SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange
Act of 1934
For The Fiscal Year Ended June 30, 2001
Commission File No. 0-22818
THE HAIN CELESTIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3240619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Charles Lindbergh Boulevard
Uniondale, New York 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 237-6200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to Form
10-K. |_|
State the aggregate market value of the voting common equity held by non-
affiliates, computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days.
Class of Voting Stock and Number Market Value Held
of Shares Held by Non-Affiliates by Non-affiliates*
-------------------------------- -----------------
26,677,715 shares of Common Stock $ 486,866,474
* Based on the last reported sale price for the Common Stock on Nasdaq National
Market on September 21, 2001
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date. Common Stock, par value $.01
per share, 33,771,874 shares outstanding as of September 21, 2001.
Documents Incorporated by Reference
Document Part of the Form 10-K
into which Incorporated
The Hain Celestial Group, Inc. Definitive Part III
Proxy Statement for the Annual Meeting
of Stockholders to be Held December 11, 2001
TABLE OF CONTENTS
PART I
Page
Item 1. Business 1
Note Regarding Forward Looking Information 1
General 1
Product Overview 3
Products 4
New Product Initiatives Through Research and Development 5
Sales and Distribution 5
Marketing 6
Manufacturing Facilities 6
Suppliers of Ingredients and Packaging 7
Co-packed Product Base 8
Trademarks 9
Competition 9
Government Regulation 10
Independent Certification 11
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7A.Quantitative and Qualitative Disclosures
About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 53
PART III
Item 10. Directors and Executive Officers of
the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership and Certain Beneficial
Owners and Management 54
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K 54
Signatures 58
PART I
THE HAIN CELESTIAL GROUP, INC.
Item 1. Business.
Note Regarding Forward Looking Information
Certain statements contained in this Annual Report constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, levels of activity, performance or achievements of the Company (as
defined below), or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; the ability of the Company
to implement its business and acquisition strategy; the ability to effectively
integrate its acquisitions; the ability of the Company to obtain financing for
general corporate purposes; competition; availability of key personnel; and
changes in, or the failure to comply with government regulations. As a result of
the foregoing and other factors, no assurance can be given as to the future
results, levels of activity and achievements and neither the Company nor any
person assumes responsibility for the accuracy and completeness of these
statements.
General
The Hain Celestial Group, Inc., a Delaware corporation, and its
subsidiaries (collectively, the "Company") manufacture, market, distribute and
sell natural, specialty, organic and snack food products under brand names which
are sold as "better-for-you" products. The Company is a leader in many of the
top natural food categories, with such well-known natural food brands as
Celestial Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R),
Arrowhead Mills(R), Health Valley(R), Breadshop's(R), Casbah(R), Garden of
Eatin'(R), Terra Chips(R), Gastons(R), Yves Veggie Cuisine(R), DeBoles(R),
Earth's Best(R), and Nile Spice(R). The Company's principal specialty product
lines include Hollywood(R) cooking oils, Estee(R) sugar-free products, Weight
Watchers(R) dry products, Kineret(R) kosher foods, Boston Better Snacks(R), and
Alba Foods(R). The Hain Celestial Group's website can be found at
www.hain-celestial.com.
The Company's products are sold primarily to specialty and natural food
distributors and are marketed nationally to supermarkets, natural food stores,
and other retail classes of trade including: mass-market stores, food service
channels and club stores. During fiscal 2001, approximately 51% of the Company's
revenues were manufactured within its own facilities. The remaining 49% of the
Company's revenues were derived from products which are produced by independent
food manufacturers ("co-packers") using proprietary specifications controlled by
the Company.
On May 30, 2000, the Company, previously known as The Hain Food Group,
Inc. ("Hain"), completed a merger (the "Merger") with Celestial Seasonings, Inc.
("Celestial") by issuing 10.3 million shares of Hain common stock in exchange
for all of the outstanding common stock of Celestial. Each share of Celestial
common stock was exchanged for 1.265 shares of Hain common stock. Hain
subsequently changed its name to The Hain Celestial Group, Inc. Celestial, the
common stock of which was previously publicly traded, is the market leader in
speciality teas.
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The Merger was accounted for as a pooling-of-interests and,
accordingly, all prior period consolidated financial statements of Hain have
been restated to include the results of operations, financial position and cash
flows of Celestial.
Since its formation, the Company has completed a number of acquisitions
of companies and brands. In the last three years, the Company has acquired the
following companies and brands:
On July 1, 1998, the Company acquired the following businesses and
brands from The Shansby Group and other investors:
Arrowhead Mills, Inc., a natural food company.
DeBoles Nutritional Foods, Inc., a natural pasta products company.
Dana Alexander, Inc. the maker of Terra Chips natural vegetable chips.
Garden of Eatin', Inc., a natural snack products company.
On May 18, 1999, the Company acquired Natural Nutrition Group, Inc. and
its subsidiaries ("NNG"). NNG is a manufacturer and marketer of premium natural
and organic food products primarily under its Health Valley, Breadshop's and
Sahara Natural brands.
In September 1999, the Company purchased the trademarks of Earth's Best
natural baby food products from H.J. Heinz Company ("Heinz"). Prior thereto,
Earth's Best products were sold by the Company to natural food stores pursuant
to a license from Heinz acquired in May 1998, and further to United States
retail grocery and natural food stores under an April 1999 expansion of the
licensing agreement. In addition, the Company entered into a global strategic
alliance with Heinz related to the production and distribution of natural
products domestically and internationally. In connection with the alliance and
the Company's acquisition of the Earth's Best trademarks, the Company issued to
a subsidiary of Heinz approximately 3.5 million shares of its common stock. The
Company and the Heinz subsidiary also entered into an Investors Agreement under
which the Heinz subsidiary agreed to limit its holdings to 19.5% of the
Company's common stock for an 18 month period that ended March 27, 2001. See
Note 12 of the Notes to the Consolidated Financial Statements for further
information regarding this transaction.
On January 18, 2001, the Company acquired Fruit Chips B.V., a
Netherlands based company, which manufactures, distributes and markets low fat
fruit, vegetable and potato chips.
On June 8, 2001, the Company acquired Yves Veggie Cuisine, Inc. and its
subsidiaries ("Yves"), a Vancouver, British Columbia based company. Yves is a
manufacturer, distributor and marketer of premium soy protein meat alternative
products.
The Company's brand names are well recognized in the various market
categories they serve. The Company has acquired numerous brands over the past
seven years (besides those mentioned above) and will seek future growth through
internal expansion, as well as the acquisition of complementary brands.
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The Company's overall mission is to be a leading marketer and seller of
natural, organic, beverage and speciality food products by integrating all of
its brands under one management team and employing a uniform marketing, sales
and distribution program. The Company's business strategy is to capitalize on
the brand equity and the distribution previously achieved by each of the
Company's acquired product lines and to enhance revenues by strategic
introductions of new product lines that complement existing products. This
strategy has been established through the acquisitions referred to above and the
introduction of a number of new products that complement existing product lines.
The Company believes that by integrating its various brand groups, it will
achieve economies of scale and enhanced market penetration. The Company
considers the acquisition of natural, organic and speciality food companies and
product lines as an integral part of its business strategy. To that end, the
Company from time to time reviews and conducts preliminary discussions with
acquisition candidates.
As of June 30, 2001, the Company employed a total of 1,178 full-time
employees. Of these employees, 115 were in sales, 684 in production and the
remaining 379 were management and administrative. Certain employees at the
Health Valley facility were previously represented by the Bakery, Confectionary
and Tobacco Workers' Union (the "Union"). As previously disclosed, earlier in
the fiscal year, a potential labor action ensued between the Company and these
employees. However, in December 2000, the Health Valley employees decertified
the Union and currently there are no employees subject to a collective
bargaining agreement.
Product Overview
Natural and Organic Food Products
The Company's Hain, Westbrae, Westsoy, Little Bear, Bearitos, Arrowhead
Mills, Terra Chips, DeBoles, Garden of Eatin', Health Valley, Sahara Natural,
Breadshop's, Nile Spice, Earth's Best, Harry's Premium Snacks and Farm Foods
businesses market and distribute a full line of natural food products. The
Company is 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 the
Company's products are also made with "organic" ingredients which are grown
without dependence upon artificial pesticides, chemicals or fertilizers.
Tea and Beverage Products
The Company's tea products contain no artificial preservatives, are made from
high-quality, natural ingredients and are generally offered in 20 and 40 count
packages sold in grocery, natural foods and other retail stores. The Company
develops high-quality, flavorful, natural products with attractive, colorful and
thought-provoking packaging. The Company's products include Sleepytime(R), Lemon
Zinger(R), Peppermint, Chamomile, Mandarin Orange Spice(R), Wild Cherry
Blackberry, Cinnamon Apple Spice, Red Zinger(R), Raspberry Zinger(R), Tension
Tamer(R), Country Peach Passion(R) and Wild Berry Zinger(R) herb teas, a line of
green teas, a line of wellness teas, a line of organic teas, and a line of
specialty black teas.
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Snack Food Products
The Company manufactures, markets and sells a variety of potato and
vegetable chips, organic tortilla style chips, pretzels, popcorn and potato
chips under the Terra Chips, Gastons, Garden of Eatin', Little Bear, Boston
Popcorn and Harry's Original names.
Meat Alternative Products
The Company manufactures, distributes and markets a full line of soy
protein meat alternative products under the Yves brand name including such well
known products as The Good Dog(R) and The Good Slice(R), among others. Meat
alternative products provide consumers with a meat alternative product that
contains health benefits of soy but are void of the health concerns associated
with traditional meat products.
Medically-Directed and Weight Management Products
The Company's Estee and Featherweight businesses market and distribute
a full line of sugar-free, fructose sweetened and low sodium products targeted
towards diabetic and health conscious consumers and persons on medically-
restricted diets. Under a license agreement, the Company manufactures, markets
and sells Weight Watchers weight-loss and portion control dry grocery products.
Specialty Cooking Oil Products
The Company's Hollywood Foods business markets a line of specialty
cooking oils that are enhanced with Vitamin E to maintain freshness and quality.
The Hollywood product line also includes carrot juice, mayonnaise and margarine.
Hollywood products are primarily sold directly to supermarkets and other mass
market merchandisers.
Kosher Food Products
The Company's Kineret business markets and distributes a line of frozen
and dry kosher food products. Kosher foods are products that are prepared in a
manner consistent with Kosher dietary laws.
Products
The Company's natural and organic food product lines consist of
approximately 1,200 branded items and include non-dairy drinks (soy and rice
milk), popcorn cakes, cookies, crackers, flour and baking mixes, hot and cold
cereals, pasta, baby food, condiments, cooking oils, granolas, granola bars,
cereal bars, canned and instant soups, chilis, packaged grain, nut butters and
nutritional oils, as well as other food products. For both fiscal 2001 and 2000,
non-dairy drinks accounted for approximately 14% of total net sales.
The Company's beverage and tea products consist of: Herb teas which are
made from all natural ingredients and are offered in a wide variety of flavors.
The Company's top-selling herb tea products include Sleepytime(R), Chamomile,
Lemon Zinger(R), Peppermint, Raspberry Zinger(R), Tension Tamer(R), Wild Berry
Zinger(R), Country Peach Passion(R), Mandarin Orange Spice(R) and Red Zinger(R);
Green teas which includes Authentic Green Tea, Decaffeinated Green Tea, Emerald
Gardens(R) Green Tea, Green Lemon Zinger, Honey Lemon Ginseng Green Tea and
Misty Jasmine(TM) Green Tea; Wellness teas, which includes Sleepytime EXTRA,
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Tension Tamer EXTRA, Detox A.M.(TM), Diet Partner, Echinacea, Echinacea Complete
Care(TM), GingerEase(TM), GinkgoSharp(TM), Ginseng Energy(TM), LaxaTea(TM) and
Mood Mender(TM) and Specialty Black Teas which are made exclusively from natural
ingredients. Black tea products include Earl Grey, English Breakfast, Fast
Lane(R), Vanilla Maple, Ceylon Apricot Ginger and Black Raspberry. For both
fiscal 2001 and 2000, tea beverages accounted for approximately 24% of total net
sales.
Yves meat alternative products consists of approximately 25 items
including meat alternative choices among veggie burgers, veggie wieners, veggie
slices, veggie entrees and veggie ground round.
Terra Chips natural food products consist of approximately 60 items
comprised of varieties of potato chips, potato sticks (known as Frites(R)),
sweet potato chips and other vegetable chips.
Garden of Eatin' natural food products substantially consist of a
variety of organic tortilla chip products.
Boston Popcorn and Harry's products consist of approximately 40
varieties of popcorn, potato chips, tortilla chips and other snack food items.
The Company's principal Hollywood products are safflower, canola, and
peanut oils, and carrot juice. Hollywood cooking oils are enhanced with Vitamin
E.
The Estee line of products consists of sugar-free and fructose
sweetened food products.
Kineret offers a line of kosher frozen food products under the Kineret
and Kosherific labels. The Kineret products include fish products, potato
pancakes, blintzes, challah bread, pastry dough, and assorted other food
products. Recently, the Company introduced a line of dry grocery products for
Passover.
The Company continuously evaluates its existing products for taste,
nutritional value and cost and makes improvements where possible. The Company
will discontinue products or stock keeping units when sales of those items do
not warrant further production.
New Product Initiatives Through Research and Development
The Company considers research and development of new products to be a
significant part of its overall philosophy and is 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 the Company
in order to formulate new products. In addition to developing new products, the
research and development department routinely reformulates and revises existing
products. During the fiscal years ended June 30, 2001, 2000 and 1999, amounts
spent for Company-sponsored research and development activities were
approximately $1.5 million each year.
Sales and Distribution
The Company's products are sold in all 50 states and in approximately
50 countries. Certain of the Company's product lines have seasonality
fluctuations (e.g. the Company's hot tea products, baking and cereal products
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and soup sales are stronger in cold months while its 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.
A majority of the products marketed by the Company are sold through
independent food distributors. Over half of these sales orders are received from
third-party food brokers. Over the past few years, the Company has been
increasing its direct sales force for sales into natural food stores and
reducing its reliance on food brokers. Food brokers act as agents for the
Company within designated territories, usually on a non-exclusive basis, and
receive commissions. Food distributors purchase products from the Company for
resale to retailers. Because food distributors take title to the products upon
purchase, product pricing decisions on sales of the Company's products by the
distributors are generally made in their sole discretion, although the Company
may participate in product pricing during promotional periods.
The Company's customer base consists principally of mass-market
merchandisers, natural food distributors, supermarkets, drug store chains, club
stores and grocery wholesalers. In the last year, 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 Company's distributors, United Natural
Foods and Tree of Life, accounted for approximately 18% and 17%, respectively,
of net sales for the fiscal year ended June 30, 2001 and 17% and 18%,
respectively, for the year ended June 30, 2000 and 18% each during the year
ended June 30, 1999. Net sales to export customers account for approximately
less than 5% of total net sales for each of the three years ended June 30, 2001.
