and refrigerated products, has
shown sustained growth over the past several years. A statement by the FDA
endorsing the heart healthy benefits of soy in October 1999 spurred the growth
in both the aseptic and refrigerated segments. Aseptic soy milk is the more
mature product category of the two and in recent years, additional larger
competitors entered the category but have since exited the category after
unsuccessful regional launches. Westsoy(R) has taken advantage of the shelf
space which became available and continues to be the number one and largest
growing brand of aseptic soymilk in the grocery and natural channels.
The refrigerated soy beverage market is primarily driven by one brand, Silk(R),
which is owned by Dean Foods and holds a significant share of refrigerated
soymilk space through its strong national distribution system. In 2003, we
switched our primary focus from our refrigerated Westsoy(R) product and
redirected it to focus our efforts on our Soy Dream(R) and Rice Dream(R)
refrigerated products, specifically targeting accounts that agree to partner
with us in strong soy milk markets that distribute both aseptic and refrigerated
products.
Government Regulation
Along with our manufacturers, brokers, distributors and co-packers, we are
subject to extensive regulation by federal, state and local authorities. The
federal agencies governing our business include the Federal Trade Commission
(FTC), FDA, United States Department of Agriculture (USDA), and Occupational
Safety and Health Administration (OSHA). These agencies regulate, among other
things, the production, sale, safety, advertising, labeling of and ingredients
used in our products. Under various statutes, these agencies prescribe the
requirements and establish the standards for quality, purity and labeling. Among
other requirements, the USDA, in certain circumstances, must 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.
Independent Certification
We rely on independent certification, such as certifications of our products as
"organic" or "kosher," to differentiate our products in natural and specialty
food categories. The loss of any independent certifications could adversely
affect our market position as a natural and specialty food company, which could
harm our business.
We must comply with the requirements of independent organizations or
certification authorities in order to label our products as certified. We
utilize organizations such as Quality Assurance International (QAI) and Oregon
Tilth to certify our products as organic under the guidelines established by the
USDA. Similarly, we utilize appropriate kosher supervision organizations, such
as The Union of Orthodox Jewish Congregations, The Organized Kashruth
Laboratories, "KOF-K" Kosher Supervision, Kosher Overseers Associated of America
and Upper Midwest Kashruth.
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Available Information
The following information can be found on our website at
http://www.hain-celestial.com:
o our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission (SEC);
o our policies related to corporate governance, including our Code of
Business Conduct and Ethics applying to our directors, officers and
employees (including our principal executive officer, and principal
financial and accounting officer) that we have adopted to meet the
requirements set forth in the rules and regulations of the SEC, and
o the charters of the Audit, Compensation and Corporate Governance &
Nominating Committees of our Board of Directors.
We intend to satisfy the applicable disclosure requirements regarding amendments
to, or waivers from, provisions of our Code of Ethics by posting such
information on our website.
Item 2. Properties.
Our corporate headquarters are located in approximately 35,000 square feet of
leased office space located at 58 South Service Road, Melville, New York 11747,
to which we relocated in January 2002. The lease on this facility expires in
2012 with a current annual rental of approximately $1.2 million.
We own a manufacturing and office facility in Boulder, Colorado, built in 1990
on 42 acres of Company-owned land. The facility has approximately 167,000 square
feet, of which 50,000 square feet is office space and 117,000 square feet is
manufacturing space.
We own a 75,000 square foot manufacturing facility in Moonachie, New Jersey to
manufacture our Terra(R) vegetable chip products.
We own and operate manufacturing and distribution centers in Hereford, Texas
(134,000 square feet) and Shreveport, Louisiana (36,000 square feet) for certain
of our natural food product lines.
We lease 81,000 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 2012, and provides for a current annual rental of approximately
$500,000.
We own and operate a 105,000 square foot manufacturing facility in West Chester,
Pennsylvania that manufactures our Rosetto(R) frozen pasta and co-packs similar
products for Heinz and others.
We lease a 28,864 square foot manufacturing facility in Framingham,
Massachusetts which is used to manufacture Ethnic Gourmet(R) frozen meals. The
lease on this facility expires in 2006 with a current annual rental of
approximately $0.3 million.
We lease a 24,275 square foot manufacturing facility in Culver City, California
through 2011 that produces our JASON(R) health and body care products. We also
lease two nearby locations, a 39,000 square foot warehouse in Inglewood,
California used for storage and shipment of our health and body care products
through 2007 and a 30,000 square foot warehouse in Culver City, California used
for storage of raw materials for our health and body care products through 2005.
The leases on our properties in Culver City require aggregate annual rentals of
approximately $770,000.
-8-
We lease 375,000 square feet of warehouse space in a building located in
Ontario, California. The lease provides for a minimum annual rental of
approximately $1.3 million and provides renewal options. The lease expires in
2007. This facility serves as one of our West Coast distribution centers for
principally all of our product lines.
We operate a 7,000 square foot warehouse and distribution center located in East
Hills, New York which is utilized to distribute frozen kosher food products. The
lease on this property provides for annual rentals of approximately $55,000 and
expires in 2005.
Outside the United States, we own and operate a 53,000 square foot manufacturing
and office facility in Vancouver, British Columbia that produces soy-based meat
substitute products; a 135,000 square foot manufacturing, distribution and
office facility in Maldegem, Belgium, which produces natural and organic food
products; and a 30,000 square foot processing and distribution center in
Sombreffe, Belgium, which processes fresh organic produce. In addition, we lease
a 19,000 square foot facility located in Brussels, Belgium, which produces fresh
prepared appetizers and sandwiches. The lease on this property provides for
annual rentals of approximately $86,000 and expires in 2007. We also lease a
46,925 square foot manufacturing and office facility in Eitorf, Germany, which
produces soy milk and other soy based products. The lease on this property
provides for annual rentals of approximately $201,000 and expires in 2013.
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, 2002 through September 1, 2004.
Common Stock
------------------------------------------------------------------
Fiscal 2004 Fiscal 2003
--------------------------------- -------------------------------
High Low High Low
-------------- --------------- --------------- -------------
First Quarter $20.29 $15.85 $17.88 $12.13
Second Quarter 24.02 18.10 16.42 12.65
Third Quarter 24.09 20.90 15.82 11.84
Fourth Quarter 22.14 17.13 17.61 15.14
July 1 - September 1, 2004 18.00 15.24
As of September 1, 2004, there were 514 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
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payment of all dividends will be at the discretion of our Board of Directors and
will depend on, among other things, future earnings, operations, capital
requirements, contractual restrictions, including restrictions within our Credit
Facility (as defined below), our general financial condition and general
business conditions.
The table below sets forth information with respect to our equity compensation
plans as of June 30, 2004:
Number of Securities
Number of Securities Remaining Available for
to be Issued Upon Weighted-Average Future Issuance Under Equity
Exercise of Exercise Price of Compensation Plans
Outstanding Options, Outstanding Options, (excluding securities
Plan Category Warrants and Rights Warrants and Rights reflected in column (a))
- ------------------------------------ ----------------------- ---------------------- ------------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 6,769,437 $18.67 2,018,882
Equity compensation plans not
approved by security holders N/A N/A N/A
Total 6,769,437 $18.67 2,018,882
Issuer Purchases of Equity Securities
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number as Part of Yet Be Purchased
of Shares Average Price Publicly Announced Under the Plans
Period Purchased Paid per Share Plans or Programs(a) or Programs
- ------------------------- ------------------- -------------------- --------------------- ---------------------
July 1-31, 2003
August 1-31, 2003
September 1-30, 2003 15,897 $ 17.53 15,897 684,401
October 1-31, 2003
November 1-30, 2003
December 1-31, 2003
January 1-31, 2004
February 1-29, 2004
March 1-31, 2004
April 1-30, 2004
May 1-31, 2004 10,000 17.68 10,000 674,401
June 1-30, 2004 39,040 17.24 39,040 635,361
Total 64,937 $17.39 64,937 635,361
(a) The Company's plan to repurchase up to one million shares of its common
stock was first announced publicly on a conference call on August 29, 2002.
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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
---------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------- ------------ -------------
Operating results:
Net sales $544,058 $466,459 $395,954 $345,661 $332,436
Income (loss) before extraordinary
item and cumulative change in
accounting
principle (a) 27,008 27,492 2,971 23,589 (11,403)
Extraordinary item -- -- -- -- (1,940)
Cumulative change in accounting -- -- -- -- (3,754)
principle
Net income (loss) (a) $27,008 $27,492 $2,971 $23,589 $(17,097)
Basic earnings per common share:
Income (loss) before extraordinary
item and cumulative change in
accounting principle $ .77 $ .81 $ .09 $ .71 $(.41)
Extraordinary item -- -- -- -- (.07)
Cumulative change in accounting
principle -- -- -- -- (.13)
Net income (loss) $ .77 $ .81 $ .09 $ .71 $ (.61)
Diluted earnings per common share (b):
Income (loss) before extraordinary
item and cumulative change in
accounting principle $ .74 $ .79 $ .09 $ .68 $ (.41)
Extraordinary item -- -- -- -- (.07)
Cumulative change in accounting
principle -- -- -- -- (.13)
Net income (loss) $ .74 $ .79 $ .09 $ .68 $ (.61)
Financial Position:
Working Capital $129,949 $ 83,324 $ 70,942 $ 92,312 $89,750
Total Assets 684,231 581,548 481,183 461,693 416,017
Long-term Debt 104,294 59,455 10,293 10,718 5,622
Stockholders' Equity 496,765 440,797 403,848 396,653 351,724
(a) Amounts for 2001 and 2000 include amortization of goodwill and
indefinite-life intangible assets, net of tax, amounting to $4 million, or $0.12
per share, and $3.8 million, or $0.13 per share, respectively. In subsequent
years, no amortization expense has been incurred in accordance with SFAS No.
142, which was adopted by the Company effective at the beginning of 2002.
(b) As a result of the net loss for the year ended June 30, 2000, diluted
earnings per share is the same as basic earnings per share since the effects of
stock options and warrants are not included as the results would be
antidilutive.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
We manufacture, market, distribute and sell natural, organic, specialty and
snack food products and natural health and body care products under brand names
which are sold as "better-for-you" products. Our products are sold primarily to
specialty and natural food distributors and are marketed nationally to
supermarkets, natural food stores, and other retail classes of trade including
mass-market stores, drug stores, food service channels and club stores.
We made the following acquisitions during the three years ended June 30, 2004:
o On June 3, 2004, we acquired Jason Natural Products, Inc., a
California-based manufacturer and marketer of natural health and body care
products.
o On May 27, 2004, we acquired the Rosetto(R) and Ethnic Gourmet(R)
businesses of Heinz, which produce and market frozen pasta and natural
ethnic frozen meals, respectively.
o On February 25, 2004, we acquired Natumi AG, a German producer and marketer
of soy milk and other soy based products.
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o On June 17, 2003, we acquired Acirca, Inc., a New York based manufacturer,
distributor and marketer of natural and organic juices, pasta sauces, soups
and salsas under the Walnut Acres Certified Organic(R) brand.
o On May 14, 2003, we acquired Grains Noirs, N.V., a Belgian producer and
marketer of fresh prepared organic appetizers, salads, sandwiches and other
full-plated dishes.
o On December 2, 2002, we acquired the assets and business of Imagine Foods,
Inc. ("Imagine") in the United States and the United Kingdom. Imagine is a
non-dairy beverage business specializing in aseptic and refrigerated rice
and soy milks, organic aseptic soups and broths, and organic non-dairy
frozen desserts under the Rice Dream(R), Soy Dream(R) and Imagine(R)
brands.
o 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 our results of operations from their
respective dates of acquisition.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The accounting principles we use
require us to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and amounts of
income and expenses during the reporting periods presented. We believe in the
quality and reasonableness of our critical accounting policies; however, it is
likely that materially different amounts would be reported under different
conditions or using assumptions different from those that we have consistently
applied. We believe our critical accounting policies are as follows, including
our methodology for estimates made and assumptions used:
Valuation of Accounts and Chargebacks Receivable
We perform ongoing credit evaluations on existing and new customers daily. We
apply reserves for delinquent or uncollectible trade receivables based on a
specific identification methodology and also apply a general reserve based on
the experience we have with our trade receivables aging categories. Credit
losses have been within our expectations over the last few years. While two of
our customers represent approximately 28% of our trade receivable balance at
June 30, 2004, we believe there is no credit exposure at this time.
Based on cash collection history and other statistical analysis, we estimate the
amount of unauthorized deductions that our customers have taken to be repaid and
collectible in the near future in the form of a chargeback receivable. While our
estimate of this receivable balance could be different had we used different
assumptions and judgments, historically our cash collections of this type of
receivable have been within our expectations and no significant write-offs have
occurred; however, during the fourth quarter of 2003, we reduced our chargebacks
receivable by $1.5 million. Our chargebacks receivable balance approximated $6
million at June 30, 2004 and June 30, 2003.
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.
-12-
Property, Plant and Equipment
Our property, plant and equipment is carried at cost and depreciated or
amortized on a straight-line basis over the lesser of the estimated useful lives
or lease life, whichever is shorter. We believe the asset lives assigned to our
property, plant and equipment are within ranges/guidelines generally used in
food manufacturing and distribution businesses. Our manufacturing plants and
distribution centers, and their related assets, are periodically reviewed to
determine if any impairment exists by analyzing underlying cash flow
projections. At this time, we believe no impairment exists on the carrying value
of such assets. Ordinary repairs and maintenance are expensed as incurred.
Intangibles
Goodwill is no longer amortized and the value of an identifiable intangible
asset is amortized over its useful life unless the asset is determined to have
an indefinite useful life. The carrying values of goodwill and other intangible
assets with indefinite useful lives are tested annually for impairment.
Revenue Recognition and Sales Incentives
Sales are recognized upon the shipment of finished goods to customers and are
reported net of sales incentives. Allowances for cash discounts and returns are
recorded in the period in which the related sale is recognized. Shipping and
handling costs are included as a component of cost of sales.
Results of Operations
Fiscal 2004 Compared to Fiscal 2003
Net sales in 2004 were $544.1 million, an increase of $77.6 million or 17% over
net sales of $466.5 million in 2003. The increase in sales came from volume
increases principally in our snacks brands, which were up 14.9%, our Earth's
Best baby food brand, which was up 23.1%, our Celestial Seasonings tea brand,
which was up 3.4%, and from the introduction of our new Carb Fit brand of
low-carbohydrate products, as well as sales of businesses acquired in 2004 and a
full year of our operation of businesses acquired in 2003. We believe that sales
growth during the current year period was negatively impacted by our inability
to fill orders for soup due to non-recurring manufacturing issues encountered at
our independent soup co-packer, thereby causing out-of-stock positions on soup
and, to a lesser extent, by the strike during our second and third quarters of
fiscal 2004 of grocery workers in Southern California where we have a very
strong market presence.
Gross profit in 2004 was 29.5% of net sales as compared to 30.3% of net sales in
2003. The decline in gross profit percentage was principally the result of the
aggressive spending in the trade and with consumers, including spending on the
launch of Carb Fit, as well as increases in transportation costs resulting from
higher fuel costs, the cost effects of new regulations on the U.S. trucking
industry, and an increase in the percentage of our shipments that were delivered
by us. We also saw increases in the cost of ingredients.
Selling, general and administrative expenses increased by $18.7 million to
$114.4 million in 2004 from $95.7 million in 2003. Such expenses as a percentage
of net sales amounted to 21.0% in 2004 as compared with 20.5% in 2003. Selling,
general and administrative expenses increased in overall dollars and as a
percentage of sales, primarily as a result of $3.5 million of additional costs
associated with businesses acquired in 2004 as well as the full year of
operations of businesses acquired in 2003, $4.1 million of increased consumer
marketing to support our increased sales, including our new Carb Fit line of
products, $0.5 million of added costs relating to the implementation of required
provisions of the Sarbanes Oxley Act, and increased costs relating to the
management changes that have been made during the second half of our fiscal
year.
There were no restructuring and other non-recurring charges in 2004. During
2003, we recorded approximately $0.4 million of additional restructuring and
other non-recurring charges related to the sale of our Health Valley facility
for severance liabilities and related employee costs and trade items that could
not be accrued in 2002. In addition, at
-13-
the time of lease termination in 2003, we were able to reduce our potential
lease exit costs by $0.9 million, which was recorded as a credit to
restructuring and other non-recurring charges in 2003.
Operating income was $45.9 million in 2004 compared to $46.2 million in 2003.
Operating income as a percentage of net sales was 8.4% in 2004, compared with
9.9% in 2003. These changes are a result of higher sales offset by the
aforementioned decrease in gross profit and increase in selling, general and
administrative expenses.
Interest and other expenses, net, amounted to $2.5 million in 2004 compared to
$2.0 million in 2003. We incurred higher interest expense in 2004 resulting from
borrowings for acquisitions which were outstanding for the full year in 2004 as
compared to only part of the year in 2003.
Income before income taxes in 2004 amounted to $43.4 million compared to $44.2
million in 2003. This decrease is attributable to the aforementioned decrease in
operating income and increase in interest and other expenses, net.
Income taxes in 2004 amounted to $16.4 million compared to $16.7 million in
2003. Our effective tax rate was 37.8% in 2004 and 2003.
Net income in 2004 amounted to $27.0 million compared to $27.5 million in 2003.
The decrease of $0.5 million in net income was primarily attributable to the
aforementioned decrease in income before income taxes.
Fiscal 2003 Compared to Fiscal 2002
Net sales in 2003 were $466.5 million, an increase of 17.8% over net sales of
$396.0 million in 2002. The increase in sales came principally from the net
sales of businesses acquired in 2003 as well as from the full year of our
operation of businesses acquired in 2002. Net sales in 2003 were favorably
impacted by the normal winter weather across the United States after the
unusually warm winter of the prior year, which provided higher unit sales
volumes for tea, soups and hot cereals while the net sales of our Terra Chips(R)
products experienced declines during the year caused principally by weaker
Frites(R) and Red Bliss(R) sales. Our sales were favorably impacted by
approximately 1.8% due to the weaker U.S. dollar.
Gross profit in 2003 increased to $141.4 million, or 30.3% of net sales, as
compared to $104.0 million, or 26.3% of net sales, in 2002. The 2002 gross
profit adjusted for the restructuring and non-recurring charges in that year
(see 2002 Restructuring and Non-recurring Charges discussed below) was $116.4
million, or 29.4% of net sales. The improvement in gross profit as a percentage
of sales in 2003 came from more efficient trade spending as a percentage of
sales and improvements in our delivery and warehousing costs as a percentage of
sales, offset by higher ingredient costs and the lower gross profits associated
with businesses acquired in Europe.
Selling, general and administrative expenses increased by $7.8 million to $95.7
million, in 2003 from $87.9 million in 2002. The increase in spending in
selling, general and administrative expenses came principally from $5.5 million
of costs brought on by businesses acquired in 2003 as well as from the full year
of our operation of businesses acquired in 2002, $0.6 million of increased
consumer marketing, and increases across all levels of general and
administrative expenses to support our growing business. As a percentage of
sales, selling, general and administrative expenses decreased in 2003 to 20.5%
from 22.2% in 2002. This decrease was caused principally by the increase in
sales at a faster rate than the increase in general and administrative costs as
we leverage the infrastructure in place as we acquire additional new businesses
and add them to existing infrastructures, particularly in the United States.
Operating income increased to $46.2 million in 2003 from $7.3 million in 2002.
The 2002 amount was reduced by the restructuring and non-recurring charges of
$21.3 million in that year. The increase in operating income came from the
elimination of those 2002 charges, and from the higher level of sales and gross
profits, offset by higher selling, general and administrative expenses, all
discussed above.
Interest and other expenses, net, decreased to $2.0 million in 2003 from $2.5
million in 2002. This decrease is principally comprised of an increase in
interest expense by approximately $0.8 million in 2003, such increase coming
from the increased borrowings during 2003 to fund the three acquisitions of
businesses we made during the year,
-14-
offset by the elimination of the $1.5 million charge we incurred in 2002 when we
closed the Terra Chips former manufacturing facility in Brooklyn, NY.
Income before income taxes increased to $44.2 million in 2003 from $4.8 million
in 2002. This increase is the result of the aforementioned increase in operating
income and the overall reduction of interest and other expenses, net.
Income taxes increased to $16.7 million in 2003 from $1.8 million in 2002. Our
effective tax rate was 37.8% in 2003 compared to 38.1% in 2002. The small
reduction in our effective tax rate came principally from the departure of our
Terra Chips manufacturing facility from New York City and the resulting
elimination of the related local income taxes.
Net income for 2003 amounted to $27.5 million compared to $3.0 million in 2002.
This $24.5 million increase in net income is primarily attributable to the
aforementioned increase in income before income taxes offset by the increase in
income tax expense.
2002 Restructuring and Non-recurring Charges
During the fourth quarter of fiscal 2002, we recorded charges aggregating $21.3
million, before taxes, related to the expected sale of the manufacturing assets
of our Health Valley(R) facility in Irwindale, California ($11.3 million) and
the discontinuance of our supplements business ($7.9 million) and Weight
Watchers licenses ($2.1 million). Approximately $17.9 million of these charges
were non-cash in nature.
During the second half of 2002, we decided to pursue and execute a plan to sell
the Health Valley(R) Irwindale plant. During the fourth quarter of 2002, we
entered into an agreement to sell the manufacturing assets of the facility to a
co-packer. Our decision to dispose of this facility was largely the result of
our inability to reach practical capacity at the facility. Accordingly, we
identified a co-packer who can produce our products and bring more production
into the plant by offering other branded and private label companies the
opportunity to have their products manufactured by the co-packer.
As of June 30, 2002, with the expected sale of all plant assets and certain
inventories to this co-packer, we recorded this restructuring and non-recurring
charge. The charge included $7.6 million of charges associated with reduced
values of inventories of raw ingredients and packaging, certain lease
obligations and other items, none of which included employee severance costs. Of
this $7.6 million of charges, our 2002 gross profit was reduced by $5.5 million
charged to cost of sales as required by accounting rules. At June 2002,
approximately $2.1 million of future costs were accrued, principally related to
lease exit costs. In addition, we recorded $3.7 million of impairment charges to
reduce the Health Valley(R) plant's manufacturing assets to their net realizable
values. Additional restructuring charges of approximately $0.4 million were
incurred during the year ended June 30, 2003, for severance liabilities and
related employee costs and trade items that could not be accrued at June 30,
2002. In addition, at the time of lease termination in fiscal 2003, we were able
to reduce our potential lease exit costs by $0.9 million, which was recorded as
a credit to restructuring and other non-recurring charges. Through June 30,
2004, approximately $1.6 million was charged against the Health Valley(R)
facility charge accrual in the aggregate.
In June 2002, we announced that we had discontinued our supplements business at
Celestial Seasonings(R), and that we would not renew our license to sell certain
Weight Watchers products. These product lines did not represent our core product
category of natural and organic foods, and further, the supplements business had
faced increasing competition over the last few years along with reduced consumer
interest. Our operating results and financial position have been only minimally
enhanced in fiscal 2003 and fiscal 2004 without these non-core product lines. In
addition, we can now better utilize our management resources away from these
non-core product lines. In connection with these discontinuances, we recorded
charges of $7.9 million related to supplements, principally for inventories,
packaging and trade items. Of this $7.9 million charge, $6.2 million had the
effect of reducing our 2002 gross profit. The charge for the non-renewal of the
Weight Watchers license amounted to $2.1 million, principally for inventories,
packaging and trade items, of which $0.7 million reduced our 2002 gross profit.
Approximately $4.3 million had been accrued at June 30, 2002 associated with
these future costs. At June 30, 2003, it was determined that $2 million of the
accruals for sales returns and other trade incentives would no longer be
required and, therefore, such
-15-
amount was reversed. Through June 30, 2004, approximately $2.3 million has been
charged against these accruals in the aggregate.
Liquidity and Capital Resources
We finance our operations and growth primarily with the cash flows we generate
from our operations and from borrowings under our Credit Facility.
On April 22, 2004, we entered into a new $300 million Amended and Restated
Credit Agreement (the "Credit Facility"), arranged by Fleet Securities, and led
by Fleet National Bank, SunTrust Bank, HSBC Bank USA, KeyBank and First Pioneer
Farm Credit, increasing our credit line by $60 million, and providing us with an
accordion feature under which we can request a further increase of $50 million
in the credit line. The credit facility is guaranteed by all of our direct and
indirect domestic subsidiaries, and we have pledged some of the stock of our
first-tier foreign subsidiaries. We are required to comply with customary
affirmative and negative covenants for facilities of this nature. As of June 30,
2004, we had $99.2 million borrowed under the Credit Facility.
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 $30.8 million and $21.9 million for 2004 and
2003, respectively. Our working capital and current ratio were $130.0 million
and 2.9 to 1, respectively, at June 30, 2004 compared with $83.3 million and 2.3
to 1 respectively, at June 30, 2003. Our improvement in working capital was
derived principally from the net income earned during the year ended June 30,
2004 and the working capital acquired in business combinations.
Net cash provided by financing activities was $48.9 million for 2004 and $49.2
million for 2003. During 2004 and 2003, we borrowed cash to fund acquisitions
made during each year. During Fiscal 2004, we received $19.8 million of proceeds
on the exercise of stock options and warrants. During the year ended June 30,
2003, we acquired .3 million shares of our common stock in open market purchases
at a cost of approximately $4.3 million.
Obligations for all debt instruments, capital and operating leases and other
contractual obligations are as follows:
Payments Due by Period
------------------------------------------------------------------------------
Less than 1-3 3-5
Total 1 year years years Thereafter
------------ ------------- ----------- ------------ --------------
Debt instruments $109,258 $ 5,486 $ 2,495 $101,069 $ 208
Capital lease obligations 1,881 1,359 522
Operating leases 25,313 4,619 8,735 4,789 7,170
------------ ------------- ----------- ------------ --------------
Total contractual cash obligations $136,452 $11,464 $11,752 $105,858 $ 7,378
============ ============= =========== ============ ==============
We believe that cash on hand of $27.5 million at June 30, 2004, as well as
projected fiscal 2005 cash flows from operations, and availability under our
Credit Facility are sufficient to fund our working capital needs, anticipated
capital expenditures of approximately $12 million, and the $10.7 million of debt
and lease obligations described in the table above, during the next fiscal year.
We currently invest our cash on hand in highly liquid short-term investments
yielding approximately .9% interest.
Note Regarding Forward Looking Information
Certain statements contained in this Annual Report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1934 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Such forward-looking statements involve known and unknown
risks, uncertainties and
-16-
other factors which may cause the actual results, levels of activity,
performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following:
o general economic and business conditions;
o the ability of the Company to implement its business and acquisition
strategy;
o the ability to effectively integrate its acquisitions;
o the ability of the Company to obtain financing for general corporate
purposes;
o competition;
o availability of key personnel; and
o changes in, or the failure to comply with government regulations.
As a result of the foregoing and other factors, no assurance can be given as to
the future results, levels of activity and achievements and neither the Company
nor any person assumes responsibility for the accuracy and completeness of these
statements.