Marketing
The Company uses a mix of trade and consumer promotions, as well as
advertising, to market its products. The Company uses trade advertising and
promotion, including placement fees, cooperative advertising and feature
advertising in distribution catalogs. The Company also utilizes advertising and
sales promotion expenditures via national and regional consumer promotion
through television and magazine advertising, couponing and other trial use
programs. During the past two quarters of fiscal 2001 and in the coming fiscal
year, the Company expects to invest in consumer spending and to enhance brand
equity while closely monitoring its trade spending. These consumer spending
categories include, but are not limited to, consumer advertising using radio and
print, coupons, direct mailing programs, and other forms of promotions. There is
no guarantee that these promotional investments in consumer spending will be
successful, and as the Company attempts to monitor its trade spending and
increase consumer awareness, there may be a period of higher costs.
Manufacturing Facilities
The Company manages and operates five manufacturing facilities located
throughout the United States. These facilities are located and produce the
following product lines: Celestial Seasonings(R), in Boulder, Colorado,
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produces specialty teas, Terra Chips(R), in Brooklyn, New York, produces
vegetable chips; Arrowhead Mills(R), in Hereford, Texas, produces hot and cold
cereals, baked goods and meal cups; Deboles(R) pasta, in Shreveport, Louisiana,
produces organic pasta; and Health Valley(R) in Irwindale, California, produces
hot and cold cereals, baked goods, granola, granola bars, dry soups and other
products under the Health Valley(R), Breadshop(R) and Casbah(R) labels. Outside
the United States, we have one manufacturing facility in The Netherlands (that
we acquired in January 2001 as part of the Fruit Chips B.V. acquisition) that
produces snack foods and one manufacturing facility in Vancouver, British
Columbia (that we acquired in connection with our acquisition of Yves Veggie
Cuisine, Inc.) that produces soy-based meat alternative products.
The facilities in Brooklyn, New York and Irwindale, California are
under operating leases through 2001 and 2004, respectively. We own the
manufacturing facilities in Boulder, Colorado, Hereford, Texas, Shreveport,
Louisiana, The Netherlands and Vancouver, British Columbia. For the years ended
June 30, 2001 and 2000, approximately 51% and 55%, respectively, of our revenue
was derived from products manufactured at our currently owned manufacturing
facilities.
An interruption in or the loss of operations at one or more of these
facilities or failure to maintain our labor force at one or more of these
facilities could delay or postpone production of our products, which could have
a material adverse effect on our business, results of operations and financial
condition until we could secure an alternate source of supply.
We believe we have sufficient capacity in all of our facilities except
for the Brooklyn, New York facility, which is currently at capacity. Since the
fourth quarter of fiscal 2000, the demand for Terra Chips products has exceeded
the production capacity of our Brooklyn, New York facility. We are pursuing
additional sources of supply to alleviate these ongoing capacity restraints,
including the addition of a new co-packer that began producing our products in
October 2000, the expected opening of a new Moonachie, New Jersey production
facility in the fall of 2001 and the production of certain Terra products at our
Netherlands facility. There can be no assurance that any such alternate source
of supply will meet expected demand.
Furthermore, there can be no assurance that the current power situation
in California, or similar situations which may arise in other states, would not
adversely affect our business. Also, any work stoppage or disruption at that
facility or any of our other facilities could materially harm our business.
Suppliers of Ingredients and Packaging
The Company's natural and organic ingredients and packaging are
obtained from various sources of suppliers, located principally in the United
States. However, certain of our packaging and products are sourced from the Far
East.
The Company's tea ingredients are purchased from numerous foreign and
domestic manufacturers, importers and growers, with the majority of those
purchases occurring outside of the United States.
The Company maintains long-term relationships with most of its
suppliers. Purchase arrangements with ingredient suppliers are generally made
annually and in U.S. currency. Purchases are made through purchase orders or
contracts, and price, delivery terms and product specifications vary.
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The Company's organic and botanical purchasers visit major suppliers
around the world annually to procure ingredients and to assure quality by
observing production methods and providing product specifications. The Company
performs laboratory analysis on incoming ingredient shipments for the purpose of
assuring that they meet the Company's quality standards and those of the U.S.
Food and Drug Administration ("FDA") and/or in accordance with the California
Organic Foods Act of 1990.
The Company's ability to ensure a continuing supply of ingredients at
competitive prices depends on many factors beyond its control, such as foreign
political situations, embargoes, changes in national and world economic
conditions, currency fluctuations, forecasting adequate need of seasonal raw
material ingredients and unfavorable climatic conditions. The Company takes
steps intended to lessen the risk of an interruption of botanical supplies,
including identification of alternative sources and maintenance of appropriate
inventory levels. The Company has, in the past, maintained sufficient supplies
for its ongoing operations.
Co-Packed Product Base
During fiscal 2001, approximately 49% (compared with 45% at June 30,
2000) of the Company's revenue was derived from products manufactured at
independent co-packers. Currently, independent food manufacturers, who are
referred to in our industry as co-packers, manufacture many of Hain's product
lines. These product lines include our Alba(R), Estee(R), Garden of Eatin'(R),
Hain Pure Foods(R), Kineret(R), Little Bear Organic Foods(R), Terra Chips(R),
Westbrae(R), and Westsoy(R) product lines.
The Company presently obtains:
- all of our requirements for non-dairy beverages from five co-
packers, all of which are under contract;
- all of our requirements for rice cakes from one co-packer;
- all of our cooking oils from one co-packer, which is under
contract;
- principally all of our tortilla chips from two suppliers, one of
which is under contract;
- all of our requirements for Terra's Yukon Gold line from one
supplier, which is under contract; and
- the requirements for our canned soups from one supplier, which is
under contract.
In addition, Heinz manufactures the Earth's Best baby food products for
the Company under contract. The loss of one or more co-packers, or our failure
to retain co-packers for newly acquired products or brands, could delay or
postpone production of our products, which could have a material adverse effect
on our business, results of operations and financial condition until such time
as an alternate source could be secured, which may be on less favorable terms.
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Trademarks
The Company's trademarks and brand names for the product lines referred
to herein are registered in the United States and a number of foreign countries
and the Company intends to keep these filings current and seek protection for
new trademarks to the extent consistent with business needs. The Company also
copyrights certain of its artwork and package designs. The Company owns the
trademarks for the principal products, including Arrowhead Mills, Bearitos,
Breadshop's, Casbah, Celestial Seasonings, DeBoles, Earth's Best, Estee, Garden
of Eatin', Hain Pure Foods, Health Valley, Kineret, Little Bear Organic Foods,
Nile Spice, Terra, Westbrae, Westsoy and Yves. The Company sells Weight Watchers
products pursuant to licenses from Heinz. Celestial has trademarks for most of
its best-selling brands, including Sleepytime, Lemon Zinger, Mandarin Orange
Spice, Red Zinger, Wild Berry Zinger, Tension Tamer, Country Peach Passion,
Raspberry Zinger and Gingko Sharp.
The Company believes that brand awareness is a significant component in
a consumer's decision to purchase one product over another in the highly
competitive food and beverage industry. Our failure to continue to sell our
products under our established brand names could have a material adverse effect
on our business, results of operations and financial condition. The Company
believes that its trademarks and trade names are significant to the marketing
and sale of the Company's products and that the inability to utilize certain of
these names could have a material adverse effect on the Company's business,
results of operations and financial condition.
Competition
The Company operates in highly competitive geographic and product
markets, and some of the Company's markets are dominated by competitors with
greater resources. The Company cannot be certain that it could successfully
compete for sales to distributors or stores that purchase from larger, more
established companies that have greater financial, managerial, sales and
technical resources. In addition, the Company competes for limited retailer
shelf space for its products. Larger competitors, such as mainstream food
companies including 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 the Company's products. Retailers also market competitive products
under their own private labels.
The beverage market for both tea and soy beverages are large and highly
competitive. Competitive factors in the tea industry include product quality and
taste, brand awareness among consumers, variety of specialty tea flavors,
interesting or unique product names, product packaging and package design,
supermarket and grocery store shelf space, alternative distribution channels,
reputation, price, advertising and promotion. Celestial currently competes in
the specialty tea market segment which consists of herb tea, green tea, wellness
tea and specialty black tea. Celestial's specialty herb tea products, like other
specialty tea products, are priced higher than most commodity black tea
products.
Celestial's principal competitors on a national basis in the specialty
teas market segment are Thomas J. Lipton Company, a division of Unilever PLC,
and R.C. Bigelow, Inc. Unilever has substantially greater financial resources
than the Company. Additional competitors include a number of regional
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specialty tea companies. There may be potential entrants which are not currently
in the specialty tea market who may have substantially greater financial
resources than the Company. Private label competition in the specialty tea
category is currently minimal.
The soy beverage market has shown phenomenal growth over the past
several years. A statement by the FDA endorsing the heart healthy benefits of
soy in October 1999 spurred the growth in both the aseptic and refrigerated
segments. Aseptic soy milk is the more mature product category of the two and in
the past eighteen months, additional larger competitors entered the category but
have since exited the category after unsuccessful regional launches. Westsoy has
taken advantage of the shelf space which became available and continues to be
the number one and fastest growing brand of aseptic soymilk in the grocery and
natural channels.
The refrigerated market is primarily driven by one brand, Silk, which
is owned by White Wave and holds a significant share of refrigerated soymilk
space through its strong national distribution system. The Company's
refrigerated Westsoy product is specifically being targeted to accounts that
agree to partner with us in strong soy milk markets that distribute both aseptic
and refrigerated products.
In the future the Company's competitors may introduce other products
that compete with its products and these competitive products may have an
adverse effect on our business, results of operations and financial condition.
Government Regulation
The Company and its manufacturers, brokers, distributors and co-packers
are subject to extensive regulation by federal, state and local authorities that
affect our business. The federal agencies governing our business include the
Federal Trade Commission, or FTC, The Food and Drug Administration, or FDA, the
United States Department of Agriculture, or USDA and the Occupational Safety and
Health Administration, OSHA. These agencies regulate, among other things, the
production, sale, safety, advertising, labeling of and ingredients used in our
products. Under various statutes these agencies prescribe the requirements and
establish the standards for quality, purity and labeling. Among other
requirements, the USDA, in certain circumstances must approve our products,
including a review of the manufacturing processes and facilities used to produce
these products before these products can be marketed in the United States. In
addition, advertising of our business is subject to regulation by the FTC. The
Company's activities are also regulated by state agencies as well as county and
municipal authorities. We are also subject to the laws of the foreign
jurisdictions in which we manufacture and sell our products.
The USDA has adopted regulations with respect to organic labeling and
certification which became effective February 28, 2001 (with an 18-month
compliance period for existing products). The Company is in the process of
evaluating our level of compliance with these regulations. In addition, on
January 19, 2001, the FDA proposed new policy guidelines regarding the labeling
of genetically modified foods. The FDA's proposal is in a comment period. These
rules, 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.
-10-
Furthermore, new government laws and regulations may be introduced in
the future that could result in additional compliance costs, seizures,
confiscation, recall or monetary fines, any of which could prevent or inhibit
the development, distribution and sale of our products. If we fail to comply
with applicable laws and regulations, we may be subject to civil remedies,
including fines, injunctions, recalls or seizures, as well as potential criminal
sanctions, which could have a material adverse effect on our business, results
of operations and financial condition.
In addition, the Company manufactures and sells dietary supplements
through our Celestial subsidiary which are subject to the Dietary Supplement
Health and Education Act of 1994 or DSHEA, which went into effect in March 1999.
DSHEA defines dietary supplements as a new category of food, separate from
conventional food. DSHEA requires specific nutritional labeling requirements for
dietary supplements and permits substantiated, truthful and non-misleading
statements of nutritional support to be made in labeling, such as statements
describing general well-being resulting from consumption of a dietary
ingredient, or the role of a nutrient or dietary ingredient in affecting or
maintaining a structure or function of the body.
Independent Certification
The Company relies on independent certification agencies to certify our
products as "organic" or "kosher," to differentiate our products in natural and
specialty food categories. The loss of any independent certifications could
adversely affect the Company's market position as a natural and specialty food
company, which could have a material adverse effect on its business, results of
operations and financial condition.
The Company complies with the requirements of independent organizations
or certification authorities in order to label our product as certified. For
example, we can lose our "organic" certification if a plant becomes contaminated
with non-organic materials, or if not properly cleaned after a production run.
In addition, all raw materials must be certified organic. Similarly, we can lose
our "kosher" certification if a plant and raw materials do not meet the
requirements of the appropriate kosher supervision organization, such as The
Union of Orthodox Jewish Congregations, The Organized Kashruth Laboratories,
"KOF-K" Kosher Supervision, Kosher Overseers Associated of America and Upper
Midwest Kashruth.
Item 2. Properties.
The Company's corporate headquarters are located in approximately
17,000 square feet of leased office space located at 50 Charles Lindbergh
Boulevard, Uniondale, New York. The Company will be relocating its corporate
headquarters in November 2001 to 58 South Service Road, Melville, New York,
11747, occupying approximately 35,000 square feet. Its current lease will be
terminated without penalty. This new lease runs through November 2012 with a
current annual rental of approximately $1.3 million
The Company owns a manufacturing and office facility in Boulder,
Colorado, built in 1990 on 42 acres of Company-owned land. The facility has
approximately 167,000 square feet, of which 50,000 square feet is office space
and 117,000 square feet is manufacturing space.
The Company leases 60,000 square feet of warehouse space in Boulder,
Colorado which is used for the storage and shipment of its tea and beverage
-11-
products. The lease expires in 2004, and provides for a current annual rental
of approximately $500,000.
The Company leases 375,000 square feet of warehouse space in a building
located in Ontario, California. The lease expires June 30, 2007 with renewal
options and provides for a minimum annual rental of approximately $1.3 million.
This facility serves as one of the Company's West Coast distribution centers for
principally all of the Company's product lines.
The Company leases 27,000 square feet of space in Brooklyn, New York
through December 2001. This facility is used to manufacture and distribute its
Terra vegetable chip products. The lease provides for minimum annual rentals of
$225,000. In January 2001, the Company purchased a 75,000 square foot
manufacturing facility in Moonachie, New Jersey to manufacture its Terra
products. This facility is expected to open and become operational in the fall
of 2001.
The Company operates a 7,000 square foot warehouse and distribution
center located in East Hills, New York which it utilizes to distribute its
frozen kosher food products. This lease, which provides for annual rental of
approximately $55,000, expires in fiscal 2005.
As part of the NNG acquisition, the Company extended the then existing
leases of Health Valley to provide 180,000 square feet of manufacturing,
warehouse and distribution space in Irwindale, California. These leases provide
for combined annual rentals of approximately $900,000 and expire June 2004.