Our Acquisition Strategy Exposes Us To Risk
We intend to continue to grow our business in part through the acquisition of
new brands and businesses, both in the United States and internationally. Our
acquisition strategy is based on identifying and acquiring businesses with
products and/or brands that complement our existing product mix. We cannot be
certain that we will be able to:
o successfully identify suitable acquisition candidates;
o negotiate identified acquisitions on terms acceptable to us; or
o obtain the necessary financing to complete such acquisitions.
We may encounter increased competition for acquisitions in the future, which
could result in acquisition prices we do not consider acceptable. We are unable
to predict whether or when any prospective acquisition candidate will become
available or the likelihood that any acquisition will be completed.
Our Future Success May Be Dependent on Our Ability to Integrate Companies That
We Acquire
Our future success may be dependent upon our ability to effectively integrate
new brands and businesses that we acquire, including our ability to realize
potentially available marketing opportunities and cost savings, some of which
may involve operational changes. We cannot be certain:
o as to the timing or number of marketing opportunities or amount of cost
savings that may be realized as the result of our integration of an
acquired brand or business;
o that a business combination will enhance our competitive position and
business prospects;
o that we will not experience difficulties with customers, personnel or other
parties as a result of a business combination; or
-17-
o that, with respect to our acquisitions outside the United States, we will
not be affected by, among other things, exchange rate risk.
In addition, we cannot be certain that we will be successful in:
o integrating an acquired brand or business's distribution channels with our
own;
o coordinating sales force activities of an acquired company or in selling
the products of an acquired company to our customer base; or
o integrating an acquired company into our management information systems or
in integrating an acquired company's products into our product mix.
Additionally, integrating an acquired company into our existing operations will
require management resources and may divert our management from our day-to-day
operations. If we are not successful in integrating the operations of acquired
companies, our business could be harmed.
Consumer Preferences for Our Products Are Difficult to Predict and May Change
A significant shift in consumer demand away from our products or our failure to
maintain our current market position could reduce our sales or the prestige of
our brands in our markets, which could harm our business. While we continue to
diversify our product offerings, we cannot be certain that demand for our
products will continue at current levels or increase in the future.
Our business is primarily focused on sales of natural and organic and specialty
food products in markets geared to consumers of natural foods, specialty teas,
non-dairy beverages, cereals, breakfast bars, canned soups and vegetables,
snacks and cooking oils, which, if consumer demand for such categories were to
decrease, could harm our business. Consumer trends change based on a number of
possible factors, including:
o nutritional values, such as a change in preference from fat free to reduced
fat to no reduction in fat; and
o a shift in preference from organic to non-organic and from natural products
to non-natural products.
In addition, we have other product categories, such as medically-directed food
products, kosher foods and other specialty food items, as well as natural health
and beauty care products. We are subject to evolving consumer preferences for
these products.
Our Markets Are Highly Competitive
We operate in highly competitive geographic and product markets, and some of our
markets are dominated by competitors with greater resources. We cannot be
certain that we could successfully compete for sales to distributors or stores
that purchase from larger, more established companies that have greater
financial, managerial, sales and technical resources. In addition, we compete
for limited retailer shelf space for our products. Larger competitors, such as
mainstream food companies including General Mills, Nestle S.A., Kraft Foods,
Groupe Danone, Kellogg Company and Sara Lee Corporation, also may be able to
benefit from economies of scale, pricing advantages or the introduction of new
products that compete with our products. Retailers also market competitive
products under their own private labels.
The beverage market is large and highly competitive. The tea portion of the
beverage market is also highly competitive. Competitive factors in the tea
industry include product quality and taste, brand awareness among consumers,
variety of specialty tea flavors, interesting or unique product names, product
packaging and package design, supermarket and grocery store shelf space,
alternative distribution channels, reputation, price, advertising and promotion.
Our principal competitors on a national basis in the specialty tea market are
Thomas J. Lipton Company, a division
-18-
of Unilever PLC, and R.C. Bigelow, Inc. Unilever has substantially greater
financial resources than us. In addition, in April 2004, Tazo Tea Company (a
subsidiary of Starbucks Corporation) and Kraft Foods Global, Inc. announced a
licensing agreement whereby Tazo products might gain additional access to
grocery channels through placement by Kraft, which has substantially greater
financial resources than we do. Additional competitors include a number of
regional specialty tea companies. There may be potential entrants which are not
currently in the specialty tea market who may have substantially greater
resources than we have. Private label competition in the specialty tea category
is currently minimal, but growing. The refrigerated soy beverage market is
primarily driven by one brand, Silk, which is owned by Dean Foods and holds a
significant share of refrigerated soy milk space through its strong national
distribution system.
In the future, competitors may introduce other products that compete with our
products and these competitive products may have an adverse effect on our
business, results of operations and financial condition.
We Are Dependent Upon the Services of Our Chief Executive Officer
We are highly dependent upon the services of Irwin D. Simon, our chairman of the
board, president and chief executive officer. We believe Mr. Simon's reputation
as our founder and his expertise and knowledge in the natural and specialty
foods market are critical factors in our continuing growth. The loss of the
services of Mr. Simon could harm our business.
We Rely on Independent Brokers and Distributors for a Substantial Portion of Our
Sales
We rely upon sales efforts made by or through non-affiliated food brokers to
distributors and other customers. The loss of, or business disruption at, one or
more of these distributors or brokers may harm our business. If we were required
to obtain additional or alternative distribution and food brokerage agreements
or arrangements in the future, we cannot be certain that we will be able to do
so on satisfactory terms or in a timely manner. Two of our distributors, United
Natural Foods and Tree of Life, accounted for approximately 20% and 12%,
respectively, of our net sales for the fiscal year ended June 30, 2004,
approximately 18% and 15%, respectively, for the year ended June 30, 2003, and
approximately 17% and 15%, respectively, for the year ended June 30, 2002. Our
inability to enter into satisfactory brokerage agreements may inhibit our
ability to implement our business plan or to establish markets necessary to
develop our products successfully. Food brokers act as selling agents
representing specific brands on a non-exclusive basis under oral or written
agreements generally terminable at any time on 30 days' notice, and receive a
percentage of net sales as compensation. Distributors purchase directly for
their own account for resale. In addition, the success of our business depends,
in large part, upon the establishment and maintenance of a strong distribution
network.
Loss of One or More of Our Manufacturing Facilities Could Harm Our Business
For the years ended June 30, 2004, 2003 and 2002, approximately 39%, 42% and
54%, respectively, of our revenue was derived from products manufactured at our
manufacturing facilities. An interruption in or the loss of operations at one or
more of these facilities, or the failure to maintain our labor force at one or
more of these facilities, could delay or postpone production of our products,
which could have a material adverse effect on our business, results of
operations and financial condition until we could secure an alternate source of
supply.
We Rely on Independent Co-Packers to Produce Some or Most of Our Products
During 2004, 2003 and 2002, approximately 61%, 58% and 46%, respectively, of our
revenue was derived from products manufactured at independent co-packers. In the
U.S., we presently obtain:
o all of our requirements for non-dairy beverages from five co-packers, all
of which are under contract or other arrangements;
o all of our U.S. requirements for rice cakes from one co-packer;
-19-
o all of our Health Valley(R) baked goods and cereal products from one
co-packer, which is under contract;
o all of our cooking oils from one co-packer;
o principally all of our tortilla chips from three co-packers, one of which
is under contract;
o a portion of our requirements for Terra's Yukon Gold(R) line from one
co-packer, which is under contract;
o the requirements for our canned soups from two co-packers, which are under
contract;
o all of our Earth's Best(R) baby food products from two co-packers, which
are under contract; and
o a portion of our Ethnic Gourmet(R) products from one co-packer, which is
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.
Our Tea Ingredients Are Subject to Import Risk
Our tea business purchases its ingredients from numerous foreign and domestic
manufacturers, importers and growers, with the majority of those purchases
occurring outside of the United States. We maintain long-term relationships with
most of our suppliers. Purchase arrangements with ingredient suppliers are
generally made annually and in U.S. currency. Purchases are made through
purchase orders or contracts, and price, delivery terms and product
specifications vary.
Our botanical purchasers visit major suppliers around the world annually to
procure ingredients and to assure quality by observing production methods and
providing product specifications. Many ingredients are presently grown in
countries where labor-intensive cultivation is possible, and where we often must
educate the growers about product standards. We perform laboratory analysis on
incoming ingredient shipments for the purpose of assuring that they meet our
quality standards and those of the FDA and the California Organic Foods Act of
1990.
Our ability to ensure a continuing supply of ingredients at competitive prices
depends on many factors beyond our control, such as foreign political
situations, embargoes, changes in national and world economic conditions,
currency fluctuations forecasting adequate need of seasonal raw material
ingredients and unfavorable climatic conditions. We take steps and will continue
to take steps intended to lessen the risk of an interruption of botanical
supplies, including identification of alternative sources and maintenance of
appropriate inventory levels. We have, in the past, maintained sufficient
supplies for our ongoing operations.
Our failure to maintain relationships with our existing suppliers or find new
suppliers, observe production standards for our foreign procured products or
continue our supply of botanicals from foreign sources could harm our business.
We Are Subject to Risks Associated with Our International Sales and Operations,
Including Foreign Currency Risks
Operating in international markets involves exposure to movements in currency
exchange rates, which are volatile at times. The economic impact of currency
exchange rate movements is complex because such changes are often linked to
variability in real growth, inflation, interest rates, governmental actions and
other factors. Consequently, isolating the effect of changes in currency does
not incorporate these other important economic factors. These changes, if
material, could cause adjustments to our financing and operating strategies.
During fiscal 2004, approximately 20.3% of our net sales were generated from
sales outside the United States, while such sales outside the United States were
17.3% of net sales in 2003 and 14.3% in 2002.
-20-
We expect sales from non-core U.S. markets to possibly represent an increasing
portion of our total net sales in the future. Our non U.S. sales and operations
are subject to risks inherent in conducting business abroad, many of which are
outside our control, including:
o periodic economic downturns and unstable political environments;
o price and currency exchange controls;
o fluctuations in the relative values of currencies;
o unexpected changes in trading policies, regulatory requirements, tariffs
and other barriers;
o compliance with applicable foreign laws; and
o difficulties in managing a global enterprise, including staffing,
collecting accounts receivable and managing distributors.
Our Inability to Use Our Trademarks Could Have a Material Adverse Effect on Our
Business
Our inability to use our trademarks could have a material adverse effect on our
business, results of operations and financial condition.
We believe that brand awareness is a significant component in a consumer's
decision to purchase one product over another in the highly competitive food and
beverage industry. Our failure to continue to sell our products under our
established brand names could have a material adverse effect on our business,
results of operations and financial condition. We believe that our trademarks
and trade names are significant to the marketing and sale of our products and
that the inability to utilize certain of these names could have a material
adverse effect on our business, results of operations and financial condition.
Our Products Must Comply With Government Regulation
The USDA has adopted regulations with respect to a national organic labeling and
certification program which became effective February 20, 2001, and fully
implemented on October 21, 2002. We currently manufacture approximately 650
organic products which are covered by these new regulations. Future developments
in the regulation of labeling of organic foods could require us to further
modify the labeling of our products, which could affect the sales of our
products and thus harm our business.
In addition, on January 18, 2001, the FDA proposed new policy guidelines
regarding the labeling of genetically engineered foods. The FDA is currently
considering the comments it received before issuing final guidance. These
guidelines, if adopted, could require us to modify the labeling of our products,
which could affect the sales of our products and thus harm our business.
The FDA published the final rule amending the Nutritional Labeling regulations
to require declaration of "Trans Fatty Acids" in the nutritional label of
conventional foods and dietary supplements on July 11, 2003. The final rule will
be effective on January 1, 2006. Additionally, an allergen labeling law was
passed and signed on August 3, 2004. This law requires certain allergens to be
clearly labeled by January 1, 2006. We are in the process of revising our labels
to comply with the final rules.
Furthermore, new government laws and regulations may be introduced in the future
that could result in additional compliance costs, seizures, confiscations,
recalls or monetary fines, any of which could prevent or inhibit the
development, distribution and sale of our products. If we fail to comply with
applicable laws and regulations, we may be subject to civil remedies, including
fines, injunctions, recalls or seizures, as well as potential criminal
sanctions, which could have a material adverse effect on our business, results
of operations and financial condition.
-21-
Product Recalls Could Have a Material Adverse Effect on Our Business
Manufacturers and distributors of products in the food industry are sometimes
subject to the recall of their products for a variety of reasons, including for
product defects, such as ingredient contamination, packaging safety and
inadequate labeling disclosure. If any of our products are recalled due to a
product defect or for any other reason, we could be required to incur the
expense of the recall or the expense of any resulting legal proceeding.
Additionally, if one of our significant brands were subject to recall, the image
of that brand and our company could be harmed, which could have a material
adverse effect on our business.
Product Liability Suits, If Brought, Could Have a Material Adverse Effect On Our
Business
If a product liability claim exceeding our insurance coverage were to be
successfully asserted against us, it could harm our business. We cannot assure
you that such coverage will be sufficient to insure against claims which may be
brought against us, or that we will be able to maintain such insurance or obtain
additional insurance covering existing or new products. As a marketer of food
products, we are subject to the risk of claims for product liability. We
maintain product liability insurance and generally require that our co-packers
maintain product liability insurance with us as a co-insured.
We Rely on Independent Certification For a Number of Our Natural and Specialty
Food Products
We rely on independent certification, such as certifications of our products as
"organic" or "kosher," to differentiate our products in natural and specialty
food categories. The loss of any independent certifications could adversely
affect our market position as a natural and specialty food company, which could
harm our business.
We must comply with the requirements of independent organizations or
certification authorities in order to label our products as certified. 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.
Due to the Seasonality of Many of Our Products, Including Our Tea Products, and
Other Factors, Our Operating Results Are Subject to Quarterly Fluctuations
Our tea 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. In addition, some of our other products (e.g., baking and
cereal products and soups) also show stronger sales in the cooler months while
our snack food product lines are stronger in the warmer months. Quarterly
fluctuations in our sales volume and operating results are due to a number of
factors relating to our business, including the timing of trade promotions,
advertising and consumer promotions and other factors, such as seasonality,
inclement weather and unanticipated increases in labor, commodity, energy,
insurance or other operating costs. The impact on sales volume and operating
results due to the timing and extent of these factors can significantly impact
our business. For these reasons, you should not rely on our quarterly operating
results as indications of future performance.
Our Officers and Directors May Be Able to Control Our Actions
Our officers and directors beneficially own approximately 1.3% of our common
stock as of June 30, 2004. In addition, two of these directors currently serve
as a designee and a jointly appointed designee of an affiliate of H.J. Heinz
Company, or Heinz, which owns approximately 16.7% of our common stock as of June
30, 2004. Accordingly, our officers and directors may be in a position to
influence the election of our directors and otherwise influence stockholder
action.
-22-
Our Ability to Issue Preferred Stock May Deter Takeover Attempts
Our board of directors is empowered to issue, without stockholder approval,
preferred stock with dividends, liquidation, conversion, voting or other rights
which could decrease the amount of earnings and assets available for
distribution to holders of our common stock and adversely affect the relative
voting power or other rights of the holders of our common stock. In the event of
issuance, the preferred stock could be used as a method of discouraging,
delaying or preventing a change in control. Our certificate of incorporation
authorizes the issuance of up to 5,000,000 shares of "blank check" preferred
stock with such designations, rights and preferences as may be determined from
time to time by our board of directors. Although we have no present intention to
issue any shares of our preferred stock, we may do so in the future under
appropriate circumstances.
Supplementary Quarterly Financial Data:
Unaudited quarterly financial data (in thousands, except per share amounts) for
fiscal 2004 and 2003 is summarized as follows:
Three Months Ended
------------------------------------------------------------------
September 30, December 31, March 31, June 30,
2003 2003 2004 2004
-------------- ------------ ----------- -----------
Net sales $ 127,053 $142,792 $ 136,862 $ 137,351
Gross profit 37,162 47,099 38,546 37,457
Operating income 11,343 17,052 9,019 8,464
Income before income taxes 10,552 16,702 8,087 8,047
Net income 6,542 10,372 5,014 5,080
Basic earnings per common share $ .19 $ .30 $ .14 $ .14
Diluted earnings per common share $ .19 $ .29 $ .14 $ .14
Three Months Ended
------------------------------------------------------------------
September 30, December 31, March 31, June 30,
2002 2002 2003 2003(a)
-------------- ------------ ------------ ------------
Net sales $ 96,420 $ 123,006 $ 129,224 $ 117,809
Gross profit 27,798 40,771 39,705 33,131
Restructuring and non-recurring charges -- 440 -- (875)
Operating income 7,703 13,356 13,804 11,296
Income before income taxes 7,533 13,150 12,620 10,861
Net income 4,689 8,186 7,856 6,761
Basic earnings per common share $ .14 $ .24 $ .23 $ .20
Diluted earnings per common share $ .14 $ .24 $ .23 $ .19
(a) Gross profit for the three months ended June 30, 2003 was positively
impacted by the following offsetting items: a reduction by $1.5 million of
chargebacks receivable from customers, and a $2.0 million reduction of reserves
established last year in connection with similar items included in the charges
recorded for supplements and other items. These offsetting items increased gross
profit by $0.5 million.
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.
-23-
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 2004 variable debt and cash equivalents
levels, a one-point change in interest rates would have the effect of increasing
our interest expense by approximately $1.0 million, thereby reducing our net
income by approximately $.02 per share.
Foreign Operations
Operating in international markets involves exposure to movements in currency
exchange rates, which are volatile at times. The economic impact of currency
exchange rate movements is complex because such changes are often linked to
variability in real growth, inflation, interest rates, governmental actions and
other factors. Consequently, isolating the effect of changes in currency does
not incorporate these other important economic factors. These changes, if
material, could cause adjustments to our financing and operating strategies.
During fiscal 2004, approximately 20.3% of our net sales were generated from
sales outside the United States, while such sales outside the United States were
17.3% of net sales in 2003 and 14.3% in 2002.
We expect sales from non-core U.S. markets to possibly represent an increasing
portion of our total net sales in the future. Our non U.S. sales and operations
are subject to risks inherent in conducting business abroad, many of which are
outside our control, including:
o periodic economic downturns and unstable political environments;
o price and currency exchange controls;
o fluctuations in the relative values of currencies;
o unexpected changes in trading policies, regulatory requirements, tariffs
and other barriers;
o compliance with applicable foreign laws; and
o difficulties in managing a global enterprise, including staffing,
collecting accounts receivable and managing distributors.
-24-
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of The Hain Celestial Group,
Inc. and subsidiaries are included in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - June 30, 2004 and 2003
Consolidated Statements of Income - Years ended June 30, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity - Years ended June 30, 2004,
2003 and 2002
Consolidated Statements of Cash Flows - Years ended June 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of The Hain Celestial
Group, Inc. and subsidiaries is included in Item 15 (a):
Schedule II Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the SEC are not required under the related instructions or are
inapplicable and therefore have been omitted.
-25-
Report of Independent Registered Public Accounting Firm
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, 2004 and 2003, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 2004. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Hain Celestial
Group, Inc. and Subsidiaries at June 30, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2004, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Melville, New York
August 30, 2004
-26-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
June 30,
-----------------------------------
2004 2003
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,489 $ 10,984
Accounts receivable, less allowance for doubtful accounts of
$2,185 and $1,748 69,392 61,215
Inventories 86,873 66,444
Recoverable income taxes, net -- 223
Deferred income taxes 3,111 3,171
Other current assets 11,449 7,671
------------- ---------------
Total current assets 198,314 149,708
Property, plant and equipment, net of accumulated depreciation
and amortization of $40,799 and $31,555 87,002 68,665
Goodwill 333,218 296,508
Trademarks and other intangible assets, net of accumulated
amortization of $8,349 and $7,377 55,793 55,975
Other assets 9,904 10,692
------------- ---------------
Total assets $684,231 $581,548
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 59,031 $ 55,710
Income taxes payable 2,489 1,867
Current portion of long-term debt 6,845 8,807
------------- ---------------
Total current liabilities 68,365 66,384
Long-term debt, less current portion 104,294 59,455
Deferred income taxes 14,807 14,912
------------- ---------------
Total liabilities 187,466 140,751
Stockholders' equity:
Preferred stock - $.01 par value, authorized 5,000,000 shares,
no shares issued -- --
Common stock - $.01 par value, authorized 100,000,000 shares,
issued 37,064,648 and 34,810,722 shares 371 348
Additional paid-in capital 394,740 364,877
Deferred compensation (2,809) --
Retained earnings 106,097 79,089
Foreign currency translation adjustment 7,651 4,639
------------- ---------------
506,050 448,953
Less: 671,556 and 606,619 shares of treasury stock, at cost (9,285) (8,156)
------------- ---------------
Total stockholders' equity 496,765 440,797
------------- ---------------
Total liabilities and stockholders' equity $684,231 $581,548
============= ===============
See notes to consolidated financial statements.
-27-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended June 30
---------------------------------------------------
2004 2003 2002
------------ ------------- --------------
Net Sales $ 544,058 $ 466,459 $ 395,954
Cost of sales 383,794 325,054 291,915
------------ ------------- --------------
Gross profit 160,264 141,405 104,039
Selling, general and administrative expenses 114,386 95,681 87,920
Restructuring and other non-recurring charges -- (435) 4,977
Impairment of long-lived assets -- -- 3,878
------------ ------------- --------------
Operating income 45,878 46,159 7,264
Interest expense, net and other expenses 2,490 1,995 2,461
------------ ------------- --------------
Income before income taxes 43,388 44,164 4,803
Provision for income taxes 16,380 16,672 1,832
------------ ------------- --------------
Net income $ 27,008 $ 27,492 $ 2,971
============ ============= ==============
Earnings per share:
Basic $ .77 $ .81 $ .09
============ ============= ==============
Diluted $ .74 $ .79 $ .09
============ ============= ==============
Weighted average common shares outstanding:
Basic 35,274 33,910 33,760
============ ============= ==============
Diluted 36,308 34,722 34,744
============ ============= ==============
See notes to consolidated financial statements.
-28-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2003 AND 2004 (In thousands, except per share and
share data)
Common Stock
Additional Unamortized
Amount Paid-In Non-Cash Retained
Shares at $.01 Capital Compensation Earnings
------------ ---------- ----------- -------------- ------------
Balance at June 30, 2001 33,771,124 $ 338 $348,942 $ 48,626
Exercise of stock options 94,341 1 992
Purchase of treasury shares
Issuance of common stock 210,174 2 4,507
Non-cash compensation charge 47
Tax benefit from stock options 334
Comprehensive income:
Net income 2,971
Translation adjustments
------------ ---------- ----------- -------------- ------------
Total comprehensive income
Balance at June 30, 2002 34,075,639 341 354,822 51,597
Exercise of stock options 67,521 1 623
Purchase of treasury shares
Issuance of common stock 667,562 6 9,206
Non-cash compensation charge 46
Tax benefit from stock options 180
Comprehensive income:
Net income 27,492
Translation adjustments
------------ ---------- ----------- -------------- ------------
Total comprehensive income
Balance at June 30, 2003 34,810,722 348 364,877 79,089
Exercise of stock options and warrants 2,103,926 21 19,787
Purchase of treasury shares
Restricted stock grant 150,000 2 3,133 $(3,135)
Non-cash compensation charge 46 326
Tax benefit from stock options 6,897
Net income for the period
Comprehensive income:
Net income 27,008
Translation adjustments
------------ ---------- ----------- -------------- ------------
Total comprehensive income
Balance at June 30, 2004 37,064,648 $ 371 $394,740 $ (2,809) $ 106,097
============ ========== =========== ============== ============
-29-
Foreign
Currency
Treasury Stock Translation Comprehensive
Shares Amount Adjustment Total Income (Loss)
----------- ---------- ------------ ----------- --------------
Balance at June 30, 2001 100,000 $ (275) $ (978) $ 396,653
Exercise of stock options 993
Purchase of treasury shares 206,917 (3,600) (3,600)
Issuance of common stock 4,509
Non-cash compensation charge 47
Tax benefit from stock options 334
Comprehensive income:
Net income 2,971 $ 2,971
Translation adjustments 1,941 1,941 1,941
----------- ---------- ------------ ----------- --------------
Total comprehensive income $ 4,912
==============
Balance at June 30, 2002 306,917 (3,875) 963 403,848
Exercise of stock options 624
Purchase of treasury shares 299,702 (4,281) (4,281)
Issuance of common stock 9,212
Non-cash compensation charge 46
Tax benefit from stock options 180
Comprehensive income:
Net income 27,492 $ 27,492
Translation adjustments 3,676 3,676 3,676
----------- ---------- ------------ ----------- --------------
Total comprehensive income $ 31,168
==============
Balance at June 30, 2003 606,619 (8,156) 4,639 440,797
Exercise of stock options and warrants 19,808
Purchase of treasury shares 64,937 (1,129) (1,129)
Restricted stock grant --
Non-cash compensation charge 372
Tax benefit from stock options 6,897
Comprehensive income:
Net income 27,008 $ 27,008
Translation adjustments 3,012 3,012 3,012
----------- ---------- ------------ ----------- --------------
Total comprehensive income $ 30,020
==============
Balance at June 30, 2004 671,556 $(9,285) $ 7,651 $ 496,765
=========== ========== ============== ============
See notes to consolidated financial statements.
-30-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended June 30
--------------------------------------------
2004 2003 2002
----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 27,008 $ 27,492 $ 2,971
Adjustments to reconcile net income to net cash provided by
operating activities:
Non-cash restructuring and non-recurring charges, including
related inventory charges -- -- 10,929
Non-cash impairment of long-lived assets -- -- 3,878
Depreciation and amortization of property and equipment 8,277 7,610 7,687
Amortization of other intangible assets 881 385 249
Amortization of deferred financing costs 605 624 423
Provision for doubtful accounts 438 103 551
Deferred income taxes 3,968 7,864 (237)
Non-cash compensation 372 46 47
Increase (decrease) in cash attributable to changes in operating
assets and liabilities, net of amounts applicable to acquired
businesses:
Accounts receivable (5,230) (4,973) 1,824
Inventories (11,436) (2,742) (9,179)
Other current assets (2,086) (1,167) (4,274)
Other assets 1,888 (1,745) 1,836
Accounts payable and accrued expenses (1,403) (9,320) (7,494)
Accrued restructuring and non-recurring charges - (5,805) 6,410
Recoverable income taxes 622 3,389 6,637
Tax benefit of nonqualified stock options 6,897 180 334
----------- ---------- -----------
Net cash provided by operating activities 30,801 21,941 22,592
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired (50,734) (57,528) (13,568)
Purchases of property and equipment (9,918) (9,157) (21,341)
----------- ---------- -----------
Net cash used in investing activities (60,652) (66,685) (34,909)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank revolving credit facility, net 45,350 49,450 --
Payments on economic development revenue bonds (558) (500) (459)
Costs in connection with bank financing (985) (220) (249)
Purchase of treasury stock (1,129) (4,281) (3,600)
Proceeds from exercise of options and warrants, net of related
expenses 19,808 624 1,071
Repayments (proceeds) of other long-term debt, net (13,612) 4,100 (3,275)
----------- ---------- -----------
Net cash provided by (used in) financing activities 48,874 49,173 (6,512)
----------- ---------- -----------
Effect of exchange rate changes on cash (2,518) (983) (276)
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 16,505 3,446 (19,105)
Cash and cash equivalents at beginning of year 10,984 7,538 26,643
----------- ---------- -----------
Cash and cash equivalents at end of year $ 27,489 $ 10,984 $ 7,538
=========== ========== ===========
See notes to consolidated financial statements.