The Company owns and operates two other manufacturing and distribution
centers in Hereford, Texas and Shreveport, Louisiana for certain of its natural
food product lines. Outside the United States, the Company owns and operates a
90,000 square foot manufacturing facility in The Netherlands that produces snack
food, including certain Terra products, and one 53,000 square foot manufacturing
facility in Vancouver, British Columbia that produces soy- based meat substitute
products.
In addition to the foregoing distribution facilities operated by the
Company, the Company also utilizes bonded public warehouses from which it makes
deliveries to customers.
Item 3. Legal Proceedings.
On May 5, 1995, a purported stockholder of Celestial filed a lawsuit,
Schwartz v. Celestial Seasonings, Inc. et al., in the United States District
Court for the District of Colorado (Civil Action Number: 95-K-1045), in
connection with disclosures by Celestial concerning Celestial's license
agreement with Perrier Group of America, Inc. which was terminated on January
1, 1995. In addition to Celestial, the complaint named as defendants certain
of Celestial's then present and former directors and officers, PaineWebber,
Inc., Shearson/Lehman Brothers, Inc., and Vestar/Celestial Investment Limited
Partnership. The complaint, which was pled as a class action on behalf of
persons who acquired Celestial's common stock from July 12, 1993 through May
18, 1994, sought money damages from Celestial and the other defendants for the
class in the amount of their loss on their investment in Celestial's common
stock, punitive damages, costs and expenses of the action, and such other
relief as the court may order.
-12-
On November 6, 1995, the federal district court granted a motion by
Celestial and the other defendants to dismiss the case. On September 5, 1997,
however, the court of appeals reversed the decision of the district court and
returned the case to the district court for further proceedings. The case was
certified as a class action.
On November 4, 1999, Celestial reached a settlement with the plaintiff,
which resulted in a pre-tax charge of $1.2 million during Celestial's fourth
quarter of its fiscal year ending 1999. The settlement was subject to a
completion of a definitive settlement stipulation to be filed in the district
court and court approval of the settlement. On April 25, 2000, the settlement
was approved by the courts. The settlement has become final. The Company does
not expect any additional shareholder lawsuits related to this matter.
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.
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.
The outstanding shares of Common Stock, par value $.01 per share, of
the Company are traded on Nasdaq's National Market System (under the ticker
symbol HAIN). The following table sets forth the reported high and low closing
prices for the Common Stock for each fiscal quarter from July 1, 1999 through
September 21, 2001.
Common Stock
----------------------------------------------------
Fiscal 2001 Fiscal 2000
---------------------------- -----------------------
High Low High Low
-------------- ---------- ----------- ----------
First Quarter $ 37 1/2 $ 26 5/8 $ 28 7/16 $21 3/16
Second Quarter 39 11/16 27 26 7/16 22 1/4
Third Quarter 36 27 13/16 37 1/8 21 1/16
Fourth Quarter 27 11/16 22 36 11/16 22 3/4
July 1 - September 21, 2001 26 18 1/4
As of September 21, 2001, there were 398 holders of record of the
Company's Common Stock.
The Company has not paid any dividends on its Common Stock to date. The
Company intends to retain all future earnings for use in the development of its
business and does not anticipate declaring or paying any dividends in the
foreseeable future. The payment of all dividends will be at the discretion of
the Company's Board of Directors and will depend on, among other things, future
earnings, operations, capital requirements, contractual restrictions, including
restrictions within the Company's Senior Revolving Credit Facility, the general
financial condition of the Company and general business conditions.
-13-
Item 6. Selected Financial Data.
The following information has been summarized from the Company's
financial statements and should be read in conjunction with such financial
statements and related notes thereto (in thousands, except per share amounts):
Year Ended June 30
------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- --------- --------- ---------
Operating results:
Net sales $412,880 $ 403,543 $315,820 $206,450 $144,392
Income (loss) before
extraordinary item and
cumulative change in
accounting principle 23,589 (11,403) 13,517 11,390 6,733
Extraordinary item - (1,940) - (1,342) -
Cumulative change in
accounting principle - (3,754) - - -
----------- ----------- --------- --------- ---------
Net income (loss) $ 23,589 $(17,097) $ 13,517 $ 10,048 $ 6,733
=========== =========== ========= ========= =========
Basic earnings per common share:
Income (loss) before
extraordinary item and
cumulative change in
accounting principle $ .71 $ (.41) $ .56 $ .55 $ .36
Extraordinary item - (.07) - (.06) -
Cumulative change in
accounting principle - (.13) - - -
----------- ----------- --------- --------- ---------
Net income (loss) $ .71 $ (.61) $ .56 $ .49 $ .36
=========== =========== ========= ========= =========
Diluted earnings per common share (a):
Income (loss) before
extraordinary item and
cumulative change in
accounting principle $ .68 $ (.41) $ .51 $ .50 $ .35
Extraordinary item - (.07) - (.06) -
Cumulative change in
accounting principle - (.13) - - -
----------- ----------- --------- --------- ---------
Net income (loss) $ .68 $ (.61) $ .51 $ .44 $ .35
=========== =========== ========= ========= =========
Financial Position:
Working Capital $ 92,312 $ 89,750 $ 37,983 $37,669 $15,070
Total Assets 461,693 416,017 362,669 170,938 107,266
Long-term Debt 10,718 5,622 141,138 27,311 16,829
Stockholders' Equity 396,653 351,724 164,489 104,567 68,110
(a) As a result of the net loss for the year ended June 30, 2000, diluted
earnings per share is the same as basic earnings per share as the effects of
stock options and warrants are not included as the results would be
antidilutive.
-14-
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
On May 30, 2000, Hain completed a merger (the "Merger") with Celestial
by issuing 10.3 million shares of Hain common stock in exchange for all of the
outstanding common stock of Celestial. The Merger was accounted for as a pooling
of interests and, accordingly, all prior period financial statements of Hain
were restated to include the results of operations, financial position and cash
flows of Celestial.
The Company made the following acquisitions during the three years
ended June 30, 2001:
On July 1, 1998, the Company acquired the following businesses and
brands from The Shansby Group and other investors: Arrowhead Mills, DeBoles
Nutritional Foods, Terra Chips, and Garden of Eatin', Inc.
On May 18, 1999, the Company acquired NNG. NNG is a manufacturer and
marketer of premium natural and organic food products primarily under its Health
Valley, Breadshop's and Sahara brands.
On January 18, 2001, the Company acquired Fruit Chips B.V., a
Netherlands based company, who manufactures, distributes and markets low fat
fruit, vegetable and potato chips.
On June 8, 2001, the Company acquired Yves Veggie Cuisine, Inc. and its
subsidiaries ("Yves"). Yves is a manufacturer and marketer of premium soy
protein meat alternative food products.
All of the foregoing acquisitions, excluding Celestial, ("the
acquisitions" or "acquired businesses") have been accounted for as purchases.
Consequently, the operations of the acquired businesses are included in the
results of operations from their respective dates of acquisition. Each of the
acquired businesses markets and sells natural food products unless otherwise
noted.
Results of Operations
Fiscal 2001 Compared to fiscal 2000
Net sales for fiscal 2001 were $412.9 million, an increase of 2.3% over
net sales of $403.5 million in the year ended June 30, 2000. On a year-to- year
basis, our net sales were affected by a slowing U.S. economy, changes in the
selling price per unit billing arrangements on certain products and, redirection
of management focus on certain product lines (supplements, certain private label
categories and other non-core food product categories). On a pro forma
comparable basis, net sales increased by $23.9 million or 6.1% with the growth
primarily coming from our Westsoy, Health Valley, Terra Chips and Garden of
Eatin' brands.
Gross profit for 2001 increased by $2.1 million to $178.2 million
(43.2% of net sales) as compared to $176.1 million (43.6% of net sales). The
increase in gross profit dollars was a direct result of increased sales levels
in 2001. The decline in gross profit percentage was predominantly due to:
inventory write-offs of approximately $1.9 million associated with the
-15-
Company's decision to write-off certain nonperforming inventory SKU's as a
result of its decision to move and consolidate warehouses and upgrade the
Company's management information system within its distribution infrastructure;
approximately $.5 million associated with the Company's consolidation and move
of one of its distribution facilities into its new Ontario, California
distribution facility that opened in September 2000; approximately $1.2 million
of higher fuel costs associated with freight cost and approximately a $1.5
million decrease associated with the aforementioned change in the billing
arrangements offset by $4 million of additional writeoffs and reserves in the
2000 period associated with the supplement line.
Selling, general and administrative expenses decreased by approximately
$15.7 million to $132.4 million (32.1% of net sales) in 2001 as compared to
$148.1 (36.7% of net sales) in 2000. The dollar decrease is a combination of
approximately $8 million of synergies realized resulting from the Celestial
merger; approximately $4 million in lower trade and marketing costs (offset by
the costs associated with realizing additional shelf space on the Terra brand);
a $1.2 million nonrecurring charge incurred in the September 1999 period by
Celestial and $2.5 million of lower other selling, general and administrative
expense components. In the next fiscal year, the Company expects to invest in
consumer spending and to enhance brand equity while closely monitoring its trade
spending. These consumer spending categories include, but are not limited to,
consumer advertising using radio and print, coupons, direct mailing programs,
and other forms of promotions. There is no guarantee that these promotional
investments in consumer spending will be successful, and as the Company attempts
to monitor its trade spending and increase consumer awareness, there may be a
period of higher costs.
Merger related charges amounted to $1 million for the year ended June
30, 2001 as compared to $15.6 million during 2000. Merger related charges
incurred in 2001 relate to certain employee costs associated with the Celestial
Merger from May 2000.
During fiscal 2000, the Company recorded $4.9 million and $3.5 million
of restructuring charges and an impairment of long-lived assets charge,
respectively. There were no such charges during the year ended June 30, 2001.
Amortization of goodwill and other intangible assets was both
approximately $6.4 million during the year ended June 30, 2001 and 2000.
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001 with early adoption permitted for companies
with fiscal years beginning after March 15, 2001, provided the first quarter
financial statements have not been issued (the Company's first fiscal 2002
quarter of September 30, 2001). Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but will be
subject to an annual impairment test in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Application of
the non-amortization provisions of the Statement is expected to result in
-16-
an approximate increase in net income within a range between $1.8 million to $3
million (between $.05 to $.09 per share) per year. This initial estimate is
subject to completion of certain purchase price valuation allocations from prior
years acquisitions. During 2002, the Company will perform the first of the
required impairment tests on goodwill and indefinite lived intangible assets as
of July 1, 2001 and it is expected that such impairment test will not have an
effect on the earnings and financial position of the Company.
Operating income increased to $38.4 million during June 2001 compared
to a operating loss of $2.4 million in 2000. The increase of $40.8 million is
due to increased gross profits, lower selling, general and administrative
expenses and merger charges as well as no restructuring or impairment of asset
charges that occurred in 2000.
Other income increased from $1.6 million in 2000 to $2.8 million in
2001. The income in 2001 was primarily interest earned on higher cash balances
as compared to 2000. The 2000 other income was a result of gains from sale of
assets and marketable securities.
Interest and financing costs decreased from $6.7 million in 2000 to $.5
million in 2001. The Company had minimal debt levels throughout 2001 (average
debt to equity was below 2% for the year), as compared to 2000 whereby the
average debt level for our then term loan facility was $57.7 million with an
average interest rate of 8.22%
Income before income taxes, extraordinary item and cumulative change in
accounting principle increased $48.2 million to $40.7 million in 2001 as
compared to a pretax loss of $7.5 million in 2000. The increase is a result of
the aforementioned increase in operating income, higher interest and other
income and lower interest and finance costs.
During fiscal 2000, the Company recorded a $3.9 million (52%) tax
provision on a pre-tax loss of $7.5 million as compared to a tax provision of
$17.1 million (42%) on a pre-tax income of $40.7 million during 2001. The fiscal
2000 tax expense, even though there was a pre-tax loss, was primarily a result
of the add back of nondeductible merger and asset write-down charges. The tax
rate of 42% in fiscal 2001 is higher than the statutory federal and state rates
in effect primarily due to nondeductible goodwill amortization.
Fiscal 2000 Compared to Fiscal 1999:
Net sales for fiscal 2000 were $403.5 million, an increase of 28% over
net sales of $315.8 million. 81% of the increase was derived from net sales of
acquired businesses or net sales resulting from licensing agreements entered
into during the fourth quarter of fiscal 1999. The remainder of the increase was
derived from internal growth, primarily from the non-dairy beverages of Westsoy,
and Terra Chips.
Gross profit for 2000 increased by $29.4 million to $176.1 million
(43.6% of net sales) as compared to $146.7 million (46.4% of net sales). The
increase in gross profit dollars was a direct result of increased sales levels
in 2000. The decline in gross profit percentage was due to a combination of
changes in sales mix, additional write-offs and reserves associated with the
previously announced decision to cease production of the 30-count supplement
product line, as well as certain reserves related to expected returns of the
60-count supplement product line, the write-off of
-17-
certain inventories, including raw materials and packaging, related to the
Company's decision to discontinue certain items, inefficiencies within certain
co-packers, additional freight costs incurred due to fuel surcharges assessed to
the Company that were not passed onto customers and higher warehouse costs
primarily a result of the transition to our new west coast consolidated
warehouse.
Selling, general and administrative expenses increased by approximately
$36.3 million to $148.1 million in 2000 as compared to $111.8 million in 1999.
Such expenses, as a percentage of net sales, amounted to 36.7% in 2000 compared
with 35.4% in 1999. The increase of 1.3% is due to: 2% of higher trade
promotional expenses over expected amounts offset by approximately a 1%
improvement in other selling, general and administrative component costs
resulting from the realization of reduced administrative expenses from
integration of certain operations of the acquired businesses within the
Company's infrastructure.
During the fourth quarter of fiscal 2000, the Company recorded charges
of $15.6, $3.7 and $3.5 million, before taxes, related to: merger related
charges associated with the Merger; costs for restructuring certain non-core
businesses and the consolidation of warehouse and information systems within the
Company's distribution and operating network; and impaired long-lived assets,
principally goodwill and other long term assets associated with its supplement
product line, respectively. Included in both the fiscal 2000 and 1999 periods
within restructuring and other nonrecurring charges is a September 1999, $1.2
million settlement agreement relating to a shareholder lawsuit (see Note 2 to
the Consolidated Financial Statements).
The components of the $3.7 million restructuring charge are
approximately $2.0 million of write-downs of fixed and other assets, $1.2
million for lease exit and related incremental costs, $.2 million for severance
and related benefits associated with the consolidation and closure of certain
warehouses and streamlining certain business costs.
Amortization of goodwill and other intangible assets increased from
$4.8 million in 1999 to $6.3 million in fiscal 2000. The increase of $1.5
million is attributable to goodwill and other intangibles (principally
trademarks) in connection with the acquisitions during fiscal 1999 and 2000.
Operating income decreased from $28.9 million in 1999 to a loss of $2.4
million in 2000. The decrease was due to the aforementioned decline in gross
profit and increase in selling, general and administrative dollars along with
the $22.8 million of merger, restructuring and impairment of long-lived asset
charges, recorded during the fourth quarter of fiscal 2000, as well as increased
amortization of goodwill and other intangible assets.
The Company's other income in fiscal 2000 (there was no other income in
the comparable period) primarily resulted from gains on proceeds received from
sale of assets ($.9 million) along with investment gains of $.7 million on
marketable securities bought and sold during the second quarter of fiscal 2000.
Interest and finance costs increased from $6.4 million in 1999 to $6.7
million in fiscal 2000. The increase of $.3 million was due to the debt incurred
in connection with the fiscal 1999 acquisitions offset by the September 1999 and
June 2000 $75 million and $44 million, respectively, repayments on this debt, as
more fully described in Note 10 to the
-18-
Consolidated Financial Statements. The infusion of equity has enabled the
Company to achieve a debt to equity ratio of 2% at June 30, 2000.
Income before income taxes, extraordinary item and cumulative change in
accounting principle decreased from $22.4 million in 1999 to a loss of $7.5
million in 2000. This $30 million decrease is a result of the aforementioned
decline in operating income offset by higher other income.
During fiscal 2000, the Company recorded a $3.9 million (52%) tax
provision on a pre-tax loss of $7.5 million as compared to a tax provision of
$8.9 million (40%) on a pre-tax income of $22.4 million during 1999. The fiscal
2000 tax expense, even though there was a pre-tax loss, was primarily a result
of the add back of nondeductible merger and asset write-down charges along with
higher nondeductible goodwill amortization brought on by the 1999 acquisitions.
Extraordinary charge
During the fourth quarter of fiscal 2000, the Company recorded a $1.9
million (net of tax benefit of $1.2 million) extraordinary charge related to the
early extinguishment of the Company's existing credit facility and the write-off
of the related debt financing costs.
Change in Accounting Principle
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 became effective beginning on July 1, 1999, and required
the start-up costs capitalized prior to such date to be written-off as a
cumulative effect of an accounting change as of July 1, 1999. Any future
start-up costs are to be expensed as incurred. Start up activities are broadly
defined as those one time activities related to introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer or commencing some new operation. In accordance with SOP 98-5,
the Company recorded a one-time non-cash charge in the first quarter of fiscal
2000 reflecting the cumulative effect of a change in accounting principle, in
the amount of $3.8 million, net of tax benefit, representing such start-up costs
capitalized as of the beginning of fiscal year 2000.
Liquidity and Capital Resources
The Company requires liquidity for working capital needs and debt service
requirements.
The Company had working capital and a current ratio of $92.3 million and
2.99 to 1, respectively, at June 30, 2001 as compared to $89.8 million and 2.69
to 1, respectively, at June 30, 2000. During the years ended June 30, 2001 and
2000, the Company's days sales outstanding and inventory turnover rate have
remained consistent at approximately 35 days and 5.0 times, respectively. During
the year ended June 30, 2001, the Company's cash and cash equivalents decreased
by $11.7 million from 2000. The decrease was a result of cash provided by
operations of $23 million (primarily a result of higher net income) and
financing activities of $16.2 million (primarily proceeds from exercise of
warrants and stock options) offset by cash flow used in investing activities of
$51 million (acquisition of businesses and purchases of property, plant and
equipment).
-19-
In March 2001, the Company entered into a new $240 million Senior
Revolving Credit Facility (the "Senior Credit Facility"). The Senior Credit
Facility provides for a four year, $145 million revolving credit facility
(initially this revolving facility is priced at LIBOR plus 1.00%) and a $95
million 364-day facility (the 364-day facility is also initially priced at LIBOR
plus 1.00%). The Senior Credit Facility is unsecured, but guaranteed by all
current and future direct and indirect domestic subsidiaries of the Company.
This Senior Credit Facility also includes customary affirmative and negative
covenants for transactions of this nature. The Company's outstanding revolving
credit loans under these facilities bears interest at a base rate (greater of
the applicable prime rate or Federal Funds Rate plus 0.50% per annum) or, at the
Company's option, the reserve adjusted LIBOR rate plus the applicable margin (as
defined in the Senior Credit Facility). As of June 30, 2001, approximately $4.4
million was borrowed under the revolving facility at 5.94%.
The Company believes its cash on hand of $26.6 million at June 30,
2001, as well as cash flows from operations are sufficient to fund its working
capital needs, anticipated capital expenditures, scheduled debt payments of $2.9
million, other operating expenses, as well as provide liquidity to pay down the
remaining merger related and restructuring accruals (aggregating $1.3 million)
existing at June 30, 2001. The Company is currently investing its cash on hand
in highly liquid short-term investments yielding approximately 4% interest.
Supplementary Quarterly Financial Data:
Unaudited quarterly financial data (in thousands, except per share
amounts) for fiscal 2001 and 2000 is summarized as follows:
Three Months Ended
-------------------------------------------------
September 30, December 31, March 31, June 30,
2000 2000 2001 2001
----------- ------------- ---------- -----------
Net sales $ 93,653 $116,025 $103,909 $ 99,293
Gross profit 40,408 53,728 42,780 41,321
Merger costs 1,032 - - -
Operating income 10,517 17,028 6,561 4,273
Income before income taxes 11,043 17,699 7,313 4,616
Net income $ 6,405 $ 10,266 $ 4,241 $ 2,677
Basic earnings per
common share $ .20 $ .31 $ .13 $ .08
Diluted earnings per
common share $ .19 $ .30 $ .12 $ .08
In August 2001, the Company announced that while fourth quarter fiscal
2001 net sales grew 13% over the corresponding period, higher marketing and
advertising expenditures, primarily related to the Westsoy brand, higher trade
promotion costs (placement cost) associated with the Terra brand and higher
production costs associated with the Terra Chip manufacturing process adversely
impacted earnings growth in the fourth quarter.
-20-
Three Months Ended
----------------------------------------------------
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
------------- ----------- ----------- ------------
Net sales $ 87,940 $ 116,675 $ 111,916 $ 87,012
Gross profit 33,331 56,203 54,614 31,978
Merger costs - - - 15,633
Restructuring and other
non-recurring charges 1,200 - - 3,733
Impairment of long-
lived assets - - - 3,468
Income (loss) before
income taxes,
extraordinary item
and cumulative change
in accounting principle (2,300) 14,639 14,541 (34,383)
Extraordinary item - - - (1,940)
Cumulative change in
accounting principle (3,754) - - -
Net income (loss) $ (4,966) $ 8,501 $ 8,637 $(29,269)
Basic earnings (loss)per
common share before
extraordinary item
and cumulative change in
accounting principle $ (.05) $ .30 $ .30 $ (.93)
Diluted earnings (loss)
per common share before
extraordinary item and
cumulative change in
accounting principle $ (.05) $ .28 $ .28 $ (.93)
During the three month period ended June 30, 2000, in addition to the
merger costs, restructuring and other non-recurring charges and impairment of
long-lived assets, the Company recorded an additional $2.5 million of costs
associated with Celestial's previously announced decision to cease production of
its 30-count supplement product line at September 30, 1999, as well as certain
reserves related to expected returns of the Company's 60- count supplement
sales. These decisions were primarily related to a management change along with
prevailing market conditions affecting the supplement industry.
Shortly after the Merger was consummated on May 30, 2000, the Company
initiated a program to reduce the amount of tea inventory in the hands of
distributors by changing Celestial's trade practices. During the fourth quarter
of fiscal 2000, this program reduced Celestial's revenue by an estimated 450,000
cases, or approximately $9.6 million, resulting in lower operating profit by
approximately $4.8 million. In addition, during the period after announcement of
the Merger, an environment of significant uncertainty regarding integration of
the companies existed within the Company's sales organization, as well as within
the Company's customer base. The Company believes that this uncertainty further
impacted revenue from non- core brands thereby reducing operating profit by
approximately $2.3 million. The Company was also impacted by lower revenues from
Earth's Best products
-21-
as a result of the lack of availability of certain ingredients. The Company
anticipated resolving this issue by early June 2000, however, the problems were
not fully resolved until shortly after fiscal 2000 year-end.
In addition, during the fourth quarter of fiscal 2000, the Company
incurred approximately $8.3 million of trade promotional expenses over expected
amounts. These costs were primarily due to: (1) a concerted effort to gain
additional distribution, (2) increased deductions by customers in the face of
our announced merger (3) a higher level of actual spending over amounts
estimated and accrued by Celestial at March 31, 2000, and (4) the implementation
of a new trade promotion tracking system at Celestial which has accelerated the
availability of information and allowed the Company to better match these costs
with related revenues. Gross profit margin was negatively impacted by
approximately $3.1 million primarily due to: (1) a change in sales mix, (2) the
write-off of certain inventories, including raw materials and packaging, related
to the Company's decision to discontinue certain items, (3) inefficiencies
within certain co-packers, (4) additional freight costs incurred due to fuel
surcharges assessed to the Company, that were not passed onto customers and (5)
higher warehouse costs primarily due to increased inventory levels in
anticipation of a new distribution agreement for the Company's medically
directed products together with the transition to the Company's new West Coast
consolidated warehouse.
The supplementary quarterly financial data for the year ended June 30,
2000, includes the results of operations of Hain and Celestial for each quarter
presented. The quarter ended September 30, 1999, however, includes the results
of operations of Celestial two times as a result of the need to change
Celestial's year end to be the same as that of Hain. Consequently, the quarter
ended September 30, 1999 includes the following duplicated information for
Celestial: net sales of $19.9 million after reduction for 30- count supplement
returns of $5.1 million; gross profit of $5.3 million after cost of sales
charges of $4.0 million for the 30-count supplement product line; the $1.2
million charge related to the shareholder lawsuit settlement, and net loss of
$3.9 million.
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. 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. In some future periods, our operating results may fall below the
expectations of securities analysts and investors, which could harm our
business.
Inflation
The Company does not believe that inflation had a significant impact on
the Company's results of operations for the periods presented.
-22-
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
The Company centrally manages its debt and cash equivalents considering
investment opportunities and risks, tax consequences and overall financing
strategies. The Company's cash equivalents consist primarily of commercial paper
and obligations of U.S. Government agencies. Assuming year-end 2001 variable
debt and cash equivalent levels, a one-point change in interest rates would not
have a material impact on net interest income.
Foreign Operations
Operating in international markets involves exposure to movements in
currency exchange rates, which are volatile at times. The economic impact of
currency exchange rate movements on the Company is complex because such changes
are often linked to variability in real growth, inflation, interest rates,
governmental actions and other factors. These changes, if material, could cause
the Company to adjust its financing and operating strategies. Consequently,
isolating the effect of changes in currency does not incorporate these other
important economic factors. The Company's net sales to foreign customers
represented less than 5% of total net sales for each of the three years ended
June 30, 2001 and its results of operations during fiscal 2001 were not
significant to the consolidated results of operations.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of The Hain Celestial
Group, Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets - June 30, 2001 and 2000
Consolidated Statements of Operations - Years ended June 30, 2001, 2000
and 1999
Consolidated Statements of Cash Flows - Years ended June 30, 2001, 2000
and 1999
Consolidated Statements of Stockholders' Equity - Years ended June 30,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
-23-
The following consolidated financial statement schedule of The Hain Celestial
Group, Inc. and subsidiaries is included in Item 14 (a):
Schedule II Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
-24-
Report of Independent Auditors
The Stockholders and Board of Directors
The Hain Celestial Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Hain
Celestial Group, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 2001. Our audits
also included the financial statement schedule listed in the index at Item
14(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 did not audit the
financial statements and schedule of Celestial Seasonings, Inc. prior to its
restatement for the 2000 pooling of interests described in Note 2, which
statements reflect total revenues of $109,851,000 for the year ended September
30, 1999. Those statements were audited by other auditors, whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
Celestial Seasonings, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of The Hain Celestial Group, Inc. and
Subsidiaries at June 30, 2001 and 2000, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 6 to the financial statements, in fiscal year 2000 the
Company changed its method of accounting for start-up costs.
/s/ Ernst & Young LLP
Melville, New York
August 31, 2001
-25-
INDEPENDENT AUDITOR'S REPORT
To the Stockholder's and Board of Directors of Celestial Seasonings, Inc.
We have audited the consolidated statements of income, stockholders' equity and
cash flows for the year ended September 30, 1999 (none of which are presented
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Celestial
Seasonings, Inc. for the year ended September 30, 1999, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Denver, Colorado
November 3, 1999
-26-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
June 30,
--------------------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash $ 26,643 $ 38,308
Accounts receivable, less allowance for doubtful 46,404 36,120
accounts of $815 and $929
Inventories 49,593 48,139
Recoverable income taxes 8,232 7,982
Deferred income taxes 3,740 8,724
Other current assets 4,168 3,611
----------- -----------
Total current assets 138,780 142,884
Property, plant and equipment, net of accumulated 55,780 39,340
depreciation and amortization of $25,551 and $19,471
Goodwill, net of accumulated amortization of $18,252 219,826 188,212
and $13,109
Trademarks and other intangible assets, net of 38,230 40,265
accumulated amortization of $6,794 and $5,594
Other assets 9,077 5,316
----------- -----------
Total assets $ 461,693 $ 416,017
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 42,456 $ 43,039
Accrued merger related charges 1,131 9,414
Current portion of long-term debt 2,881 681
----------- -----------
Total current liabilities 46,468 53,134
Long-term debt, less current portion 10,718 5,622
Deferred income taxes 7,854 5,537
----------- -----------
Total liabilities 65,040 64,293
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value, authorized 5,000,000 - -
shares, no shares issued
Common stock - $.01 par value, authorized 100,000,000 338 321
shares, issued 33,771,124 and 32,147,261 shares
Additional paid-in capital 348,942 326,641
Retained earnings 48,626 25,037
Foreign currency translation adjustment (978) -
----------- -----------
396,928 351,999
Less: 100,000 shares of treasury stock, at cost (275) (275)
----------- -----------
Total stockholders' equity 396,653 351,724
----------- -----------
Total liabilities and stockholders' equity $ 461,693 $ 416,017
=========== ===========
See notes to consoldiated financial statements.