-31-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
1. BUSINESS
The Hain Celestial Group, Inc., a Delaware corporation, and its subsidiaries
(collectively, the "Company", and herein referred to as "we", "us", and "our")
manufacture, market, distribute and sell natural, organic, specialty and snack
food products and natural health and body care products under brand names which
are sold as "better-for-you" products. We are a leader in many of the top
natural food categories, with such well-known food brands as Celestial
Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R), Rice Dream(R),
Soy Dream(R), Imagine(R), Walnut Acres Certified Organic(R), Ethnic Gourmet(R),
Rosetto(R), Little Bear Organic Foods(R), Bearitos(R), Arrowhead Mills(R),
Health Valley(R), Breadshop's(R), Casbah(R), Garden of Eatin'(R), Terra
Chips(R), Harry's Premium Snacks(R), Boston's(R), Lima(R), Biomarche(R), Grains
Noirs(R), Natumi(R), Milkfree, Yves Veggie Cuisine(R), DeBoles(R), Earth's
Best(R), and Nile Spice(R). The Company's principal specialty product lines
include Hollywood(R) cooking oils, Estee(R) sugar-free products, Kineret(R)
kosher foods, Boston Better Snacks(R), and Alba Foods(R). Our natural health and
body care product line is marketed under the JASON(R), Orjene(R), Shaman Earthly
Organics(TM), and Heather's(R) brands.
We operate in one business segment: the sale of natural, organic and other food,
beverage and body care products. During the three years ended 2004,
approximately 39%, 42% and 54% of our revenues were derived from products that
are manufactured within our own facilities with 61%, 58% and 46% produced by
various co-packers. In fiscal 2004, 2003 and 2002, there were no co-packers who
manufactured 10% or more of our products.
2. BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of The Hain Celestial
Group, Inc. and all wholly-owned subsidiaries. In the Notes to Consolidated
Financial Statements, all dollar amounts, except per share data, are in
thousands unless otherwise indicated.
3. SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES
Consolidation Policy
Our accompanying consolidated financial statements include the accounts of the
Company and all of its wholly-owned subsidiaries. Material intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The accounting principles we use
require us to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and amounts of
income and expenses during the reporting periods presented. We believe in the
quality and reasonableness of our critical accounting policies; however, it is
likely that materially different amounts would be reported under different
conditions or using assumptions different from those that we have consistently
applied.
Valuation of Accounts and Chargebacks Receivable and Concentration of Credit
Risk
We perform ongoing credit evaluations on existing and new customers daily. We
apply reserves for delinquent or uncollectible trade receivables based on a
specific identification methodology and also apply an additional reserve based
on the experience we have with our trade receivables aging categories. Credit
losses have been within our expectations in recent years. While two of our
customers represent 28%, 25% and 27% of our trade receivables balance as of June
30, 2004, 2003 and 2002, respectively, we believe there is no credit exposure at
this time.
-32-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Based on cash collection history and other statistical analysis, we estimate the
amount of unauthorized deductions our customers have taken that we expect to be
repaid and collectible in the near future in the form of a chargeback
receivable. While our estimate of this receivable balance ($6 million at June
30, 2004 and 2003) could be different had we used different assumptions and
judgments, historically our cash collections of this type of receivable has been
within our expectations and no significant write-offs have occurred; however,
during the fourth quarter of 2003, we reduced our chargebacks receivable by $1.5
million.
During the year ended June 30, 2004, sales to two customers and their affiliates
approximated 20% and 12%. These two customers accounted for approximately 18%
and 15% of net sales in 2003 and approximately 17% and 15% of net sales in 2002.
Inventory
Our inventory is valued at the lower of cost or market. Cost has been determined
principally using standard costs utilized under the first-in, first-out method.
We provide write-downs for finished goods expected to become non-saleable due to
age and specifically identify and provide for slow moving or obsolete raw
ingredients and packaging.
Property, Plant and Equipment
Our property, plant and equipment is carried at cost and depreciated or
amortized on a straight-line basis over the estimated useful lives or lease
life, whichever is shorter. We believe the asset lives assigned to our property,
plant and equipment are within ranges generally used in food manufacturing and
distribution businesses. Our manufacturing plants and distribution centers, and
their related assets, are periodically reviewed to determine if any impairment
exists by analyzing underlying cash flow projections. At this time, we believe
no impairment exists on the carrying value of such assets. Ordinary repairs and
maintenance are expensed as incurred. We utilize the following ranges of asset
lives:
Buildings and improvements 10-31 years
Machinery and equipment 5-10 years
Furniture and fixtures 3-7 years
Leasehold improvements 3-10 years
Intangibles
Goodwill is no longer amortized and the value of an identifiable intangible
asset is amortized over its useful life unless the asset is determined to have
an indefinite useful life. The carrying values of goodwill and other intangible
assets with indefinite useful lives are tested annually for impairment.
Revenue Recognition and Sales Incentives
Sales are recognized upon the shipment of finished goods to customers and are
reported net of sales incentives. Allowances for cash discounts and returns are
recorded in the period in which the related sale is recognized.
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.
-33-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Advertising Costs
Media advertising costs, which are included in selling, general and
administrative expenses, amounted to $5.6 million for each of the two fiscal
years 2004 and 2003 and $4.8 million for fiscal 2002. Such costs are expensed as
incurred.
Income Taxes
We follow the liability method of accounting for income taxes. Under the
liability method, deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities at enacted rates
in effect in the years in which the differences are expected to reverse.
Shipping and Handling Costs
We include the costs associated with shipping and handling of our inventory as a
component of cost of sales.
Fair Values of Financial Instruments
At June 30, 2004 and 2003, we had $10.9 and $0.2 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, 2004 and 2003, the carrying values of these money market
securities approximate their fair values.
We believe that the interest rates charged on our debt instruments approximate
current borrowing rates and, accordingly, the carrying amounts of such debt at
June 30, 2004 and 2003 approximate fair value.
Accounting For Stock Issued to Employees
We have elected to follow APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations, in accounting for stock
options because, as discussed below, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of our employee stock
options at least equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding earnings and earnings per share is required by
SFAS No. 123, and has been determined as if we have accounted for our stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: risk free interest rates
ranging from 4% to 6.77%; no dividend yield; volatility factors of the expected
market price of our common stock of approximately 51% for fiscal 2004, 55% for
fiscal 2003, and 93% for fiscal 2002; and a weighted-average expected life of
the options of five years in each year.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our stock options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
our employee stock options.
-34-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. Our pro forma
information is as follows:
2004 2003 2002
-------------- --------------- -------------
Net income, as reported $ 27,008 $ 27,492 $ 2,971
Non-cash compensation charge net of related tax
effects 232 30 30
Stock-based employee compensation expense
determined under fair value method, net of related
tax effects (3,921) (11,365) (15,165)
-------------- --------------- -------------
Pro forma net income (loss) $ 23,319 $ 16,157 $ (12,164)
============== =============== =============
Basic net income per common share:
As reported $ .77 $ .81 $ .09
Pro forma $ .66 $ .48 $ (.36)
Diluted net income per common share:
As reported $ .74 $ .79 $ .09
Pro forma $ .64 $ .47 $ (.36)
Accounting for the Impairment of Long-Lived Assets
During 2002, we accounted for the impairment of long-lived assets, other than
goodwill and other indefinite life intangibles, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No.
121"). SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the recorded value of
the asset may not be recoverable. We perform such a review at each balance sheet
date whenever events and circumstances have occurred that indicate possible
impairment. We consider continued operating losses and significant and long-term
changes in prevailing market conditions to be the primary indicators of
potential impairment. In accordance with SFAS No. 121, we use an estimate of the
future undiscounted net cash flows of the related asset or asset grouping over
the remaining life to measure whether the assets are recoverable. During fiscal
2002, as part of the expected Health Valley Irwindale manufacturing facility
sale (see Note 5),we recorded a $3.7 million impairment charge to reduce the
Health Valley plant's manufacturing assets to their net realizable value.
Effective July 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supersedes SFAS
No. 121; however, it retains fundamental provisions related to the recognition
and measurement of the impairment of long-lived assets to be "held and used." In
addition, SFAS No. 144 provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived assets group to be
disposed of other than by sale (e.g., abandoned) be classified as "held and
used" until disposed of, and establishes more restrictive criteria regarding
classification of an asset group as "held for sale."
SFAS No. 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations" ("APB 30"), for the disposal of a segment of a business, and extends
the reporting of a discontinued operation to a "component of an entity."
Further, SFAS No. 144 requires operating losses from a "component of an entity"
to be recognized in the period in which they occur rather than as of the
measurement date as previously required by APB 30.
There have been no disposal activities since adoption of SFAS No. 144 and,
therefore, the adoption of that statement had no effect on our financial
statements.
-35-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Deferred Financing Costs
Eligible costs associated with obtaining debt financing are capitalized and
amortized over the related term of the applicable debt instruments, which
approximates the effective interest method.
Earnings Per Share
We report basic and diluted earnings per share in accordance with SFAS No. 128,
"Earnings Per Share" ("SFAS No. 128"). Basic earnings per share excludes the
dilutive effects of options and warrants. Diluted earnings per share includes
only the dilutive effects of common stock equivalents such as stock options and
warrants.
The following table sets forth the computation of basic and diluted earnings per
share pursuant to SFAS No. 128.
2004 2003 2002
----------- ------------ -------------
Numerator:
Net income $27,008 $ 27,492 $ 2,971
=========== ============ =============
Denominator (in thousands):
Denominator for basic earnings per share - weighted
average shares outstanding during the period 35,274 33,910 33,760
Effect of dilutive securities:
Stock options and awards 940 653 802
Warrants 94 159 182
----------- ------------ -------------
1,034 812 984
----------- ------------ -------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 36,308 34,722 34,744
=========== ============ =============
Basic net income per share $ .77 $ .81 $ .09
=========== ============ =============
Diluted net income per share $ .74 $ .79 $ .09
=========== ============ =============
Options totaling 2,964,303 in 2004, 4,528,953 in 2003 and 4,068,369 in 2002,
were excluded from our earnings per share computations as their effects would
have been anti-dilutive.
Reclassifications
We have made certain reclassifications to the prior years' consolidated
financial statements and notes thereto to conform to the current year
presentation.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Our results for the year ended June 30, 2002, include the effect of adopting
SFAS No. 141, "Business Combinations." 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, "Goodwill and Other
Intangible Assets" 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, 2004, included in trademarks and other intangible assets on the
balance sheet, is approximately $4.2 million of intangible assets deemed to have
a finite life which are being amortized over their estimated useful lives.
-36-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Goodwill and indefinite-life intangible assets must be tested for impairment at
the beginning of the fiscal year in which SFAS No. 142 is adopted and at least
annually thereafter. We perform a test for impairment during the fourth quarter
of our fiscal year. In accordance with SFAS No. 142, we have evaluated the fair
value of our goodwill and indefinite-life intangible assets, and based on such
evaluations, no impairment existed at July 1, 2001 or through June 30, 2004. The
$6.1 million pre-tax reduction of intangible amortization expense recognized
during the year ended June 30, 2002 represents the amount of amortization of
goodwill and indefinite-life intangible assets that arose from acquisitions
prior to July 1, 2001 and are no longer amortized. Amounts assigned to
indefinite-life intangible assets primarily represent the values of trademarks.
The following table reflects the components of trademarks and other intangible
assets:
2004 2003
------------------------------------ ------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
---------------- ----------------- ------------------ ---------------
Amortized intangible assets:
Other intangibles $ 4,189 $1,865 $ 3,041 $ 893
Non-amortized intangible assets:
Trademarks 59,953 6,484 60,311 6,484
Amortization of amortized intangible assets is expected to approximate $0.9
million in each of the next five fiscal years; however, such amortization may
vary upon completion of the procedures required to finalize the purchase price
allocation for Fiscal 2004 acquisitions.
5. 2002 RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the fourth quarter of fiscal 2002, we recorded charges aggregating $21.3
million, before taxes, related to the expected sale of our Health Valley
facility in Irwindale, California ($11.3 million) and the discontinuance of our
supplements business ($7.9 million) and Weight Watchers license ($2.1 million).
Approximately $17.9 million of these charges were noncash in nature.
Our Health Valley facility charge included $7.6 million of restructuring and
non-recurring charges associated with reduced values of inventories of raw
ingredients and packaging, certain lease obligations and other items. Of this
$7.6 million of charges, our 2002 gross profit was reduced by $5.5 million
charged to cost of sales as required by accounting rules. In addition, we
recorded $3.7 million of impairment charges to reduce the Health Valley plant's
manufacturing assets to their net realizable value. At June 30, 2002, we accrued
$2.1 million of future costs associated with this charge primarily relating to
lease exit costs relating to incremental costs and contractual obligations and
other facility exit costs expected to be incurred as part of this sale.
Additional restructuring charges of approximately $0.4 million were incurred
during the year ended June 30, 2003 for severance liabilities and related
employee costs and trade items that could not be accrued at June 30, 2002. In
addition, at the time of lease termination in fiscal 2003, we were able to
reduce our potential lease exit costs by $0.9 million, which was recorded as a
credit to restructuring and other non-recurring charges. Through June 30, 2004,
approximately $1.6 million was charged against the Health Valley facility charge
accrual in the aggregate.