-27-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended June 30
-------------------------------------
2001 2000 1999
---------- ------------- ------------
Net Sales $ 412,880 $ 403,543 $ 315,820
Cost of sales 234,643 227,417 169,141
---------- ------------- ------------
Gross profit 178,237 176,126 146,679
Selling, general and administrative expenses 132,385 148,133 111,802
Merger costs 1,032 15,633 -
Restructuring and other non-recurring charges - 4,933 1,200
Impairment of long-lived assets - 3,468 -
Amortization of goodwill and other intangible assets 6,441 6,346 4,787
---------- ------------- ------------
Operating income (loss) 38,379 (2,387) 28,890
Other income 2,808 1,585 -
Interest and financing costs (516) (6,701) (6,442)
---------- ------------- ------------
Income (loss) before income taxes, extraordinary item 40,671 (7,503) 22,448
and cumulative change in accounting principle
Provision for income taxes 17,082 3,900 8,931
---------- ------------- ------------
Income (loss) before extraordinary item and 23,589 (11,403) 13,517
cumulative change in accounting principle
Extraordinary item - costs in connection with early - (1,940) -
extinguishment of debt, net of income tax benefit
of $1,182 in 2000
Cumulative change in accounting principle, net of - (3,754) -
income tax benefit of $2,547
---------- ------------- ------------
Net income (loss) $ 23,589 $ (17,097) $ 13,517
========== ============= ============
Basic earnings per common share:
Income (loss) before extraordinary item and $ .71 $ (.41) $ .56
cumulative change in accounting principle
Extraordinary item - (.07) -
Cumulative change in accounting principle - (.13) -
---------- ------------- ------------
Net income (loss) $ .71 $ (.61) $ .56
========== ============= ============
Diluted earnings per common share:
Income (loss) before extraordinary item and $ .68 $ (.41) $ .51
cumulative change in accounting principle
Extraordinary item - (.07) -
Cumulative change in accounting principle - (.13) -
---------- ------------- ------------
Net income (loss) $ .68 $ (.61) $ .51
========== ============= ============
Weigted average common shares outstanding:
Basic 33,014 27,952 24,144
========== ============= ============
Diluted 34,544 27,952 26,636
========== ============= ============
.
See notes to consoldidated financial statements.
-28-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
-------------------------------------
2001 2000 1999
------------ ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 23,589 $ (17,097) $ 13,517
Adjustment for change in year-end of Celestial - 3,933 -
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Non-cash merger related charge - 175 -
Non-cash restructuring charge - 1,994 -
Non-cash impairment of long-lived assets - 3,468 -
Extraordinary item - 1,940 -
Cumulative change in accounting principle - 3,754 -
Depreciation and amortization of property and equipment 6,287 4,986 2,530
Amortization of goodwill and other intangible assets 6,441 6,053 4,787
Amorization of deferred financing costs 107 718 589
Provision for doubtful accounts 393 432 313
Deferred income taxes 7,301 4,373 80
Gain on disposal of assets - (922) 63
Other 46 46 46
Increase (decrease) in cash attributable to changes in
assets and liabilities, net of amounts applicable to
acquired businesses:
Accounts receivable (6,514) 4,211 (5,033)
Inventories 848 (8,607) 8,441
Other current assets 604 2,090 (2,979)
Other assets (746) (2,771) (7,014)
Accounts payable and accrued expenses (19,119) 3,882 (1,164)
Recoverable taxes, net of income tax payable 3,604 (2,094) 2,332
------------ ----------- ----------
Net cash provided by operating activities 22,841 10,564 16,508
------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired (37,184) (4,673) (95,270)
Purchases of property and equipment and other (13,474) (4,298) (7,601)
intangible assets
Proceeds from sale of assets - 1,583 148
------------ ----------- ----------
Net cash used in investing activities (50,658) (7,388) (102,723)
------------ ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (Repayments) from bank revolving credit facility, net 4,400 (5,080) (6,270)
Proceeds from term loan facilities - - 190,000
Repayment of term loan facilities - (130,000) (78,600)
Payments on economic development revenue bonds (366) (317) (300)
Costs in connection with bank financing (1,369) (26) (2,542)
Proceeds from private equity offering, net of expenses - 160,332 -
Proceeds from exercise of warrants and options, net of 13,685 9,354 4,490
related expenses
Collections of receivables from equipment sales - - 116
Payment of debt of acquired company - - (20,678)
Payment of other long-term debt and other liabilities (217) (278) (1,882)
------------ ----------- ----------
Net cash provided by financing activities 16,133 33,985 84,334
------------ ----------- ----------
Net (decrease) increase in cash and cash equivalents (11,684) 37,161 (1,881)
Effect of exchange rate changes on cash 19 - -
Cash and cash equivalents at beginning of year 38,308 1,147 3,028
------------ ----------- ----------
Cash and cash equivalents at end of year $ 26,643 $ 38,308 $ 1,147
============ =========== ==========
See notes to consolidated financial statements.
-29-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 2000 AND 2001
(In thousands, except per share and share data)
Common Stock
---------------------- Additional Foreign
Amount Paid-in Retained Treasury Stock Currency Comprehensive
Shares at $.01 Capital Earnings Shares Amount Trans. Adj. Total Income (Loss)
---------------------------------------------------------------------------------------------------
Balance at June 30, 1998 22,161,780 $ 222 $ 79,936 $ 24,684 100,000 $ (275) $ 104,567
Issuance of shares in connection
with the acquisitions
of businesses 1,716,111 17 39,733 39,750
Exercise of common stock warrants,
net of related expenses 340,930 3 1,986 1,989
Exercise of stock options 471,658 5 2,638 6,400 (142) 2,501
Retirement of treasury shares (6,400) (142) (6,400) 142
Non-cash compensation charge 46 46
Tax benefit from stock options 2,119 2,119
Net income 13,517 13,517 13,517
---------------------------------------------------------------------------------------------------
Balance at June 30, 1999 24,684,079 247 126,316 38,201 100,000 (275) 164,489
Issuance of shares to Heinz, net
of related expenses 6,090,351 61 177,642 177,703
Conversion of promissory notes 442,538 4 9,973 9,977
Exercise of common stock warrants,
net of related expenses 345,853 3 1,922 1,925
Exercise of stock options 584,440 6 7,423 7,429
Non-cash compensation charge 46 46
Tax benefit from stock options 3,319 3,319
Adjustment for change in year-end of Celestial 3,933 3,933
Net loss (17,097) (17,097) (17,097)
---------------------------------------------------------------------------------------------------
Balance at June 30, 2000 32,147,261 321 326,641 25,037 100,000 (275) 351,724
Exercise of common stock warrants,
net of related expenses 166,419 2 657 659
Exercise of stock options 1,265,465 13 12,857 12,870
Issuance of common stock 191,979 2 5,714 5,716
Non-cash compensation charge 46 46
Tax benefit from stock options 3,027 3,027
Net income for the period 23,589 23,589
Comprehensive income:
Net income 23,589
Translation adjustments (978) (978) (978)
------------
Total comprehensive income $ 22,611
---------------------------------------------------------------------------------------============
Balance as June 30, 2001 33,771,124 $ 338 $ 348,942 $ 48,626 100,000 $ (275) $ (978) $ 396,653
=======================================================================================
See notes to consolidated financial statements.
-30-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
The Hain Celestial Group, is a natural, specialty and snack food
company. The Company is a leader in many of the top natural food categories,
with such well-known natural food brands as Celestial Seasonings (R) teas, Hain
Pure Foods(R), Westbrae(R), Westsoy(R), Arrowhead Mills(R), Health Valley(R),
Breadshop's(R), Casbah(R), Garden of Eatin(R), Terra Chips(R), 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, Weight Watchers(R) dry and refrigerated products,
Kineret(R) kosher foods, Boston Better Snacks(R), and Alba Foods(R).
The Company and its subsidiaries operate in one business segment: the
sale of natural, organic and other food and beverage products. During fiscal
2001, approximately 51% (as compared to 55% in 2000) of the Company's revenues
were derived from products which are manufactured within its own facilities with
49% produced by various co-packers. In fiscal 2001, 2000 and 1999 there were no
co-packers who manufactured 10% or more of the Company's products.
2. Basis of Presentation
The consolidated financial statements include the accounts of The Hain
Celestial Group, Inc. (formerly known as The Hain Food Group, Inc. ("Hain")) and
all wholly-owned subsidiaries (the "Company"). In the Notes to Consolidated
Financial Statements, all dollar amounts, except per share amounts, are in
thousands of dollars unless otherwise indicated.
Merger: On May 30, 2000, Hain completed a merger (the "Merger") with
Celestial Seasonings, Inc. ("Celestial") by issuing 10.3 million shares of Hain
common stock in exchange for all of the outstanding common stock of Celestial.
Each share of Celestial common stock was exchanged for 1.265 shares of Hain
common stock. In addition, Hain assumed all Celestial stock options previously
granted by Celestial. As part of the Merger, Hain changed its name to The Hain
Celestial Group, Inc. Celestial, the common stock of which was previously
publicly traded, is the market leader in speciality teas.
The Merger was accounted for as a pooling-of-interests and,
accordingly, all prior period consolidated financial statements of Hain have
been restated to include the results of operations, financial position and cash
flows of Celestial. Information concerning common stock, employee stock plans
and per share data has been restated on an equivalent share basis. The
accompanying consolidated financial statements as of and for the year ended June
30, 1999 include Hain's June 30 fiscal year amounts combined with Celestial's
September 30 fiscal year amounts. The consolidated financial statements as of
and for the year ended June 30, 2000 include the financial position of both Hain
and Celestial as of such date and the results of operations and cash flows of
Hain and Celestial for the year then ended. Consequently, Celestial's results of
operations and cash flows for the three- month period ended September 30, 1999
are included in both fiscal 2000 and 1999, which results in the need to
eliminate such duplication by an adjustment to retained earnings. Since
Celestial incurred a net loss of $3.9 million for the three month period
duplicated, the adjustment to retained
-31-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
earnings adds back such loss. Summary information for Celestial's three- month
period ended September 30, 1999 is as follows: net sales - $19.9 million; loss
before income taxes - $7.3 million; net loss - $3.9 million; cash provided by
operating activities - $1.1 million; cash used in investing activities - $4.1
million; and cash provided by financing activities - $3.4 million.
The reconciliations of operating results of Hain and Celestial for the
periods previously reported prior to the combination are as follows:
Nine months ended Year ended
March 31, 2000 June 30, 1999
-------------------------------------
Net sales:
Hain $ 226,100 $ 205,900
Celestial 90,400 109,900
-------------------------------------
Combined $ 316,500 $ 315,800
-------------------------------------
Income before extraordinary item and
cumulative change in accounting principle:
Hain $ 22,700 $ 11,000
Celestial 4,200 2,500
-------------------------------------
Combined $ 26,900 $ 13,500
-------------------------------------
Net income:
Hain $ 8,700 $ 11,000
Celestial 3,400 2,500
-------------------------------------
Combined $ 12,100 $ 13,500
-------------------------------------
There were no material adjustments required to conform the accounting
policies of the two companies. Certain amounts of Celestial have been
reclassified to conform to the reporting practices of Hain.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation Policy:
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly-owned. Material
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications:
Certain reclassifications have been made to prior consolidated
financial statements and notes thereto to conform to the current year
presentation.
Foreign Currency Translation:
Financial statements of foreign subsidiaries are translated into U.S.
dollars at current rates, except that revenues, costs and expenses are
translated at average current rates during each reporting period. Net exchange
gains or losses resulting from the translation of foreign financial
-32-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 shareholders' equity and other comprehensive
income.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition:
Sales are recognized upon the shipment of finished goods to customers.
Allowances for cash discounts are recorded in the period in which the related
sale is recognized.
Advertising Costs:
Media advertising costs, which are included in selling, general and
administrative expenses, amounted to $5,510, $1,980 and $7,349 for fiscal 2001,
2000 and 1999, respectively. Such costs are expensed as incurred.
Income Taxes:
The Company follows the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined based on the
differences between the financial statement and tax bases of assets and
liabilities at enacted rates in effect in the years in which the differences are
expected to reverse.
Concentration of Credit Risk:
Substantially all of the Company's trade accounts receivable are due
from food distributors and food retailers located throughout the United States
and Canada. The Company performs credit evaluations of its customers and
generally does not require collateral. Credit losses are provided for in the
consolidated financial statements and consistently have been within management's
expectations. During the year ended June 30, 2001, sales to two customers and
their affiliates approximated 18% and 17%. These two customers accounted for 17%
and 18%, respectively, for the year ended June 30, 2000 and approximately 18%
each for the year ended June 30, 1999. At June 30, 2001 and 2000, these two
customers and their affiliates accounted for approximately 28% and 32%,
respectively, of total accounts receivable outstanding.
Inventories:
Inventories consist principally of finished goods, raw materials and
packaging materials, and are stated at the lower of cost (first-in, first-out
basis) or market. Cost is determined principally on the standard cost method
-33-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for manufactured goods and on the average cost method for other inventories,
each of which approximates actual cost on the first-in, first-out method.
Shipping and Handling Costs:
The Company includes costs associated with shipping and handling of its
inventory as a component of cost of goods sold in the Consolidated Statements of
Operations
Fair Values of Financial Instruments:
At June 30, 2001, the Company had $22.8 million invested in corporate
money market securities, including commercial paper, repurchase agreements,
variable rate instruments and bank instruments. The Company has classified these
securities as cash equivalents as the maturities of these instruments are less
than three months. At June 30, 2001, the carrying value of these money market
securities approximates their fair values. At June 30, 2000, the Company had no
cash equivalents.
The Company believes that the interest rates set forth in the Company's
debt instruments approximate its current borrowing rate and, accordingly, the
carrying amounts of such debt at June 30, 2001 and 2000 approximate fair value.
Property, Plant and Equipment:
Property, plant and equipment are carried at cost and are depreciated
or amortized on a straight-line basis over the lesser of the estimated useful
lives or lease life, whichever is shorter.
Buildings 31-35 years
Machinery and equipment 5-10 years
Furniture and fixtures 3-7 years
Leasehold improvements 3-10 years
Goodwill, Trademarks and Other Intangible Assets:
Goodwill consists of the excess of the cost of acquired businesses over
the fair value of the assets and liabilities acquired or assumed, and is being
amortized over a period of 40 years from date of acquisition.
Other intangible assets, principally trademarks, are being amortized
over their respective applicable lives. The Company amortizes trademarks over
5-40 years.
Accounting for the Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the recorded value of
the asset may not be recoverable. The Company performs such a review at each
balance sheet date whenever events and circumstances
-34-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
have occurred that indicate possible impairment. The Company considers continued
operating losses and significant and long-term changes in prevailing market
conditions to be its primary indicators of potential impairment. In accordance
with SFAS No. 121, the Company uses an estimate of the future undiscounted net
cash flows of the related asset or asset grouping over the remaining life to
measure whether the assets are recoverable. During fiscal year 2000, the Company
wrote-off approximately $3.5 million of impaired long-lived assets. The
write-off included $1.4 million of goodwill and $2.1 million of barter credits
related to the Company's supplements products, which have experienced losses.
The Company determined that the product line had become impaired and does not
expect to recover their recorded values in the foreseeable future.
Deferred Financing Costs:
Eligible costs associated with obtaining debt financing are capitalized
and amortized over the related lives of the applicable debt instruments, which
approximates the effective interest method.
Earnings Per Share:
The Company reports basic and diluted earnings per share in accordance
with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per
share excludes any dilutive effects of options, warrants and convertible debt.