We also discontinued our supplements business at Celestial Seasonings, and did
not renew our license to sell certain Weight Watchers products. In connection
with these 2002 discontinuances, we recorded charges of $7.9 million related to
supplements principally for inventories, packaging and trade items. Of this $7.9
million charge, $6.2 million had the effect of reducing our 2002 gross profit.
The charge for the non-renewal of the Weight Watchers license amounted to $2.1
million, principally for inventories, packaging and trade items, of which $0.7
million reduced our 2002 gross profit. At June 30, 2002, we accrued $3.1 and
$1.2 million for future costs associated with the Celestial Seasonings
supplements and Weight Watchers license discontinuances, respectively. These
future costs
-37-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
primarily related to anticipated sales returns resulting from the discontinuance
notification, other trade incentives, employee severance costs and other items.
At June 30, 2003, it was determined that $2 million of the accruals for
anticipated sales returns and other trade incentives would no longer be required
and therefore, such amount was reversed. Through June 30, 2004, approximately
$2.3 million has been charged against these accruals in the aggregate.
At June 30, 2004, our balance sheet includes the above-described aggregate of
$0.1 million of accrued restructuring and non-recurring charges, all of which
are expected to be paid during 2005.
6. ACQUISITIONS
Fiscal 2004
On June 3, 2004, we acquired 100% of the stock of privately-held Jason Natural
Products, Inc., a California-based manufacturer and marketer of natural health
and body care products. In recent years, Jason Natural Products has expanded its
lines of natural health and body care products by integrating a series of brands
including Orjene(R), Shaman Earthly Organics(TM), and Heather's(R) into its
portfolio. The purchase price consisted of approximately $23.9 million in cash,
plus the assumption of certain liabilities. At June 30, 2004, goodwill (not
deductible for tax purposes) from this transaction was estimated to be $20.9
million.
On May 27, 2004, we acquired substantially all of the assets and assumed certain
liabilities of the Rosetto(R) and Ethnic Gourmet(R) businesses of H.J. Heinz
Company, LP, which owned approximately 16.7% of our common stock at the time of
the transaction. These businesses produce and market frozen pasta and natural
ethnic frozen meals, respectively. The purchase price consisted of approximately
$22.8 million in cash, plus the assumption of certain liabilities. At June 30,
2004, goodwill (deductible for tax purposes) from this transaction was estimated
to be $6.6 million.
The following table summarizes the estimated fair values of assets acquired and
liabilities assumed of Jason Natural Products, Rosetto, and Ethnic Gourmet at
the dates of the acquisitions:
Current assets $12,358
Property and equipment 12,871
Other assets 102
---------
Total assets 25,331
Liabilities assumed 4,321
---------
Net assets acquired $21,010
=========
The balance sheet at June 30, 2004, includes the assets acquired and liabilities
assumed valued at fair market value at the date of purchase. We are in the
process of performing the procedures required to finalize the purchase price
allocation for the above fiscal 2004 acquisitions; however, these procedures are
in the early stages and are expected to be completed during fiscal 2005.
The results of operations for the year ended June 30, 2004 include the results
of the above fiscal 2004 acquired businesses from their respective dates of
acquisition. The following table presents information about sales and net income
had the operations of the acquired businesses been combined with our business as
of the first day of each of the periods shown. This information has not been
adjusted to reflect any changes in the operations of these businesses subsequent
to their acquisition by us. Changes in operations of these acquired businesses
include, but are not
-38-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
limited to, integration of systems and personnel, discontinuation of products
(including discontinuation resulting from the integration of acquired and
existing brands with similar products), changes in trade practices, application
of our credit policies, changes in manufacturing processes or locations, and
changes in marketing and advertising programs. Had any of these changes been
implemented by the former management of the businesses acquired prior to
acquisition by us, the sales and net income information might have been
materially different than the actual results achieved and from the pro forma
information provided below.
2004 2003
------------ ------------
Net sales $ 599,599 $ 529,612
Net income 28,930 29,197
Earnings per share:
Basic .82 .86
Diluted .80 .84
Weighted average shares:
Basic 35,274 33,910
Diluted 36,308 34,722
In management's opinion, the unaudited pro forma results of operations is not
indicative of the actual results that would have occurred had the JASON(R),
Rosetto(R) and Ethnic Gourmet(R) acquisitions been consummated at the beginning
of the periods presented or of future operations of the combined companies under
our management.
On February 25, 2004, our subsidiary in Belgium acquired Natumi, AG, a German
producer of non-dairy beverages and desserts marketed principally in retail
channels in Europe. The purchase price consisted of approximately $1.75 million
in cash as well as the assumption of certain liabilities. The purchase price
excludes the amount of contingency payments we are obligated to pay the former
owner of Natumi. The contingency payments are based on the achievement by Natumi
of certain financial targets over an approximate 3.5 year period following the
date of acquisition. Such payments, which could total approximately 9 million
euros, will be charged to goodwill if and when paid. No such contingency
payments have been made since the acquisition. The net assets acquired, as well
as the sales and operations of Natumi, are not material to the Company's
consolidated financial position or results of operations and, therefore, have
not been included in the detailed information about our acquisitions.
Fiscal 2003
On June 17, 2003, we acquired 100% of the stock of privately-held Acirca, Inc.,
the owner of the Walnut Acres Certified Organic(R) brand of organic fruit
juices, soups, pasta sauces and salsas. Since June 2000, the financial and
investment group Acirca, Inc. has expanded Walnut Acres, its premier certified
organic food and beverage brand, by integrating a series of organic brands
including Mountain Sun(R), ShariAnn's(R), Millina's Finest(R), and Frutti di
Bosco(R) into its Walnut Acres flagship. The acquisition of these product lines
allows us to add natural and organic juices and sauces to our product offerings,
and enhance our offerings of soups and salsas. The purchase price consisted of
approximately $9.0 million in cash, 134,797 shares of our common stock valued at
$2.2 million, plus the assumption of certain liabilities. At June 30, 2004,
goodwill (not deductible for tax purposes) from this transaction approximated
$13.1 million.
On December 2, 2002, we acquired substantially all of the assets and assumed
certain liabilities of privately-held Imagine Foods, Inc. ("Imagine") in the
United States and the United Kingdom. Imagine is a non-dairy beverage company
specializing in aseptic and refrigerated rice and soy milks, organic aseptic
soups and broths, and organic frozen desserts in the U.S., Canada, and Europe.
The acquisition of these product lines is expected to enhance our
-39-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
existing market positions in non-dairy beverages and soups while adding frozen
dessert products to our offerings to customers. The purchase price consisted of
approximately $44.2 million in cash, 532,765 shares of our common stock valued
at $7.0 million, plus the assumption of certain liabilities. At June 30, 2004,
goodwill (deductible for tax purposes) from this transaction was valued at $38.7
million, trademarks and other non-amortizable intangibles were $15.7 million,
and patents and other amortizable intangibles were valued at $1.0 million.
The following table summarizes the estimated fair values of assets acquired and
liabilities assumed of Acirca and Imagine at the dates of the acquisitions:
Current assets $17,714
Property and equipment 2,409
------------
Total assets 20,123
Liabilities assumed 14,937
------------
Net assets acquired $ 5,186
============
The balance sheet at June 30, 2004 includes the assets acquired and liabilities
assumed valued at fair market value at the date of purchase. We have completed
substantially all of the procedures required to finalize the purchase price
allocation for Imagine and Acirca.
Our results of operations for the year ended June 30, 2004 includes the results
of the above described fiscal 2003 acquisitions for the complete period. The
following table presents information about sales and net income had the
operations of the acquired businesses been combined with our business as of the
first day of each of the periods shown. This information has not been adjusted
to reflect any changes in the operations of these businesses subsequent to their
acquisition by us. Changes in operations of these acquired businesses include,
but are not limited to, integration of systems and personnel, discontinuation of
products (including discontinuation resulting from the integration of acquired
and existing brands with similar products), changes in trade practices,
application of our credit policies, changes in manufacturing processes or
locations, and changes in marketing and advertising programs. Had any of these
changes been implemented by the former management of the businesses acquired
prior to acquisition by us, the sales and net income information might have been
materially different than the actual results achieved and from the pro forma
information provided below.
2003 2002
---------- ----------
Net sales $524,176 $473,169
Net income (loss) 20,142 (12,916)
Earnings (loss) per share:
Basic 0.59 (0.38)
Diluted 0.57 (0.38)
Weighted average shares:
Basic 34,261 34,428
Diluted 35,073 34,428
In management's opinion, the unaudited pro forma results of operations is not
indicative of the actual results that would have occurred had the Acirca and
Imagine(R) acquisitions been consummated at the beginning of the periods
presented or of future operations of the combined companies under our
management.
On May 14, 2003, our subsidiary in Belgium acquired Grains Noirs, N.V., a
Belgian producer and marketer of fresh prepared organic appetizers, salads,
sandwiches and other full-plated dishes. The purchase price paid was
approximately $2.2 million in cash. The net assets acquired, as well as the
sales and results of operations of Grains Noirs, are not material and,
therefore, have not been included in the detailed information about our
acquisitions.
-40-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Fiscal 2002
In December 2001, we acquired 100% of the stock of privately-held Lima, N.V.
("Lima"), a leading Belgian manufacturer and marketer of natural and organic
foods. We consummated this strategic European acquisition to provide us with a
diversified natural and organic food products manufacturer and distributor that
is similar to our manufacturing and distribution (types of food products) here
in the United States. The aggregate purchase price, including acquisition costs,
amounted to approximately $20.0 million. The purchase price paid was based on a
multiple of future operating income Lima will generate with the integration of
certain business processes and introduction of existing Hain products into
Europe, utilizing Lima's distribution network.
The purchase price was paid by $15.6 million in cash and the issuance of 205,128
shares of our common stock valued at $4.4 million.
The value assigned to the common stock was determined based on the average
market price of our common stock over the period including three days before and
after the terms of the acquisition were agreed to and announced. The aggregate
purchase price paid over the net assets acquired amounted to approximately $15.6
million (included in goodwill, and currently not tax deductible). Based on an
independent valuation analysis, the excess cost over net assets acquired was
allocated between goodwill and trademarks, which will not amortize under SFAS
No. 142.
The following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.
Current assets $ 6,770
Property, plant & equipment and other long-term assets 3,990
-----------
Total assets 10,760
Liabilities assumed 6,360
-----------
Net assets acquired $ 4,400
===========
The above purchase price excludes the amount of contingency payments we are
obligated to pay the former owner of Lima. The contingency payments are based on
the achievement by Lima of certain financial targets over the 2.5 years
following the date of acquisition. Such payments, which could total $3.5
million, will be charged to goodwill if and when paid. During fiscal 2004 and
2003, $1.5 million and $0.5 million, respectively, in contingency payments were
made.
7. INVENTORIES
Inventories consist of the following at June 30:
2004 2003
--------- ----------
Finished goods $56,132 $ 43,022
Raw materials, work-in-process and packaging 30,741 23,422
--------- ----------
$86,873 $ 66,444
========= ==========
-41-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30:
2004 2003
----------- -----------
Land $ 8,113 $ 6,913
Buildings and improvements 29,867 24,448
Machinery & equipment 79,275 61,949
Furniture and fixtures 2,527 2,383
Leasehold improvements 3,478 1,457
Construction in progress 4,541 3,070
----------- -----------
127,801 100,220
Less:
Accumulated depreciation and amortization 40,799 31,555
----------- -----------
$ 87,002 $ 68,665
=========== ===========
Included within machinery and equipment are assets held under capital leases
with net book values at June 30, 2004 and 2003 of $2.1 million and $3.9 million,
respectively.
9. LONG-TERM DEBT
Long-term debt at June 30 consists of the following:
2004 2003
----------- -----------
Senior Revolving Credit Facilities payable to banks $ 99,200 $ 53,850
Capital leases on machinery and equipment 1,881 3,632
Other debt instruments 6,508 6,672
Economic Development Revenue Bonds due in monthly installments through
November 1, 2009; interest payable monthly at variable rates 3,550 4,108
----------- -----------
111,139 68,262
6,845 8,807
----------- -----------
Current Portion $ 104,294 $ 59,455
=========== ===========
On April 22, 2004, we entered into a new $300 million credit facility (the
"Credit Facility") with a bank group led by our existing bank agents for a
five-year term expiring in April 2009. The Credit Facility provides for an
uncommitted $50 million accordion feature, under which the facility may be
increased to $350 million. The Credit Facility is secured only by a pledge of
shares of certain of our foreign subsidiaries and is guaranteed by all of our
current and future direct and indirect domestic subsidiaries. We are required to
comply with customary affirmative and negative covenants for facilities of this
nature. Revolving credit loans under this facility bear interest at a base rate
(greater of the applicable prime rate or Federal Funds Rate plus an applicable
margin) or, at our option, the reserve adjusted LIBOR rate plus an applicable
margin. As of June 30, 2004, $99.2 million was borrowed under the Credit
Facility at an average interest rate of 2.4%.
Capital Leases
Capital leases on machinery and equipment of $1.9 million bear interest at rates
ranging from 4.9% to 12.3% and are due in monthly installments through June
2007.
-42-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
The aggregate minimum future lease payments for all capital leases at June 30,
2004 are as follows:
2005 $ 1,359
2006 430
2007 92
-----------
$ 1,881
===========
Other Debt Instruments
Other debt instruments consist of borrowings by our European businesses under
several arrangements with a member of the group of banks that provide our Credit
Facility. These borrowings include $4.1 million under revolving credit
facilities with interest rates approximating 4.0%, and notes payable of $2.4
million, of which approximately $1.9 million is payable in quarterly
installments plus interest at 4.85% over a four year period through May 2008.
Economic Development Bonds
Borrowings related to Economic Development Revenue Bonds (the "Bonds") bear
interest at a variable rate (1.3% at June 30, 2004) and are secured by a letter
of credit. The Bonds mature November 1, 2009. The Bonds can be tendered monthly
to the Bond trustee at face value plus accrued interest, with payment for
tendered Bonds made from drawdowns under a letter of credit facility which
expires November 2004.
Maturities of all debt instruments at June 30, 2004, are as follows:
2005 $ 6,845
2006 1,724
2007 1,293
2008 1,244
2009 99,825
Thereafter 208
-------------
$ 111,139
=============
Interest paid (which approximates the related expense) during the years ended
June 30, 2004, 2003 and 2002 amounted to $2,484, $1,566 and $893, respectively.
10. INCOME TAXES
The provision for income taxes for the years ended June 30, 2004, 2003 and 2002
is presented below.
2004 2003 2002
-------------- ------------- -------------
Current:
Federal $ 7,418 $ 4,906 $ (130)
State 3,580 1,530 (15)
Foreign 1,612 2,372 2,214
-------------- ------------- -------------
12,610 8,808 2,069
Deferred Federal and State 3,770 7,864 (237)
-------------- ------------- -------------
Total $ 16,380 $ 16,672 $ 1,832
============== ============= =============
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
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.
-43-
Components of our deferred tax asset/(liability) as of June 30 are as follows:
2004 2003
------------ ------------
Current deferred tax assets:
Basis difference on inventory $ 2,007 $ 1,726
Allowance for doubtful accounts 732 800
Net operating loss carryforwards 191 --
Reserves not currently deductible 181 645
------------ ------------
Current deferred tax assets 3,111 3,171
------------ ------------
Noncurrent deferred tax liabilities:
Difference in amortization (12,486) (10,120)
Basis difference on property and equipment (5,667) (4,792)
Noncurrent deferred tax assets:
Net operating loss carryforwards 3,346 --
------------ ------------
Noncurrent deferred tax liabilities, net (14,807) (14,912)
------------ ------------
$ (11,696) $ (11,741)
============ ============
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:
2004 % 2003 % 2002 %
------- ----- ------- ----- ------ ------
Expected U.S. federal income tax at statutory $15,185 35.0% $15,457 35.0% $1,681 35.0%
rate
State income taxes, net of federal benefit 1,501 3.5 1,653 3.7 (46) (.9)
Foreign income at different rates 448 1.0 297 0.7 277 5.7
Other (754) (1.7) (735) (1.7) (80) (1.7)
------- ----- ------- ----- ------ ------
Provision for income taxes $16,380 37.8% $16,672 37.7% $1,832 38.1%
======= ===== ======= ===== ====== ======
Income taxes paid (refunded) during the years ended June 30, 2004, 2003 and 2002
amounted to $4.7 million, $5.2 million and $(5.1) million, respectively.
11. STOCKHOLDERS' EQUITY
Common Stock Issued - Business Acquisitions
As part of the Lima acquisition consummated during fiscal 2002, 205,128 common
shares were issued to the sellers, valued at approximately $4.4 million. As part
of the Imagine and Acirca acquisitions consummated during fiscal 2003, 667,562
common shares were issued to the sellers, valued at approximately $9.2 million
in the aggregate.
Restricted Stock Grant
In accordance with the terms of the employment agreement with our Chief
Executive Officer ("CEO"), on February 24, 2004, we granted 150,000 shares of
restricted common stock to our CEO. On the grant date, the market value of our
common stock was $20.90 per share and, therefore, the total market value of the
grant approximated $3.1 million. These shares will vest ratably from the date of
grant through expiration of the employment agreement on June 30, 2007. Through
June 30, 2004, 15,618 shares have vested. For the year ended June 30, 2004,
approximately $0.3 million of non-cash compensation has been charged to general
and administrative expenses.
-44-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Preferred Stock
We are authorized to issue "blank check" preferred stock (up to 5 million
shares) with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered to issue, without stockholder approval, preferred stock with
dividends, liquidation, conversion, voting, or other rights which could decrease
the amount of earnings and assets available for distribution to holders of our
Common Stock. At June 30, 2004 and 2003, 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 2004, Argosy exercised 36,667 of the
warrants resulting in proceeds of $0.5 million. In fiscal 2003 and 2002, Argosy
exercised no warrants. In fiscal 2001, Argosy exercised 26,666 of these
warrants, resulting in proceeds of $0.3 million.
In fiscal 2001, Argosy exercised warrants previously granted in 1994 to acquire
104,100 of our common stock at an exercise price of $3.25. During fiscal 2004,
the remaining 322,764 warrants were exercised resulting in proceeds of $1.0
million.
12. STOCK OPTION PLANS
Hain
In December 1994, we adopted the 1994 Long-Term Incentive and Stock Award Plan,
which amended and restated our 1993 stock option plan. On December 9, 1997, the
stockholders of Hain approved an amendment to increase the number of shares
issuable under the 1994 Long Term Incentive and Stock Award Plan by 345,000 to
1,200,000 shares. In December 1998, the plan was further amended to increase the
number of shares issuable by 1,200,000 bringing the total shares issuable under
this plan to 2,400,000. In December 1999, the plan was further amended to
increase the number of shares issuable by 1,000,000 bringing the total shares
issuable under this plan to 3,400,000. In May 2000, the plan was further amended
to increase the number of shares issuable by 3,000,000 bringing the total shares
issuable under this plan to 6,400,000. The plan provides for the granting of
incentive stock options to employees, directors and consultants to purchase
shares of our common stock. All of the options granted to date under the plan
have been incentive and non-qualified stock options providing for exercise
prices equivalent to the fair market price at date of grant, and expire ten
years after date of grant. Vesting terms are determined at the discretion of the
Company. During 2002, options to purchase 1,688,900 shares were granted at
prices ranging from $15.42 to $22.72 per share. During 2003, options to purchase
565,000 shares were granted at prices ranging from $12.13 to $16.30. During
2004, options to purchase 195,550 shares were granted at prices ranging from
$18.25 to $20.90. At June 30, 2004, 150,982 options were available for grant
under this plan.
In October 2002, we adopted a new Long-Term Incentive and Stock Award Plan. The
plan provides for the granting of stock options and other equity awards to
employees, directors and consultants to purchase shares of our common stock. An
aggregate of 1,600,000 shares of common stock were originally reserved for
issuance under this plan. In December 2003, the plan was amended to increase the
number of shares issuable by 1,500,000 shares to 3,100,000 shares. All of the
options granted to date under the plan have been incentive and non-qualified
stock options provid-
-45-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
ing for exercise price equivalent to the fair market price at the date of grant
and expire ten years after the date of grant. Vesting terms are determined at
the discretion of the company. During 2003, options to purchase 1,471,200 shares
were granted at prices ranging from $11.84 to $16.24 per share. During 2004,
options to purchase 116,300 shares were granted at prices ranging from $15.85 to
$18.63 per share. At June 30, 2004, 1,580,900 options were available for grant
under this plan.
Our CEO was granted options to purchase 125,000 shares of common stock at
$4.8125 per share on the date of grant (June 30, 1997) pending approval of an
increase in the number of shares available for grant (approved by shareholders
on December 9, 1997). We incur a straight line non-cash compensation charge of
$46,000 annually over the ten-year vesting period based on the excess ($0.5
million) of the market value of the stock options ($8.50 per share) on December
9, 1997 over the $4.8125 per share market value on the date of grant.
In December 1995, we adopted a Directors Stock Option Plan. The plan provides
for the granting of stock options to non-employee directors to purchase up to an
aggregate of 300,000 shares of our common stock. In December 1998, the plan was
amended to increase the number of shares issuable from 300,000 to 500,000. In
December 1999, the plan was amended to increase the number of shares issuable by
250,000, bringing the total shares issuable under this plan to 750,000. The
remaining available shares in this plan have been canceled and no future grants
are available on this plan effective January 2001.
In May 2000, we adopted a new Directors Stock Option Plan. The plan originally
provided for the granting of stock options to non-employee directors to purchase
up to an aggregate of 750,000 shares of our common stock. In December 2003, the
plan was amended to increase the number of shares issuable by 200,000 shares to
950,000 shares. At June 30, 2001, no options were granted under this plan.
During 2002, options for an aggregate of 255,000 shares were granted at prices
ranging from $20.01 to $26.44 per share. During 2003, options for an aggregate
of 300,000 shares were granted at prices ranging from $12.13 to $17.88. During
2004, options to purchase 163,000 shares were granted at prices ranging from
$18.03 to $22.08 per share. At June 30, 2004, 287,000 options were available for
grant under this plan.
We also have a 1993 Executive Stock Option Plan pursuant to which we granted our
CEO options to acquire 600,000 shares of our common stock. The exercise price of
options designed to qualify as incentive options was $3.58 per share and the
exercise price of non-qualified options was $3.25 per share. No exercises were
made during fiscal 2002 or 2003. During fiscal 2004, the remaining outstanding
535,000 options were exercised. As of June 30, 2004, no additional shares are
available for grant under this plan.
Celestial Seasonings
In 1991, Celestial Seasonings granted options to an executive officer of
Celestial Seasonings to purchase 241,944 shares of common stock in connection
with capital contributions made by the officer and certain other agreements.
Such options were immediately vested at the grant date, are exercisable at a
weighted average price per share of $3.90 and expire in 2031.
During 1993, Celestial Seasonings adopted an incentive and non-qualified stock
option plan that provided for the granting of awards for up to 331,430 shares of
Celestial Seasonings common stock. Options granted at the time of Celestial
Seasonings initial public offering in 1993 vested over one-year and five-year
periods. Options granted subsequent to Celestial Seasonings initial public
offering generally vested over a five-year period. Options expire ten years from
the grant date.
In 1993, Celestial Seasonings granted options to purchase 25,300 shares of
Celestial Seasonings common stock to a director of Celestial Seasonings. The
options vested over a three-year period and expire ten years from the grant
date. During fiscal 2001, all of these options were exercised.
-46-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
In 1995, Celestial Seasonings adopted a non-qualified stock option plan for
non-employee directors. The plan provides for up to 189,750 shares of Celestial
Seasonings common stock for issuance upon exercise of options granted to
non-employee directors and in lieu of meeting fees paid to non-employee
directors. The options vest over a one-year period and expire ten years from the
grant date.
During 1998, Celestial Seasonings amended this plan to provide each non-employee
director an initial grant of an option to purchase 12,650 shares and an annual
grant, commencing in 1999, of an option to purchase 5,060 shares. Effective May
30, 2000, no further grants are available under this plan.
In 1997, Celestial Seasonings granted options to an executive officer of
Celestial Seasonings to purchase 417,450 shares of Celestial Seasonings common
stock. The options were granted in connection with the officer's employment
agreement, initially vested over a five-year period, are exercisable at $8.70
per share and expire ten years from the grant date. During 2001, all of these
options were exercised.
Employee Stock Purchase Plan
Under the Celestial Seasonings Employee Stock Purchase Plan, Celestial
Seasonings was authorized to issue up to 66,286 shares of common stock to its
full-time employees, nearly all of whom were eligible to participate. Under the
terms of the plan, employees could choose each year to have up to 10% of their
annual base earnings withheld to purchase Celestial Seasonings common stock. The
purchase price of the stock was equal to 85 percent of the lower of the market
price at the beginning or end of each six month participation period.
Approximately 30 percent of eligible Celestial Seasonings employees participated
in the plan. Under the plan, Celestial Seasonings sold approximately 5,000
shares for the year ended June 30, 2002 and 5,300 shares for the year ended June
30, 2001. As of December 31, 2001, this plan was terminated.
A summary our stock option plans' activity for the three years ended June 30,
2004 follows:
2004 2003 2002
------------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ ---------- ----------- --------- ----------- ----------
Outstanding at beginning of year 8,266,721 $17.05 6,023,383 $18.72 4,240,741 $18.01
Granted 474,850 20.23 2,347,700 12.92 1,943,900 19.70
Exercised (1,744,495) 10.92 (67,821) 9.24 (94,341) 9.12
Terminated (227,639) 20.95 (36,541) 23.17 (66,917) 23.27
------------ ---------- ----------- --------- ----------- ----------
Outstanding at end of year 6,769,437 $18.67 8,266,721 $17.75 6,023,383 $18.72
============ ========== =========== ========= =========== ==========
Exercisable at end of year 6,162,554 $19.09 6,675,738 $18.18 4,482,182 $18.14
============ ========== =========== ========= =========== ==========
Weighted average fair value of
options granted during year $ 9.77 $12.95 $14.23
============ ========== =========== ========= =========== ==========
-47-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
The following table summarizes information for stock options outstanding at June
30, 2004:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------- ----------------------------
Weighted
Average Weighted Options Weighted
Options Remaining Average Exercisable Average
Range of Outstanding Contractual Exercise as of Exercise
Exercise Prices as of 06/30/2004 Life (in years) Price 06/30/2004 Price
- ------------------------- ----------------- --------------- ---------- ------------ ----------
$2.94 - $6.75 442,956 16.5 $ 4.15 442,956 $ 4.15
6.76 - 12.50 896,038 8.3 11.76 496,538 11.70
12.51 - 17.65 1,489,912 6.8 15.73 1,419,912 15.72
17.66 - 19.19 876,228 7.3 18.10 873,228 18.10
19.20 - 22.73 1,425,230 6.8 21.09 1,290,847 21.11
22.74 - 25.68 164,130 4.1 23.51 164,130 23.51
25.69 - 29.35 1,233,693 6.1 26.79 1,233,693 26.79
29.36 - 33.01 216,250 6.3 31.54 216,250 31.54
33.02 - 38.38 25,000 0.1 36.69 25,000 36.69
----------------- --------------- ---------- ------------ ----------
6,769,437 6.6 $ 18.67 6,162,554 $ 19.09
================= =============== ========== ============ ==========
Shares of Common Stock reserved for future issuance as of June 30, 2004 are as
follows:
Stock options 8,788,319
Warrants 36,667
---------
8,824,986
=========
13. LEASES
Our corporate headquarters are located in approximately 35,000 square feet of
leased office space in Melville, New York, under a lease which expires in
December 2012. In addition, the Company leases manufacturing and warehouse space
under leases which expire through 2007. These leases provide for additional
payments of real estate taxes and other operating expenses over a base period
amount.