Diluted earnings per share includes only the dilutive effects of common stock
equivalents such as stock options and warrants.
-35-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128.
2001 2000 1999
---------- ----------- ---------
Numerator:
Income (loss) before extraordinary item and
cumulative change in accounting
principle - numerator for basic and
diluted earnings per share $ 23,589 $ (11,403) $ 13,517
Extraordinary item - (1,940) -
Cumulative change in accounting principle - (3,754) -
---------- ----------- ---------
Net income (loss) $ 23,589 $ (17,097) $ 13,517
========== =========== =========
Denominator (in thousands):
Denominator for basic earnings (loss) per
share - weighted average shares outstanding
during the period 33,014 27,952 24,144
Effect of dilutive securities (a):
Stock options 1,304 - 1,863
Warrants 226 - 629
---------- ----------- ---------
1,530 - 2,492
---------- ----------- ---------
Denominator for diluted earnings (loss) per
share - adjusted weighted average shares
and assumed conversions 34,544 27,952 26,636
========== =========== =========
Basic earnings (loss) per share:
Income (loss) before extraordinary item and
cumulative change in accounting principle $ .71 $ (.41) $ .56
Extraordinary item - (.07) -
Cumulative change in accounting principle - (.13) -
---------- ----------- ---------
Net income (loss) $ .71 $ (.61) $ .56
========== =========== =========
Diluted earnings (loss) per share:
Income (loss) before extraordinary item and
cumulative change in accounting principle $ .68 $ (.41) $ .51
Extraordinary item - (.07) -
Cumulative change in accounting principle - (.13) -
---------- ----------- ---------
Net income (loss) $ .68 $ (.61) $ .51
========== =========== =========
(a) As of result of the net loss, the dilutive effect of options and
warrants (aggregating 2,300 shares) are not shown as the results would
be antidilutive.
-36-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the fourth quarter of fiscal 2000, the Company approved a plan
to streamline and restructure certain non-core businesses and consolidate
warehouses and information systems within the Company's distribution and
operating network which resulted in a pre-tax charge of $3.7 million. In
addition, in the first quarter of fiscal 2000, the Company entered into a
settlement agreement related to a shareholder lawsuit (see Note 16) resulting in
a one-time pre-tax charge of $1.2 million.
The components of the $3.7 million restructuring charge are as follows:
Write-downs of property, plant and
equipment and other assets $ 1,994
Lease exit costs 1,153
Severance and related benefits 248
Other non-core business costs 338
-------------
$ 3,733
=============
At June 30, 2000, the Company had accrued approximately $1.7 million of
future costs associated with this restructuring charge. As of June 30, 2001, $.2
million of future cash outlays remain associated with this accrual.
The write down of property, plant and equipment and other assets net of
salvage value, primarily related to machinery and equipment and computer
equipment within certain of the Company's distribution facilities, corporate
information systems relating to an enterprise-wide program to upgrade its
business information systems and computer hardware and software and other
equipment and assets related to the restructuring of certain non-core business.
Lease exit costs of approximately $1.2 million relate to incremental
costs and contractual obligations for items such as leasehold termination
payments (net of estimated expected sub rentals) and other facility exit costs
expected to be incurred as a direct result of this plan.
In addition, during the first quarter of fiscal 2000, Celestial decided
to cease production of its 30-count supplements product line and focus it
efforts on its 60-count product line. In conjunction with the discontinuance of
the 30-count products, Celestial decided to offer a return program to its
customers. Accordingly, Celestial reversed sales ($5.1 million) and recorded
additional cost of sales ($4.0 million) for the estimated 30-count products
still with customers and an estimated write-down of inventory on hand and
expected to be returned.
In the fourth quarter of fiscal 2000, the Company was required to
provide additional amounts for sales returns and inventory write-offs (totaling
$.9 million) related to the previously announced decision to cease production of
the 30-count products. Moreover, the Company provided certain reserves related
to expected returns of the Company's 60-count supplement products, totaling $1.6
million, primarily related to the receipt of return notification from certain
customers and prevailing market conditions affecting the supplements industry.
-37-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting for Certain Sales Incentives:
In May 2000, the Emerging Issues Task Force ("EITF") issued Issue 00-
14, "Accounting for Certain Sales Incentives". Under the consensus, certain
sales incentives must be recognized as a reduction of sales, rather than as an
expense (the Company includes such sales incentives within selling, general and
administrative expenses). In April 2001, the EITF reached a consensus on Issue
00-25, "Vendor Statement Characterization of Consideration from a Vendor to a
Retailer", which expanded upon the types of consideration paid by vendors to
retailers which are now considered sales incentives and, accordingly, should be
classified as a reduction of sales, rather than as a component of selling,
general and administrative expenses. This consensus is effective for fiscal
quarters beginning after December 15, 2001 (the Company's March 2002 quarter).
Upon application of these consensus', the Company's earnings for current and
prior periods will not be changed, but rather a reclassification will take place
within the Consolidated Statements of Operations for all periods presented for
comparative purposes. The EITF changed the effective date of Issue 00-14 to
coincide with the effective date of Issue 00-25.
Had EITF 00-14 and 00-25 been adopted at the beginning of the fiscal
years June 30, 2001 and 2000, the Company's net sales and selling, general and
administrative expenses would have each been reduced by $72.5 million and $76.1
million, for the respective periods.
Accounting for Goodwill and Other Intangible Assets:
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001 with early adoption permitted for companies
with fiscal years beginning after March 15, 2001, provided the first quarter
financial statements have not been issued (the Company's first fiscal quarter is
September 30, 2001 in fiscal 2002). Under the new rules, goodwill (and
intangible assets deemed to have indefinite lives) will no longer be amortized
but will be subject to annual impairment test in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Application of
the non-amortization provisions of the Statement is expected to result in an
approximate increase in net income within a range between $1.8 million to $3
million (between $.05 to $.09 per share) per year. This initial estimate is
subject to completion of certain purchase price valuation allocations from prior
years acquisitions. During 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of July 1, 2001 and it is expected that such impairment test will not have an
effect on the earnings and financial position of the Company.
-38-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE:
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 was adopted by the Company effective July 1, 1999, and
requires start-up costs capitalized prior to such date be written-off as a
cumulative effect of an accounting change as of July 1, 1999, and any future
start-up costs to be expensed as incurred. Start-up activities are defined
broadly as those one-time activities related to introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer or commencing some new operations. In accordance with SOP
98-5, the Company recorded a one-time non-cash charge in the first quarter of
fiscal 2000 reflecting the cumulative effect of a change in accounting
principle, in the amount of $3.8 million, net of tax benefit, representing
start-up costs capitalized as of the beginning of fiscal year 2000.
7. ACQUISITIONS:
On June 8, 2001, the Company acquired privately-held Yves Veggie
Cuisine, Inc. ("Yves") a Vancouver, British Columbia based company. Yves is a
leading North American manufacturer, distributor and marketer of soy protein
meat alternative products. The aggregate purchase price, including acquisition
costs, amounted to approximately $34 million excluding the assumption of debt
and capital leases of approximately $3 million. The purchase price was paid by
approximately $32.5 million in cash and $1.5 million worth of common stock
(61,500 shares). The aggregate purchase price paid over the net assets acquired
amounted to approximately $31.5 million. The purchase price allocations have
been made on a preliminary basis, subject to adjustment and it is expected to be
completed in the second quarter of fiscal 2002.
On January 18, 2001 the Company acquired privately held Fruit Chips
B.V., ("Fruit Chips") a Netherlands based company. The Company subsequently
renamed Fruit Chips, Terra Chips B.V. Terra Chips B.V. is a manufacturer and
distributor of low fat fruit, vegetable and potato chips selling to European
markets. The aggregate purchase price paid, including transaction costs was
approximately $9.8 million consisting of both cash and stock. The aggregate
purchase price paid over the net assets acquired was approximately $6.2 million.
Unaudited pro forma results of operations for the years ended June 30,
2001 and 2000 reflecting the above acquisitions as if they occurred at the
beginning of each year would not be materially different than the actual results
for those years.
On May 18, 1999, the Company acquired Natural Nutrition Group, Inc.
("NNG"). NNG is a manufacturer and marketer of premium natural and organic food
products primarily under its Health Valley, Breadshop's and Sahara brands. The
aggregate purchase price, including acquisition costs, amounted to approximately
$82 million. The purchase price was paid by approximately $72 million in cash
and the issuance of $10 million in convertible promissory notes. To finance the
cash portion of the acquisition, the Company entered into a $160 million senior
secured loan which provided for a $30 million
-39-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revolving credit facility and $130 million in term loans. The aggregate purchase
price paid in excess of net assets acquired amounted to $62.5 million. From the
date of acquisition through June 30, 1999, NNG had net sales of approximately
$7.5 million.
On July 1, 1998, the Company acquired the following businesses and
brands from The Shansby Group and other investors: Arrowhead Mills (natural
foods), DeBoles Nutritional Foods (natural pasta products), Terra Chips (natural
vegetable chips) and Garden of Eatin', Inc. (natural snack products). The
aggregate purchase price, including acquisition costs, for these businesses
amounted to approximately $61.5 million. The purchase price was paid by the
issuance of 1,716,111 shares of the Company's common stock with a market value
of $39.75 million and approximately $21.7 million in cash. In addition, the
Company repaid approximately $20.8 million of outstanding debt of the acquired
businesses. The aggregate purchase price paid in excess of net assets acquired
amounted to $74.5 million.
The above acquisitions have been accounted for as purchases and,
therefore, operating results of the acquired businesses have been included in
the accompanying financial statements from the dates of acquisition. Goodwill
arising from the acquisitions is being amortized on a straight line basis over
40 years.
8. INVENTORIES:
Inventories consist of the following:
June 30
--------------------------
2001 2000
------------ -----------
Finished goods $ 29,933 $ 28,730
Raw materials, work-in-process and packaging 19,660 19,409
------------ -----------
$ 49,593 $ 48,139
============ ===========
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30:
2001 2000
----------------- -----------------
Land $ 6,673 $ 6,049
Building 13,611 10,579
Machinery & equipment 42,861 33,890
Assets held for sale - 197
Furniture and fixtures 2,505 2,580
Leasehold improvements 6,818 5,014
Construction in progress 8,863 502
----------------- -----------------
81,331 58,811
Less:
Accumulated depreciation and amortization 25,551 19,471
----------------- -----------------
$ 55,780 $ 39,340
================= =================
-40-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included within machinery and equipment are assets held under capital
leases with net book values at June 30, 2001 and 2000 of $3 million and $.2
million, respectively.
10. LONG-TERM DEBT:
Long-term debt at June 30 consists of the following:
2001 2000
------------- -------------
Senior revolving credit facilities payable to
banks(A) $ 4,400 $ -
Convertible Promissory Notes (B) 23 23
Capital leases on machinery and equipment and
other debt instruments (C) 2,648 847
Economic Development Revenue Bonds due in monthly
installments through November
1, 2009, interest payable monthly at variable
rates (D) 5,067 5,433
Mortgage loan (E) 1,461 -
------------- -------------
13,599 6,303
Current Portion 2,881 681
------------- -------------
$ 10,718 $ 5,622
============= =============
(A) Senior Revolving Credit Facilities
On May 18, 1999, in connection with the acquisition of NNG, the Company
arranged for a $160 million senior secured loan facility ("Facility"), that
provided for a $30 million credit facility and $130 million of term loans. The
Facility was used to complete the acquisition of NNG, refinance then existing
debt and provide for ongoing working capital needs. Interest rates on the
Facility, which were computed using either the bank's base rate, as defined, or
LIBOR, at the Company's option, ranged from 8.5% to 9.5% and averaged 8.3%
during fiscal 2000.
In June 2000, using the proceeds received from the sale of common stock
to Heinz (see Note 12), all amounts then outstanding under the Facility were
prepaid and the Facility was terminated. As a result, the Company incurred an
extraordinary charge in connection with this early extinguishment of debt of
approximately $1.9 million (net of tax benefit of approximately $1.2 million)
for the write-off of related unamortized deferred financing costs.
In March 2001, the Company entered into a new $240 million Senior
Revolving Credit Facility (the "Senior Credit Facility"). The Senior Credit
Facility provides for a four year, $145 million revolving credit facility
(initially this revolving facility is priced at LIBOR plus 1.00%) and a $95
million 364-day facility (the 364-day facility is also initially priced at LIBOR
plus 1.00%). The Senior Credit Facility is unsecured, but guaranteed by all
current and future direct and indirect domestic subsidiaries of the Company.
This Senior Credit Facility also includes customary affirmative and negative
covenants for transactions of this nature. The Company's outstanding revolving
credit loans under these facilities bears interest at a base rate (greater of
the applicable prime rate or Federal Funds Rate plus 0.50% per annum) or, at the
Company's option, the reserve adjusted LIBOR rate
-41-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plus the applicable margin (as defined in the Senior Credit Facility). As of
June 30, 2001, $4.4 million was borrowed under the revolving facility at 5.94%.
On November 2, 1998, Celestial entered into a three-year credit
facility which includes a revolving credit loan of up to $15,000,000, and a
standby letter of credit commitment in the amount of $6,100,000 (the "Letter of
Credit Facility") to support outstanding Economic Development Revenue Bonds
issued to finance Celestial's manufacturing facility. Borrowings under the
credit facility carried interest at rates ranging from LIBOR plus 0.50% to the
Federal Funds Rate plus .75%, subject to increases if the Company failed to
achieve certain future operating results. The Letter of Credit Facility included
annual financing fees of 0.50%, and loans resulting from a draw under the Letter
of Credit Facility carried interest at a rate equal to the interest rate then
applicable to the Revolving Loan. The Letter of Credit Facility expires on
November 2, 2002. The revolving credit loan was terminated.
(B) Convertible Promissory Notes
In connection with the acquisition of NNG, the Company issued $10
million of convertible promissory notes (the "Notes") bearing interest at 7%,
payable quarterly commencing September 30, 1999. The Notes are convertible into
shares of the Company's Common Stock. The number of shares of Common Stock to be
issued upon conversion of each Note is based upon the conversion price equal to
the average of the closing prices of the Company's Common Stock for the ten
trading days prior to any conversion of the Note. During the year ended June 30,
2000, holders of approximately $9.98 million in Notes have converted such Notes
into 442,538 shares of the Company's common stock.
(C) Capital Leases and Other Debt Instruments
Capital leases on machinery and equipment of $2,177 bear interest
ranging from 7.25% to 10% and are due in monthly installments through January
2006.
The aggregate minimum future lease payments for all capital leases at
June 30, 2001 are as follows:
2002 $ 626
2003 557
2004 434
2005 255
2006 42
Thereafter 263
---------------
$ 2,177
===============
The other long-term debt primarily relates to an acquisition NNG
consummated on January 12, 1999. Prior to the acquisition of NNG by the Company,
an $800,000 nonconvertible promissory note bearing interest at prime (6.75% at
June 30, 2001), was issued to the seller. This promissory note requires
principal installments starting June 30, 1999 through December 31, 2002.