The aggregate minimum future lease payments for these operating leases at June
30, 2004, are as follows:
2005 $ 4,619
2006 4,687
2007 4,048
2008 2,433
2009 2,356
Thereafter 7,170
--------
$ 25,313
========
Rent expense charged to operations for the years ended June 30, 2004, 2003 and
2002 was approximately $4,087, $4,200 and $3,804, respectively.
-48-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
14. SEGMENT INFORMATION
Our company is engaged in one business segment: the manufacturing, distribution
and marketing of natural and organic food, beverage and body care products. We
define business segments as components of an enterprise about which separate
financial information is available that is evaluated on a regular basis by a
chief operating decision maker or group.
Outside the United States, we primarily conduct business in Canada and Europe.
Selected information related to our operations by geographic area are as
follows:
2004 2003 2002
------------------------------ -------------------------------- ------------------------------
United United United
States Canada Europe States Canada Europe States Canada Europe
------ ------ ------ ------ ------ ------ ------ ------ ------
Net sales $433,787 $48,326 $61,945 $385,569 $41,498 $39,392 $339,522 $34,254 $22,178
Earnings (loss)
before income
taxes 34,437 4,670 4,281 37,287 5,460 1,417 (735) 5,398 140
Long lived assets 425,563 43,424 16,930 374,957 39,541 17,342 298,198 37,811 18,290
15. DEFINED CONTRIBUTION PLANS
We have a 401(k) Employee Retirement Plan ("Plan") to provide retirement
benefits for eligible employees. All full-time employees of Hain and our
domestic subsidiaries who have attained the age of 21 are eligible to
participate upon completion of 30 days of service. The subsidiary Yves Veggie
Cuisine has its own separate Registered Retirement Employee Savings Plan for
those employees residing in Canada. Employees of Yves who meet eligibility
requirements may participate in that plan. On an annual basis, we may, in our
sole discretion, make certain matching contributions. For the years ended June
30, 2004, 2003 and 2002, we made contributions to the Plan of $244, $228 and
$372, respectively.
16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting for Costs Associated with Exit or Disposal Activity
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between SFAS No. 146 and Issue 94-3 relates to SFAS No. 146's
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
Therefore, SFAS No. 146 eliminates the definition and requirements for
recognition of exit costs in Issue 94-3. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. The provisions
of SFAS No. 146 are effective for exit or disposal activities that we may
initiate after December 31, 2002. There have been no disposal or exit activities
since adoption of the statement.
17. LITIGATION
From time to time, the Company is involved in litigation, incidental to the
conduct of its business. In the opinion of management, disposition of pending
litigation will not have a material adverse effect on the Company's business,
results of operations or financial condition.
-49-
The Hain Celestial Group, Inc.
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
Item 9A. Controls And Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have reviewed our
disclosure controls and procedures as of the end of the period covered by this
report. Based upon this review, these officers concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures are
adequately designed to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
applicable rules and forms.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls during the quarter covered by
this report or from the end of the reporting period to the date of this Form
10-K.
PART III
Item 10, "Directors and Executive Officers of the Registrant", Item 11,
"Executive Compensation", Item 12, "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters", Item 13, "Certain
Relationships and Related Transactions", and Item 14, "Principal Accountant Fees
and Services" have been omitted from this report inasmuch as the Company will
file with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report a
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held on December 2, 2004, at which meeting the stockholders will vote upon
election of the directors. This information in such Proxy Statement is
incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) (1) List of Financial statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - June 30, 2004 and 2003
Consolidated Statements of Income - Years ended June 30, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity - Years ended June 30, 2004,
2003 and 2002
Consolidated Statements of Cash Flows - Years ended June 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedule
Valuation and Qualifying Accounts (Schedule II)
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(3) List of Exhibits
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 of Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (Commission File No. 333-33830) filed with the Commission on April 24,
2000).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of
Amendment No. 1 to the Registrant's Registration Statement on Form S-4
(Commission File No. 333-33830) filed with the Commission on April 24, 2000).
4.1 Specimen of common stock certificate (incorporated by reference to Exhibit
4.1 of Amendment No. 1 to the Registrant's Registration Statement on Form S-4
(Commission File No. 333-33830) filed with the Commission on April 24, 2000).
4.2 1993 Executive Stock Option Plan (incorporated by reference to Exhibit 4.2
of Amendment No. 1 to the Registrant's Registration Statement on Form SB-2
(Commission File No. 33-68026) filed with the Commission on October 21, 1993).
4.3 Amended and Restated 1994 Long Term Incentive and Stock Award Plan (included
as Annex F to the Joint Proxy Statement/Prospectus contained in the Registrant's
Registration Statement on Form S-4 (Commission File No. 333-33830) filed with
the Commission on April 24, 2000).
4.4 1996 Directors Stock Option Plan (incorporated by reference to Appendix A to
the Registrant's Notice of Annual Meeting of Stockholders and Proxy Statement
dated November 4, 1996).
4.5 2000 Directors Stock Option Plan (included as Annex G to the Joint Proxy
Statement/Prospectus contained in the Registrant's Registration Statement on
Form S-4 (Commission File No. 333-33830) filed with the Commission on April 24,
2000).
4.5.1 Amendment No. 1 to 2000 Directors Stock Option Plan (incorporated by
reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-8
(Commission File No. 333-111881) filed with the Commission on January 13, 2004).
4.6 2002 Long Term Incentive and Stock Award Plan (incorporated by reference to
Appendix A of the Registrant's Notice of annual Meeting of Stockholders and
Proxy Statements dated October 14, 2002).
4.6.1 Amendment No. 1 to 2002 Long Term Incentive and Stock Award Plan
(incorporated by reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 (Commission File No. 333-111881) filed with the Commission
on January 13, 2004).
10.1 Amended and Restated Credit Agreement dated as of April 22, 2004, by and
among the Registrant and Fleet National bank, as administrative agent, SunTrust
Bank and KeyBank National Association, as co-syndication agents, HSBC Bank USA
and First Pioneer Farm Credit, ACA, as co-documentation agents, and the lenders
party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K filed with the Commission on April 30, 2004).
10.3 Investor's Agreement among the Registrant, Boulder Inc. (formerly Earth's
Best, Inc.) and Irwin D. Simon dated September 24, 1999 (incorporated by
reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed
with the Commission on September 30, 1999).
10.4 Registration Rights Agreement between the Registrant and Boulder Inc.
(formerly Earth's Best, Inc.), dated September 24, 1999 (incorporated by
reference to Exhibit 10.3 of the Registrant's Current Report on Form 8-K filed
with the Commission on September 30, 1999).
-51-
10.5 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).
21.1(a) Subsidiaries of Registrant.
23.1(a) Consent of Independent Registered Public Accounting Firm - Ernst & Young
LLP.
31.1(a) Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2(a) Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1(a) Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(a) Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
a - Filed herewith
(b) Reports on Form 8-K
On May 7, 2004, the Registrant furnished a Form 8-K with respect to the
Registrant's press release announcing its financial results for its third
quarter ended March 31, 2004.
On April 30, 2004, the Registrant filed a Form 8-K with respect to the
Registrant's press release announcing that it had amended and restated its
credit facility, pricing adjustments and financial guidance for its third
quarter ended March 31, 2004.
-52-
The Hain Celestial Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- ----------------------------------- -------------- ---------------------------- ------------- ------------
Additions
Charged to
Balance at Charged to other Balance of
beginning of costs and accounts - Deductions - end of
period expenses describe describe period
------------- ------------- ------------- ------------- ------------
Year Ended June 30, 2004 Deducted
from asset accounts:
Allowance for doubtful accounts $1,748 $437 $10 (1) $ 10 (2) $ 2,185
Year Ended June 30, 2003 Deducted
from asset accounts:
Allowance for doubtful accounts $ 1,002 $ 610 $ 190 (1) $ 54 (2) $1,748
Year Ended June 30, 2002 Deducted
from asset accounts:
Allowance for doubtful accounts $ 815 $ 551 $ 175 (1) $ 539 (2) $1,002
(1) Allowance for doubtful accounts at dates of acquisitions of acquired
businesses.
(2) Uncollectible accounts written off, net of recoveries.
-53-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE HAIN CELESTIAL GROUP, INC.
By: /s/ Irwin D. Simon
--------------------------------------
Irwin D. Simon
President, Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ Ira J. Lamel
--------------------------------------
Ira J. Lamel
Executive Vice President and
Chief Financial Officer
Date: September 13, 2004
-54-
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Irwin D. Simon President, Chief Executive Officer September 13, 2004
- --------------------------------------- and Chairman of the Board of
Irwin D. Simon Directors
/s/ Ira J. Lamel Executive Vice President and Chief September 13, 2004
- --------------------------------------- Financial Officer
Ira J. Lamel
/s/ Barry Alperin Director September 13, 2004
- ---------------------------------------
Barry Alperin
/s/ Beth L. Bronner Director September 13, 2004
- ---------------------------------------
Beth L. Bronner
/s/ Jack Futterman Director September 13, 2004
- ---------------------------------------
Jack Futterman
/s/ Daniel Glickman Director September 13, 2004
- ---------------------------------------
Daniel Glickman
/s/ Marina Hahn Director September 13, 2004
- ---------------------------------------
Marina Hahn
/s/ Andrew R. Heyer Director September 13, 2004
- ---------------------------------------
Andrew R. Heyer
/s/ Roger Meltzer Director September 13, 2004
- ---------------------------------------
Roger Meltzer
/s/ Mitchell A. Ring Director September 13, 2004
- ---------------------------------------
Mitchell A. Ring
/s/ Lewis D. Schiliro Director September 13, 2004
- ---------------------------------------
Lewis D. Schiliro
/s/ D. Edward Smyth Director September 13, 2004
- ---------------------------------------
D. Edward Smyth
/s/ Larry S. Zilavy Director September 13, 2004
- ---------------------------------------
Larry S. Zilavy
-55-
Exhibit 21.1
Jurisdiction of
Subsidiary Incorporation
- ---------- -------------
Acirca, Inc. Delaware
Celestial Seasonings, Inc. Delaware
Natural Nutrition Group, Inc. Delaware
Health Valley Company Delaware
Arrowhead Mills, Inc. Delaware
AMI Operating, Inc. Texas
DeBoles Nutritional Foods, Inc. New York
Hain Pure Food Co., Inc. California
Kineret Foods Corporation New York
Westbrae Natural, Inc. Delaware
Westbrae Natural Foods, Inc. California
Little Bear Organic Foods, Inc. California
Dana Alexander, Inc. New York
Terra Chips, B.V. Netherlands
Hain-Yves, Inc. Delaware
Hain-Celestial Canada, ULC Nova Scotia
Hain Celestial Europe B.V. Netherlands
Hain Celestial Belgium BVBA Belgium
Jason Natural Products, Inc. California
Yves Fine Foods Inc. Nevada
Fruit Specialties B.V. Netherlands
The Organic Production S.A. Belgium
W.S.L. NV Belgium
Grains Noirs SA Belgium
Societe Anonyme de Gestion et D'administration SA Belgium
Natumi AG Germany
Hain Europe NV Belgium
Lima SA/NV Belgium
Lima France S.A.R.L. France
Biomarche S.C.R.L. Belgium
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-33828, 333-102017 and 333-111881), Post-Effective Amendment
No. 1 to the Registration Statement (Form S-4 on Form S-8 No. 333-33830) and
Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No.
333-38915), and the Registration Statements (Form S-3 Nos. 333-59761, 333-77137,
333-65618, 333-57806, 333-73808 and 333-106940) of The Hain Celestial Group,
Inc. and in the related Prospectus of our report dated August 30, 2004, with
respect to the consolidated financial statements and schedule of The Hain
Celestial Group, Inc. and Subsidiaries included in this Annual Report (Form
10-K) for the year ended June 30, 2004.
/s/ Ernst & Young LLP
Melville, New York
September 13, 2004
EXHIBIT 31.1
CERTIFICATION
I, Irwin D. Simon, certify that:
1. I have reviewed this annual report on Form 10-K of The Hain Celestial Group,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; (b) Evaluated the
effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and (c) Disclosed in this report any change in
the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: September 13, 2004
/s/ Irwin D. Simon
-------------------------------------
Irwin D. Simon
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Ira J. Lamel, certify that:
1. I have reviewed this annual report on Form 10-K of The Hain Celestial Group,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: September 13, 2004
/s/ Ira J. Lamel
-----------------------------
Ira J. Lamel
Executive Vice President
and Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the period ended June 30,
2004 (the "Report") filed by The Hain Celestial Group, Inc. (the "Company") with
the Securities and Exchange Commission, I, Irwin D. Simon, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 13, 2004
/s/ Irwin D. Simon
----------------------------------------
Irwin D. Simon
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to The Hain Celestial Group, Inc. and will be retained by The Hain
Celestial Group, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
EXHIBIT 32.2
CERTIFICATION FURNISHED
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the period ended June 30,
2004 (the "Report") filed by The Hain Celestial Group, Inc. (the "Company") with
the Securities and Exchange Commission, I, Ira J. Lamel, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 13, 2004
/s/ Ira J. Lamel
------------------------------
Ira J. Lamel
Executive Vice President
and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to The Hain Celestial Group, Inc. and will be retained by The Hain
Celestial Group, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.