-42-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(D) Economic Development Bonds
Borrowings related to Economic Development Revenue Bonds (the "Bonds")
bear interest at a variable rate (3.02% at June 30, 2001) and are secured by a
letter of credit. The Bonds mature December 1, 2009. The Bonds can be tendered
monthly to the Bond trustee at face value plus accrued interest, with payment
for tendered Bonds made from drawdowns under the letter of credit.
(E) Mortgage Loan
As part of the Yves acquisition on June 8, 2001, the Company assumed a
mortgage loan on the land and building occupied by Yves. The mortgage loan of
$1,461 is repayable in blended monthly installments, including principal with
interest at 7.65% (floating at Government of Canada 5 year bond rates plus 1.5%)
per annum; with a balloon payment of $1.4 million due April 1, 2002. The
mortgage is secured by such land and building and a general security agreement
over certain machinery and equipment.
Maturities of all debt instruments at June 30, 2001, are as follows:
2002 $ 2,881
2003 1,192
2004 992
2005 5,255
2006 742
Thereafter 2,537
---------------
$ 13,599
===============
Interest paid during the years ended June 30, 2001, 2000 and 1999
amounted to $412, $7,224 and $5,091 respectively.
11. INCOME TAXES:
The provision for income taxes for the years ended June 30, 2001, 2000
and 1999 is presented below. The table excludes the tax benefits applicable to
the extraordinary charges and the cumulative change in accounting principle in
2000.
2001 2000 1999
---------------- ---------------- ------------------
Current:
Federal $ 8,145 $ 2,615 $ 7,548
State 1,480 389 1,303
Foreign 156 - -
---------------- ---------------- ------------------
9,781 3,004 8,851
Deferred Federal and State 7,301 896 80
---------------- ---------------- ------------------
Total $ 17,082 $ 3,900 $ 8,931
================ ================ ==================
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-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of the Company's deferred tax asset/(liability) as of June
30 are as follows:
2001 2000
------------- ------------
Current deferred tax assets:
Basis difference on inventory $ 1,110 $ 1,244
Allowance for doubtful accounts 315 981
Net operating loss carryovers 1,552 2,034
Reserves not currently deductible 763 4,465
------------- ------------
Current deferred tax assets 3,740 8,724
------------- ------------
Noncurrent deferred tax assets/(liabilities):
Difference in amortization (6,759) (4,560)
Basis difference on property and equipment (2,407) (3,342)
Net operating loss carryovers 1,312 2,365
------------- ------------
Noncurrent deferred tax assets/(liabilities), net (7,854) (5,537)
------------- ------------
$ (4,114) $ 3,187
============= ===============
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:
2001 % 2000 % 1999 %
------- ------- -------- -------- --------- -------
Expected U.S. federal
income tax at
statutory rate $14,235 35.0% $ (2,626) 35.0 % $ 7,826 35.0%
State income taxes,
net of federal benefit 1,949 4.8 569 (7.6) 617 2.7
Goodwill amortization 1,535 3.8 1,576 (21.0) 1,016 4.5
Merger related expenses - - 4,654 (62.0) - -
Contributions - - (610) 8.1 (582) (2.6)
Other (1.6) 337 (4.5) 54 .2
(637)
--------- ------ --------- -------- --------- -------
Provision for income taxes $17,082 42.0% $ 3,900 (52.0)% $ 8,931 39.8%
========= ====== ========= ======== ========= =======
Income taxes paid during the years ended June 30, 2001, 2000 and 1999
amounted to $6,126, $4,909 and $5,442, respectively.
At June 30, 2001, the Company had net operating loss carryforwards
("NOLS") of approximately $7,402 which were acquired in previous years. These
NOL's begin expiring in fiscal 2010. Under U.S. income tax regulations, the
utilization of the NOL's is subject to annual limitations as a result of the
changes in control of the acquired entities, as well as limitations regarding
the use of the NOL's against income other than that earned by the acquired
business (referred to as "SRLY" limitations). Despite these restrictions, as a
result of new regulations issued by the Internal Revenue Service effective June
25, 1999, which had the effect of relaxing the SRLY limitations, the Company
expects to fully utilize all of the acquired NOL's prior to expiration and,
therefore, has not provided a valuation allowance on the related tax assets. The
impact of the change in the tax regulations has been included in the application
of purchase accounting for the business acquired.
-44-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCKHOLDERS' EQUITY:
Common Stock:
In connection with the acquisition of businesses from The Shansby Group
and other investors, a portion of the purchase price was paid by the issuance of
1,716,111 shares of the Company's common stock with a market value of $39.8
million.
In September 1999, the Company entered into a global strategic alliance
with Heinz related to the production and distribution of natural products
domestically and internationally, and purchased from Heinz the trademarks of its
Earth's Best baby food line of products. In connection with the alliance, the
Company issued 2,837,343 shares (the "Investment Shares") of its common stock,
par value $.01 per share (the "Common Stock") to a wholly owned subsidiary of
Heinz (the "Heinz Subsidiary"), for an aggregate purchase price of $82.4 million
under a Securities Purchase Agreement dated September 24, 1999 between the
Company and the Heinz Subsidiary. The Company used $75 million of the proceeds
from this to reduce its borrowings under its credit facility. The remainder of
the proceeds were used to pay transaction costs and for general working capital
purposes. In consideration for the trademarks, the Company paid a combination of
$4.6 million in cash and 670,234 shares of Common Stock, valued at $17.4
million(the "Acquisition Shares" and together with the Investment Shares, the
"Shares"). This purchase agreement terminates a license agreement dated April 1,
1999 between the Company and Heinz whereby the Company was granted exclusive
sale and distribution rights of Earth's Best baby food products into the United
States retail grocery and natural food channel. With the acquisition of these
trademarks, the Company is able to sell, market and distribute Earth's Best
products both domestically and internationally and have a more efficient means
to develop new products. In connection with the issuance of the Shares, the
Company and the Heinz Subsidiary have entered into an Investor's Agreement dated
September 24, 1999 that sets forth certain restrictions and obligations of the
Company and the Heinz Subsidiary and its affiliates relating to the Shares,
including restrictions and obligations relating to (1) the appointment by the
Company of one member to its Board of Directors nominated by the Heinz
Subsidiary and one member jointly nominated by the Heinz Subsidiary and the
Company, (2) an 18-month standstill period (which expired in March 2001) during
which the Heinz Subsidiary and its affiliates may not purchase or sell shares of
Common Stock, subject to certain exceptions, (3) a right of first offer granted
to the Company by Heinz and its affiliates to the Company upon the sale of
Shares by the Heinz Subsidiary and its affiliates following the standstill
period, (4) preemptive rights granted to the Heinz Subsidiary and its affiliates
relating to the future issuance by the Company of shares of capital stock and
(5) confidentiality.
Included as part of the alliance was a provision that the Heinz
Subsidiary would have the preemptive right to purchase additional equity in the
Company to maintain its investment level at 19.5% of the outstanding stock of
the Company. The Heinz Subsidiary investment level was diluted following the
acquisition by the Company of Celestial Seasonings on May 30, 2000. Under the
terms of the agreement, on June 20, 2000 the Company issued 2,582,774 shares of
its common stock, par value $.01 per share to the Heinz Subsidiary for an
aggregate purchase price of approximately $79.7 million.
-45-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company used approximately $44 million to prepay the remainder of its
borrowings under its credit facility. The remainder of the funds are being used
for working capital.
In addition, the Company and the Heinz Subsidiary have entered into a
Registration Rights Agreement dated September 24, 1999 that provides the Heinz
Subsidiary and its affiliates customary registration rights relating to the
Shares, including two demand registration rights and "piggy-back" registration
rights.
On May 30, 2000, the Company's shareholders approved an increase to the
number of authorized shares of the Company's common stock from 40 million to 100
million.
As part of the Yves and Fruit Chips acquisitions consummated during
fiscal 2001, 185,330 common shares were issued to the sellers, valued at
approximately $5.6 million in the aggregate.
Preferred Stock:
The Company is authorized to issue "blank check" preferred stock (up to
5 million shares) with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered to issue, without stockholder approval, preferred
stock with dividends, liquidation, conversion, voting, or other rights which
could decrease the amount of earnings and assets available for distribution to
holders of the Company's Common Stock. As at June 30, 2001 and 2000, no
preferred stock was issued or outstanding.
Warrants:
In connection with the Weight Watchers agreement, the Company issued
warrants to Heinz on March 31, 1997, to acquire 250,000 shares of the Company's
Common Stock at prices ranging from $7.00 to $9.00 per share. The value ascribed
to these warrants of approximately $.3 million is being amortized over ten
years. In April 1999, Heinz exercised these warrants and the Company issued
250,000 shares of Common Stock resulting in proceeds of $1.9 million. In
accordance with the terms of the then existing term loan facility, 50% of the
proceeds was used to pay down the term loan with the remainder used for working
capital purposes.
Since fiscal 1997, the Company issued a total of 300,000 warrants in
connection with services rendered by third party consultants at prices ranging
from $4.13 to $10.00 per share. 250,000 of these warrants were exercised during
fiscal 2000, resulting in proceeds of $1.6 million. In accordance with the then
existing term loan facility, 50% of the proceeds were used to pay down the term
loan with the remainder used for working capital purposes. In fiscal 2001, the
remaining 50,000 warrants were exercised via a cashless exercise resulting in
the issuance of 35,653 shares.
In connection with the acquisition of Westbrae on October 14, 1997 and
the related bank refinancing, the Company issued a warrant to its bank to
acquire 114,294 shares of the Company's common stock at an exercise price of
$11.418. The value ascribed to this warrant of approximately $.4 million is
-46-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
being amortized over six years. In July 1998, the bank exercised these warrants
via a cashless exercise resulting in the issuance to the bank of 63,647 common
shares. In addition, the Company issued warrants to Argosy Investment Corp.
("Argosy") to acquire 100,000 shares of the Company's common stock at an
exercise price of $12.688. The value ascribed to these warrants of approximately
$.4 million has been included in the costs of the acquisition of Westbrae. In
fiscal 2001, Argosy exercised 26,666 of these warrants, resulting in proceeds of
$.3 million, which proceeds were used for working capital purposes.
In fiscal years 2001 and 2000, Argosy exercised warrants previously
granted in 1994 to acquire 104,100 and 95,853, respectively, of the Company's
common stock at an exercise price of $3.25. The proceeds were utilized for
working capital purposes as the Company had already paid down its term and
revolver loans. At June 30, 2001, 322,764 of these warrants remain available for
exercise.
13. STOCK OPTION PLANS:
Hain:
In December 1994, the Company adopted the 1994 Long-Term Incentive and
Stock Award Plan ("Plan"), which amended and restated the Company's 1993 stock
option plan. On December 9, 1997, the stockholders of the Company approved an
amendment to increase the number of shares issuable under the 1994 Long Term
Incentive and Stock Award Plan by 345,000 to 1,200,000 shares. In December 1998,
the Plan was further amended to increase the number of shares issuable by
1,200,000 bringing the total shares issuable under this plan to 2,400,000. In
December 1999, the Plan was further amended to increase the number of shares
issuable by 1,000,000 bringing the total shares issuable under this plan to
3,400,000. In May 2000, the Plan was further amended to increase the number of
shares issuable by 3,000,000 bringing the total shares issuable under this plan
to 6,400,000. The Plan provides for the granting of incentive stock options to
employees, directors and consultants to purchase shares of the Company's common
stock. All of the options granted to date under the Plan have been incentive and
non-qualified stock options providing for exercise prices equivalent to the fair
market price at date of grant, and expire 10 years after date of grant. Vesting
terms are determined at the discretion of the Company. During 1999, options to
purchase 1,175,600 shares were granted at prices from $12.125 to $21.50 per
share. During 2000, options to purchase 372,550 shares were granted at prices
ranging from $21.188 to $33.50 per share. During 2001, options to purchase
1,339,100 shares were granted at prices ranging from $27.125 to $36.6875 per
shares. At June 30, 2001, 2,332,325 options were available for grant under this
plan.
The Company's Chief Executive Officer ("CEO") was granted 125,000 of
the options granted in 1998, that had been conditionally granted to him at
$4.8125 per share on the date of grant (June 30, 1997) pending approval of an
increase in the number of shares available for grant (approved by shareholders
on December 9, 1997). The Company will incur a straight line non-cash
compensation charge ($46 annually) over the 10-year vesting period based on the
excess ($.5 million) of the market value of the stock options
-47-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($8.50 per share) on December 9, 1997 compared to $4.8125 per share market value
on the date of grant.
In December 1995, the Company adopted a Directors Stock Option Plan.
The Plan provides for the granting of stock options to non-employee directors to
purchase up to an aggregate of 300,000 shares of the Company's common stock. In
December 1998, the Director Stock Option Plan was amended to increase the number
of shares issuable from 300,000 to 500,000. In December 1999, the Director Stock
Option Plan was amended to increase the number of shares issuable by 250,000,
bringing the total shares issuable under this plan to 750,000. During 1999,
options for an aggregate of 95,000 shares were granted at a price of $17.625 per
share. During 2000, options for an aggregate of 103,500 shares were granted at
prices of $23.25 and $26.063 per share. In December 2000, options for an
aggregate of 140,000 shares were granted at prices ranging from $27.75 to
$32.125 per shares. The remaining available shares in this Director Plan have
been canceled and no future grants are available on this plan effective January
2001.
In May 2000, the Company adopted a new Directors Stock Option Plan. The
Plan provides for the granting of stock options to non-employee directors to
purchase up to an aggregate of 750,000 shares of the Company's stock. At June
30, 2001, no options were granted under this plan.
The Company also has a 1993 Executive Stock Option Plan pursuant to
which it granted its CEO options to acquire 600,000 shares of the Company's
common stock. As a result of the Company achieving certain sales thresholds, all
of such shares are currently exercisable. The exercise price of options designed
to qualify as incentive options is $3.58 per share and the exercise price of
non-qualified options is $3.25 per share. During fiscal 2001, options to
purchase 65,000 shares were exercised at June 30, 2001. The options expire in
2003.
Celestial:
In conjunction with the Merger as previously discussed, all outstanding
Celestial options became fully vested as of May 30, 2000. All amounts have been
restated to reflect the conversion of the Celestial stock to Hain stock at a
ratio of 1.265:1.
During 1991, Celestial adopted an incentive and non-qualified stock
option plan that provided for the granting of options to purchase up to 116,663
shares of Celestial's common stock to employees. The options generally vested
over a four year period and expired ten years from the grant date. No grants
were made under the plan and no further grants are available under this plan.
In 1991, Celestial granted options to an executive officer to purchase
241,944 shares of the Company's common stock in connection with capital
contributions made by the officer and certain other agreements. Such options
were immediately vested at the grant date, are exercisable at a weighted average
price per share of $3.90 and expire in 2031.
During 1993, Celestial adopted an incentive and non-qualified stock
option plan that provided for the granting of awards for up to 331,430 shares
-48-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of Celestial's common stock. Options granted at the time of Celestial's initial
public offering in 1993 vested over one year and five year periods. Options
granted subsequent to Celestial's initial public offering generally vested over
a five-year period. Options expire ten years from the grant date. During 1995,
Celestial approved an increase in the number of awards that may be granted to
569,250 shares and in 1998 Celestial approved a further increase of up to
1,581,250 shares which may be granted under the plan. Effective May 30, 2000, no
further grants are available under this plan.
In 1993, Celestial granted options to purchase 25,300 shares of
Celestial common stock to a director of Celestial. The options vested over a
three-year period and expire ten years from the grant date. During fiscal 2001,
all of these options were exercised.
In 1995, Celestial adopted a non-qualified stock option plan for non-
employee directors. The plan provides for up to 189,750 shares of Celestial's
common stock for issuance upon exercise of options granted to non-employee
directors and in lieu of meeting fees paid to non-employee directors. The
options vest over a one-year period and expire ten years from the grant date.
During 1998, Celestial amended this plan to provide each non-employee director
an initial grant of an option to purchase 12,650 shares and an annual grant,
commencing in 1999, of an option to purchase 5,060 shares. In addition,
non-employee directors may elect to receive their annual retainer in shares of
common stock rather than cash. Effective May 30, 2000, no further grants are
available under this plan.
In 1997, Celestial granted options to an executive officer to purchase
417,450 shares of Celestial's common stock. The options were granted in
connection with the officer's employment agreement, initially vested over a
five-year period, are exercisable at $8.70 per share and expire ten years from
the grant date. During 2001, all of these options were exercised.
Employee stock purchase plan:
Under Celestial's Employee Stock Purchase Plan (the "Plan") Celestial
is authorized to issue up to 66,286 shares of common stock to its full-time
employees, nearly all of whom are eligible to participate. Under the terms of
the Plan, employees can choose each year to have up to 10% of their annual base
earnings withheld to purchase Celestial's common stock. The purchase price of
the stock is 85 percent of the lower of the market price at the beginning or end
of each six month participation period. Approximately 30 percent of eligible
employees have participated in the Plan in the last three years. Under the Plan,
Celestial has sold approximately 5,300 shares for the year ended June 30, 2001
and 10,000 shares for each of the years ended June 30, 2000 and 1999.
Accounting For Stock Issued to Employees:
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations, in accounting
for stock options because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires use of
option valuation models that were not developed for use in valuing employee
-49-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock options. Under APB 25, when the exercise price of the Company's employee
stock options at least equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro-forma information regarding net income(loss) and net income(loss)
per share is required by SFAS No. 123, and has been determined as if the Company
has accounted for its stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Sholes option pricing model with the following weighted-average
assumptions: risk free interest rates ranging from 4.78% to 6.77%; no dividend
yield; volatility factors of the expected market price of the Company's Common
Stock of approximately 93% for fiscal 2001, 90% for fiscal 2000 and 57% for
fiscal 1999; and a weighted-average expected life of the options of five years
at June 30, 2001, 2000 and 1999.
The Black-Sholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
2001 2000 1999
-------------- ----------------- ----------------
Pro forma net income(loss) $ 8,515 $ (23,033) $ 2,897
Pro forma diluted net $ .25 $ (.82) $ .11
A summary of the transactions pursuant to the Company's stock option
plans for the three years ended June 30, 2001 follows:
2001 2000 1999
-------------------------------- ------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------- ------------- ---------------- -------------- ---------------- -------------
Outstanding at
beginning of year 3,997,106 $ 12.91 4,076,088 $ 11.83 3,042,210 $ 7.80
Granted 1,479,100 27.55 632,710 23.05 1,630,493 18.02
Exercised (1,265,465) 10.16 (572,442) 15.03 (459,592) 5.56
Terminated (7,883) 20.12 (139,250) 18.63 (137,023) 16.78
----------------- ------------- ---------------- -------------- ---------------- -------------
Outstanding at end of
year 4,202,858 $ 18.01 3,997,106 $ 12.91 4,076,088 $ 11.83
================= ============= ================ ============== ================ =============
Exercisable at end of
year 3,444,219 $ 16.17 3,553,964 $ 11.75 2,831,522 $ 9.84
================= ============= ================ ============== ================ =============
Weighted average
fair value of options
granted during year $ 20.24 $ 15.23 $ 7.92
================= ============= ================ ============== ================ =============
-50-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information for stock options outstanding at
June 30, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
-------------- ------------- -------------- ------------- ------------- -------
$2.94 - $4.83 1,031,142 9.4 $ 3.85 1,031,142 $ 3.85
7.00 - 14.67 162,520 4.8 10.30 158,621 10.23
14.67 - 18.34 771,506 7.2 16.97 771,506 16.97
18.34 - 22.01 397,110 7.6 19.82 376,161 19.75
22.01 - 25.68 358,630 7.3 22.83 206,639 22.96
25.68 - 29.35 1,265,150 8.9 26.88 740,000 26.69
29.35 - 33.01 176,800 9.4 31.56 140,150 31.87
33.01 - 36.68 40,000 9.0 35.49 20,000 35.49
------------- ----------------------- ------------- -----------
4,202,858 8.3 $ 18.01 3,444,219 $ 16.17
============= ======================= ============= ===========
Shares of Common Stock reserved for future issuance as of June 30, 2001 are as
follows:
Stock options 7,410,183
Warrants 396,098
Employee stock purchase plan 3,244
Convertible promissory notes 4,656
-----------
7,814,181
===========
14. LEASES:
The Company's corporate headquarters are located in leased office space
in Uniondale, New York, under a lease which expires in October 2003. The Company
will be relocating its corporate headquarters in November 2001 to 58 South
Service Road, Melville, New York, occupying approximately 35,000 square feet.
Its now existing lease will be terminated without penalty. This new lease runs
through November 2012 with a current annual rental of approximately $1.3
million. In addition, the Company leases manufacturing and warehouse space under
leases which expire through fiscal 2007. These leases provide for additional
payments of real estate taxes and other operating expenses over a base period
amount.
-51-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate minimum future lease payments for these operating leases
at June 30, 2001 are as follows:
2002 $ 4,128
2003 4,089
2004 3,702
2005 2,552
2006 2,734
Thereafter 10,871
----------
$ 28,076
==========
Rent expense charged to operations for the years ended June 30, 2001,
2000 and 1999 was approximately $3,442, $3,217 and $1,823, respectively.
15. DEFINED CONTRIBUTION PLANS
The Company has a 401(k) Employee Retirement Plan ("Plan") to provide
retirement benefits for eligible employees. All full-time employees of the
Company and its subsidiaries who have attained the age of 21 are eligible to
participate upon completion of 30 days of service. The subsidiaries of NNG and
Yves Veggie Cuisine each have their own separate 401 (k)employee retirement
plan. Employees within those subsidiaries, who meet their respective eligibility
requirements, may participate in those plans. The Company's Celestial Seasonings
subsidiary has a contributory thrift plan. Each year, based on the achievement
of certain targeted operating results, the Company can contribute to the plan an
amount equal to 1% to 2.5% of thriftable wages. In addition, the Company matches
a portion (currently 50%) of participant contributions up to the limits provided
under the plan. Participants may elect to make voluntary contributions to the
Plan in amounts not exceeding federal guidelines. On an annual basis, the
Company may, in its sole discretion, make certain matching contributions. For
the years ended June 30, 2001, 2000 and 1999, the Company made contributions to
the Plans of $614, $464 and $603, respectively.
16. LITIGATION:
On May 5, 1995, a purported stockholder of Celestial filed a lawsuit,
Schwartz v. Celestial Seasonings, Inc. et al., in the United States District
Court for the District of Colorado (Civil Action Number: 95-K-1045), in
connection with disclosures by the Company concerning the Company's license
agreement with Perrier Group of America, Inc. which was terminated on January
1, 1995. In addition to Celestial, the complaint named as defendants certain
of Celestial's then present and former directors and officers, PaineWebber,
Inc., Shearson/Lehman Brothers, Inc., and Vestar/Celestial Investment Limited
Partnership. The complaint, which was pled as a class action on behalf of
persons who acquired Celestial's common stock from July 12, 1993 through May
18, 1994, sought money damages from Celestial and the other defendants for the
class in the amount of their loss on their investment in Celestial's common
stock, punitive damages, costs and expenses of the action, and such other
relief as the court may order.
On November 6, 1995, the federal district court granted a motion by Celestial
and the other defendants to dismiss the case. On September 5, 1997,
-52-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
however, the court of appeals reversed the decision of the district court and
returned the case to the district court for further proceedings. The case was
certified as a class action.
On November 4, 1999, Celestial reached a settlement with the plaintiff,
which resulted in a pre-tax charge of $1.2 million during Celestial's fourth
quarter of its fiscal year ending 1999. The settlement was subject to completion
of a definitive settlement stipulation to be filed in the district court and
court approval of the settlement. On April 25, 2000, the settlement was approved
by the courts. The settlement has become final. The Company does not expect any
additional shareholder lawsuits related to this matter.
In April 1999, an arbitrator ruled in favor of a former financial
advisor of Westbrae who claimed fees and expenses due in connection with the
sale of Westbrae to the Company in October 1997. The Company paid approximately
$1.3 million, including legal fees, as a result of the arbitrator's decision,
which amount had been provided for in connection with the 1997 acquisition of
Westbrae.
From time to time, the Company is involved in litigation, incidental to
the conduct of its business. In the opinion of management, disposition of
pending litigation will not have a material adverse effect on the Company's
business, results of operations or financial condition.
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.
-53-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
PART III
Item 10, "Directors and Executive Officers of the Registrant", Item 11,
"Executive Compensation", Item 12, "Security Ownership of Certain Beneficial
Owners and Management", and Item 13, "Certain Relationships and Related
Transactions", have been omitted from this report inasmuch as the Company will
file with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report a
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held on December 11, 2001, at which meeting the stockholders will vote
upon election of the directors. This information under the caption "Election of
Directors" in such Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K.
(a) (1) List of Financial statements
Consolidated Balance Sheets - June 30, 2001 and 2000
Consolidated Statements of Operations - Years ended June 30, 2001,
2000 and 1999
Consolidated Statements of Cash Flows - Years ended June 30, 2001, 2000
and 1999
Consolidated Statements of Stockholders' Equity - Years ended June 30,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedule
Valuation and Qualifying Accounts (Schedule II)
(3) List of Exhibits
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (Commission File No. 333-33830)
filed with the Commission on April 24, 2000).
3.2 Amended and Restated Bylaws (incorporated by reference
to Exhibit 3.2 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (Commission File
No. 333-33830) filed with the Commission on April 24,
2000).
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).
-54-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
4.3 Amended and Restated 1994 Long Term Incentive and Stock
Award Plan (included as Annex F to the Joint Proxy
Statement/Prospectus contained in the Registrant's
Registration Statement on Form S-4 (Commission File
No. 333-33830) filed with the Commission on April 24,
2000).
4.4 1996 Directors Stock Option Plan (incorporated by
reference to Appendix A to the Registrant's Notice of
Annual Meeting of Stockholders and Proxy Statement dated
November 4, 1996).
4.5 2000 Directors Stock Option Plan (included as Annex G to
the Joint Proxy Statement/Prospectus contained in the
Registrant's Registration Statement on Form S-4
(Commission File No. 333-33830) filed with the
Commission on April 24, 2000).
10.1a Credit Agreement dated as of March 29, 2001 by and among the
Registrant and Fleet National Bank, as administrative agent,
Suntrust Bank, as syndication agent, HSBC Bank USA, as
documentation agent, and the lenders party thereto, as amended.
10.2 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).
10.3 Registration Rights Agreement between the Registrant and
Boulder Inc. (formerly Earth's Best, Inc.), dated
September 24, 1999 (incorporated by reference to
Exhibit 10.3 of the Registrant's Current Report on
Form 8-K filed with the Commission on September 30,
1999).
10.4 Form of Change in Control Agreement for Executive Officers
(incorporated by reference to Exhibit 10.1 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2000 filed with the Commission on November 14,
2000).
10.5 Employment Agreement for Chief Executive Officer
(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 Subsidiaries of Registrant
23 Consent of Independent Auditors - Ernst & Young LLP
23.1 Consent of Independent Auditors - Deloitte & Touche LLP
23.2 Independent Auditors Report for Financial Statement Schedule
- Deloitte & Touche LLP
a - Filed herewith
-55-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
(b) Reports on Form 8-K
On August 20, 2001, the Company filed a report on Form 8-K disclosing
an announcement concerning expected revenues and an earnings per share range for
its fiscal fourth quarter ended June 30, 2001.
-56-
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to other Balance at
beginning costs and accounts - Deductions end of
of period expenses describe describe period
------------------------------------------------------ ---------- ---------- --------------- -------------- ----------
Year Ended June 30, 2001 Deducted from asset accounts:
Allowance for doubtful accounts $ 929 $ 393 $ 41 (1) $ 548 (2) $ 815
Year Ended June 30, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,287 $ 432 $ 100 (1) $ 890 (2) $ 929
Year Ended June 30, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 859 $ 313 $ 316 (1) $ 201 (2) $ 1,287
(1) Allowance for doubtful accounts at dates of acquisitions of acquired
businesses.
(2) Uncollectible accounts written off, net of recoveries.
-57-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE HAIN CELESTIAL GROUP, INC.
By: /s/ Irwin D. Simon
--------------------------------
Irwin D. Simon
Chairman of the Board, President and Chief Executive Officer
Date: September 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Irwin D. Simon President, Chief September 28, 2001
-----------------------
Irwin D. Simon Executive Officer
and Chairman of the
Board of Directors
/s/ Mo Siegel Vice Chairman of the September 28, 2001
-----------------------
Mo Siegel Board of Directors
/s/ Gary M. Jacobs Executive Vice President,
-----------------------
Gary M. Jacobs Finance and Chief
Financial Officer September 28, 2001
/s/ Andrew Heyer Director September 28, 2001
-----------------------
Andrew R. Heyer
/s/ Beth L. Bronner Director September 28, 2001
-----------------------
Beth L. Bronner
/s/ Jack Futterman Director September 28, 2001
-----------------------
Jack Futterman
/s/ James Gold Director September 28, 2001
-----------------------
James S. Gold
/s/ Joseph Jimenez Director September 28, 2001
-----------------------
Joseph Jimenez
/s/ Roger Meltzer Director September 28, 2001
-----------------------
Roger Meltzer
/s/ Marina Hahn Director September 28, 2001
-----------------------
Marina Hahn
/s/ Gregg Ostrander Director September 28, 2001
-----------------------
Gregg Ostrander
-58-